Private REITs in a volatile market
Key takeaways
- REITs can be an attractive opportunity for investors looking for diversified exposure to the real estate sector without the burden of a direct investment.
- Public REITs are traded on exchanges, similar to equities, while private REITs are accessible to accredited investors via brokers, cannot be bought or sold, and are less sensitive to broader market risk, which can help diversifying portfolio risk-return drivers.
- Yieldstreet offers a public, non-traded REIT – that can invest in both equity and debt – to all its investors, regardless of accreditation.
Real estate investment trust – History and Structure
REITs were created through legislation passed in 1960, with the goal of creating a mutual funds-like investment structure for real estate. While equity REITs own, and in most cases operate, income-producing (commercial) real estate, mortgage REITs are financing vehicles. Some REITs can offer a combination of debt and equity exposure.
To qualify as a REIT, which gives a material tax advantage, a corporation must earn 75% of its revenues from real estate, 75% of its assets have to be real estate, and 90% of its taxable income has to be distributed to shareholders as dividends.
A corporation also has to be managed by a board of directors or trustees and have at least 100 shareholders after its first year of existence, with no more than 50% of its shares held by five or fewer individuals.
REITs shares are transferable, which makes the products suitable to be traded on public markets.
Public REITs and Private REITs
Public REITs are typically traded on major exchanges, just like equities. Their prices can fluctuate daily, and they can be sensitive to market risk.
REITs trading on public markets are accessible by a majority of investors, and offer price discovery and public performance data. Information availability is actually a specific advantage of this specific type of vehicle over private REITs, which aren’t traded and are only accessible to accredited investors working with qualified brokers.
Some public REITs, while registered with the SEC – which helps investors with access to information – are not publicly traded. Unlike private REITs, they remain available to non-accredited investors, but while less sensitive to equity market fluctuations they can be less liquid as they require broker dealers to make a market, which tends to lead to higher fees.
Private REITs, also known as “private placement” REITs, are exempted from registration with the Securities and Exchange Commission (SEC), pursuant to Regulation D of the Securities Act of 1933. That, however, does not mean that they are not regulated – simply that because they are not publicly traded, they do not require the same level of disclosure.
Generally, disclosures about underlying investments, management strategy, performance and fee structure of a private REIT are made to investors, but not to the general public.
While private REITs are sold primarily by broker-dealers and may feature higher fees, their relatively lower correlation with the stock market – they are valued based on an appraisal of assets – makes them appealing for investors looking to diversify their exposure away from public markets.
Since they’re not publicly traded, private REITs have a lower liquidity profile. Investors would have to wait until a liquidation event happens, which can take some time, or go through a redemption program – which is not always provided by the manager. However, to offset the more limited liquidity options, private REITs tend to offer higher returns, as managers do not have to worry about early redemptions and can make more medium-term investment choices – something that can benefit investors especially in times of elevated market volatility.
The Securities Act of 1933 allows private REITs to sell securities to qualified institutional investors – hedge funds, pension funds, asset managers – and to accredited investors. Private REITs offered to retail investors typically require a minimum initial investment of between $10,000 and $100,000.
Yieldstreet’s public, non-traded REIT offering
Our Growth and Income REIT can be accessed with a minimum of $10,000. The Fund is a public, non-traded REIT that seeks to primarily make equity investments in commercial real estate properties across key U.S. markets and property types. The Fund’s primary investment objective is capital appreciation and, as a secondary objective, current income.
Learn more about the ways Yieldstreet can help diversify and grow your portfolio.
Target returns are offered as opinion and are not referenced to past performance. Target returns are not guaranteed and results may differ materially.
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Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]