The U.S. Financial Industry Regulatory Authority is warning investors to be sure they understand the features, risks and costs of investing in public, non-traded REITs.
FINRA issued an investor alert Tuesday about public REITs that aren’t exchange traded. It says that while some investors will find these products appealing due to the potential for capital appreciation and a robust distribution, “investors should also realize that the periodic distributions that help make non-traded REITs so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal.”
Additionally, it says that early redemptions of shares are often very restrictive and expensive. Most of these products limit the amount of shares that can be redeemed prior to liquidation, sometimes to as little as 3% of outstanding shares. And, the redemption price is generally lower than the purchase price, sometimes by as much as 10%.
Finally, it notes that non-traded REITs can be expensive, charging high fees that erode returns. And, it warns that it is extremely difficult for investors to make an informed decision about private REITs due to their lack of disclosure (as most are sold in the exempt market).
“Confronted with a volatile stock market and an extended period of low interest rates, many investors are looking for products that offer higher returns in turbulent times. However, investors should be wary of sales pitches that might play up non-traded REITs’ high yields and stability, while glossing over the lack of liquidity, fees and other risks,” said Gerri Walsh, FINRA’s vice president for investor education.
IE