Almost $2.6 billion of capital flowed into publicly registered nontraded real estate investment trusts and partnerships in the first quarter, up from $2.2 billion one year prior and $1.6 billion two years prior as part of investor flight into hard assets, said an investment banking company specializing in the direct investment market.
There was a total of $3.3 billion put in to the entire direct investment market in the quarter, the highest level in 20 years, according to data provided by Robert A. Stanger & Co., Shrewsbury, N.J.
Of the first-quarter investments in real estate, $2.4 billion went to nontraded equity REITs, $146 million to mortgage REITs and $1.2 million to mortgage loan limited partnerships. Over $1 billion of that total was raised in March alone, Stanger said.
Part of what is fueling the investment craze is the low interest rate returns from fixed-income products. But with the better returns comes increased risk for investors.
Last October, the Financial Industry Regulatory Authority issued an investor alert to clarify for consumers the benefits and risks with purchasing stock in public nontraded real estate investment trusts.
It noted that sales pitches for nontraded REITs could play up their high yields and stability but gloss over a lack of liquidity, high fees and other risks with these investments.
Kevin Gannon, managing director of Stanger, attributed the increased investment in nontraded REITs in part to the favorable outlook for real estate fundamentals.
“Despite the slow pace of economic recovery, many markets are experiencing improving occupancy and rental rate trends. Same-property net operating incomes are on the rise in many markets,” said Gannon, also citing the near-record low cost of debt financing as another positive factor for real estate investing.
Another reason why there is an increase in people willing to put money into in these companies is the shift to individual-directed retirement funds.
“At a time when the retiree and pre-retiree component of America’s population is increasing dramatically, a fundamental shift in responsibility for retirement funding is evolving,” said Kevin Hogan, president and chief executive of the Investment Program Association, the trade group for direct investment firms.
“This migration of retirement funding from employers to individuals, combined with the need for inflation resistant income to fund retirement, are fundamental drivers of the nonlisted REIT industry.”
According to data provided by Stanger, nine of the top 10 capital raisers in the first quarter were REITs. This included No. 1 Cole Real Estate Investments at $805 million, No. 3 American Realty Capital Advisors at $330.3 million, Dividend Capital Advisors LLC at $241.9 million and W.P. Carey at $188.2 million.
