Research / Research Papers

An Empirical Analysis of Non-Traded REITs

Published in the Journal of Wealth Management, 19(1):83-94, Summer 2016.

2015-06-01

We find that returns to 81 non-traded REITs which had listed, been acquired by or merged with a listed REIT or had updated per share values average 6.3% annually compared to 11.6% returns earned over the same period in traded REITs. A significant portion of non-traded REITs' $45 billion underperformance results from high up?front fees that average 13.2%, and largely compensate brokers. The remainder of the shortfall results from conflicts of interest that permeate the organizational structure of non-traded REITs.

Non-traded REITs that list on a major securities exchange almost always "internalize" their management and administrative functions prior to listing. We observe corresponding reductions in expenses, on average equal to 9.0% of revenues, largely attributable to the elimination of payments to affiliated parties. Institutional ownership of non-traded REITs rarely occurs until after both an exchange listing and the severing of management and advisory functions from the sponsor, consistent with our view that non-traded REIT investors suffer from the lack of monitoring and effective mechanisms for shareholder protection.

By Brian Henderson, Joshua Mallett, and Craig McCann

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Brian Henderson
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Joshua S. Mallett
Manager, Valuation Services703.539.6777
Craig J. McCann
Principal703.246.9381