The Evolution of the Public Non-Listed REIT (PNLR)

REIT magazine: September/October 2018

The ongoing evolution of the public non-listed REIT (PNLR) sector—driven by market pressures and regulatory changes—has resulted in a product that is far better positioned than before to offer retail investors a solid, diversified investment strategy, according to Anthony Chereso, president and CEO of the Institute for Portfolio Alternatives (IPA). The IPA, formerly known as the Investment Program Association, brings together investment managers, broker-dealers, investment advisers, and industry service professionals focused on bringing transparency and innovation to the Portfolio Diversifying Investment (PDI) industry.

“If you look at fee structures, the quality of asset managers, the portfolios that are being designed and built, it is a much better product,” Chereso says.

While fundraising in the non-listed sector year-to-date is slightly below year-earlier levels at around $2.1 billion through June 30, Chereso expects momentum to increase going forward. Factors fueling that growth include the entry of large institutional players into the market.

The entry of private equity firm Blackstone into PNLRs in 2016, via its Blackstone Real Estate Income Trust (BREIT), provided a significant boost to the sector, especially for net asset value (NAV) products. Known also as perpetual life REITs, NAV REITs differ from traditional lifecycle REITs in that they offer daily, or less frequent, repurchase options at net asset value.

Chereso notes that most of the capital being raised in the non-listed sector today is in the NAV REIT segment, with Blackstone raising the lion’s share via wirehouses and independent broker-dealers. In fact, NAV REITs have attracted 76 percent of the capital raised in the first half of 2018, according to Robert A. Stanger & Co., Inc., an investment banking firm that tracks industry sales. That’s a 30 percent increase from the first half of 2017. Other market players that have NAV REIT programs either in registration or coming to market, include Starwood, CIM, JLL and Nuveen.

“What we see now is a new capital source as a result of the relationship that Blackstone and others have with the wirehouses. We expect that channel to continue to be a leading source of capital for this sector,” Chereso says.

Shift to DC Plans Fueling Growth

Meanwhile, the shift away from traditional defined benefit retirement investing in favor of DC plans is “significant” and shows no sign of abating, according to Chereso. He points out that the introduction of institutional asset managers with institutional quality real estate investment structures “is going to play a huge part in creating diversification within retirement accounts going forward.”

To help make it easier to transact in the non-listed REIT sector by enhancing efficiency and transparency, IPA recently launched the OpsTech Innovation Forum.

“Currently, to transact in our space is a very manually intensive process. From an initial sale, it’s incredibly time-consuming,” says Chereso. The forum works to bring industry participants together to identify common data elements, with the goal of creating a straight-through process that avoids the manual, repeated entry of information.

The OpsTech Forum is viewed as an important first step, not only toward operational efficiencies, but also toward strengthening investor reporting and transparency. As the industry continues to grow, “it is incumbent on all market participants to create a more seamless and efficient transaction process,” Chereso says.

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