By Peter Grant
A new type of commercial real-estate fund that targets small investors is raking in money again after demand cooled during the early months of the coronavirus pandemic.
The open-ended funds, known as nontraded real-estate investment trusts, are run by big firms like Blackstone Group Inc. and Starwood Capital Group that typically deal with institutional investors. The new products typically take investments of as little as $2,500 and have been paying dividends above 5% without the volatility of the stock market.
Demand is starting to recover for these funds, and redemption requests have slowed. In the third quarter, the funds raised $1.37 billion, according to Robert A. Stanger & Co., a financial firm that tracks the market. That was $450 million more than they raised in the previous quarter.
In the first quarter, a record number of investors tried to get their money back and some weren't able to redeem shares. In the second quarter, redemption requests eased to $515.8 million from $724.1 million, in the first quarter, according to Stanger. Third quarter statistics for redemptions aren't yet available.
"Once everybody took the deep breath and said the world is not over, they started raising more and the redemptions declined," said Kevin Gannon, Stanger's chief executive.
The new fundraising still is low compared with the record $4.98 billion raised in the first quarter of 2020, mostly before the pandemic hit. But the bigger nontraded REITs have largely held steady in value, while shares of some publicly traded REITs in the office, retail and lodging industry have fallen more than 30%.
"Fundraising has rebounded because investors are no longer in a 'panic' mode' and are looking for...attractive yields in a yield-starved world," said John McCarthy, chief executive of Starwood Real Estate Investment Trust.
Now, some investors also feel these funds may be positioned to take advantage of steep discounts which are expected in the commercial real-estate market, according to industry participants.
Many funds have plenty of cash on hand. "We have a robust pipeline," said Mr. McCarthy.
Nontraded REITs have been around for more than 20 years. But the new funds are structured differently from the closed-end nontraded REIT structures that fell out of favor with financial advisers about five years ago. The new version has lower fees and better disclosure.
Michael Godwin, chief investment officer of Fragasso Financial Advisors Inc., said his Pittsburgh-based investment-management firm is advising clients to boost their nontraded REIT portfolios as a portion of their fixed-income holdings. These real-estate funds yield more than 5% and compare favorably with many investment-grade fixed-income investments yielding less than 1.5%, Mr. Godwin noted.
Many of the newer funds are invested in property types that have fared best in 2020. For example, about 30% of their investments have been in industrial space, which has outperformed because of the growing use of e-commerce, according to Stanger. About 33% have been in rental apartments.
Meanwhile, only 15% of their investments have been in hospitality, which the pandemic has clobbered by shutting down much of the travel industry. About 14% has been invested in office and 7% in retail, which also have been hard hit.
Blackstone's nontraded REIT, which was one of the pioneers of the new structure, made most of its investments in apartments and industrial space. That fund also made headlines by making big investments in Las Vegas, which saw business evaporate in the early months of the pandemic.
But the fund is insulated because it purchased stakes in ventures that own the real estate of the Bellagio, the MGM Grand and the Mandalay Bay. Those ventures collect rent from the operator, MGM Resorts International, making them more secure. Tourists have started returning to Las Vegas, though the convention business remains moribund.
Blackstone's nontraded REIT was valued at $11.17 a share as of the end of September, compared with $11.45 at the end of 2019, according to public filings. Starwood's fund was valued at $21.33 a share at the end of September, compared with $21.57 at the end of last year.
Some nontraded REITs are continuing to do deals, even though the commercial real-estate sales market has been anemic. Blackstone last week purchased a long-term lease of Roku Inc.'s headquarters in San Jose, Calif., for $275 million.
Blackstone has about $3 billion in cash available for new deals or to meet redemption requests. The fund "is very well positioned," said Frank Cohen, its chairman and chief executive.
Write to Peter Grant at firstname.lastname@example.org
Corrections & Ampifications
This article was corrected at 10:30 a.m. ET because the original incorrectly said the record redemption requests occurred in the second quarter of 2020. A record number of investors tried to redeem their shares in nontraded real estate investment trusts in the first quarter of 2020.
(END) Dow Jones Newswires