An Empirical Analysis of Non-Traded REITs

Abstract

Non-traded real estate investment trusts (REITs) are registered investment companies formed for the purpose of investing in real estate and marketed to retail investors. Unlike traded REITs, non-traded REITs do not trade on an exchange. We find average annual returns of 4.0% to 89 non-traded REITs, compared to 11.3% average returns over the same period to traded REITs. The economic magnitude of the underperformance exceeds $44 billion. A significant portion of non-traded REITs’ underperformance results from high upfront fees and expenses, which average 13.2% and largely serve to compensate brokers. The remainder of the underperformance is due to conflicts of interest that permeate the issuance and management of non-traded REITs. These conflicts include transactions with affiliated parties, such as the high fees paid to external advisors and property managers affiliated with the sponsor. We find significant reductions in expenses after non-traded REITs list their shares. Non-traded REIT investors suffer from the lack of monitoring and effective mechanisms for shareholder protection, such as the formation of block holdings.