Nontraded REITs are an attractive buy-and-hold investment for income-oriented investors. Sold through broker-dealers, shares in these real estate investment trusts do not trade on public exchanges, promise relatively high returns, and contain specific triggers for liquidating the trust. In the first such study of nontraded REITs, an examination of the comparative effects of a long holding period and a short holding period shows that investors who purchase hospitality REITs early in the cycle see a diminished return as a result of subsequent sales. In effect, the early investors subsidize the commissions paid to the dealers who sell to late-term investors. This effect is an unintended consequence of the fact that the REITs’ share prices are fixed, regardless of the value of the underlying assets. The REITs’ high dividend structure somewhat mitigates the effect, but those high dividends mean that some REITs’ payout exceeded the amount cash they took in (as measured by funds from operations). While these characteristics do not mean that investors should exclude nontraded REITs from their portfolios, would-be investors should apply due diligence. This report offers recommendations to help guide that process.
Corgel, J. B., & Gibson, S. (2008). Nontraded REITs: Considerations for hotel investors [Electronic article]. Cornell Hospitality Report, 8(19), 6-17.