Deny they're just chasing commissions
By Rick Miller
June 2, 2003

One of the hot investments from last year - non-public real estate investment trusts - shows no signs of cooling off.

And financial advisers are among those fanning the flames.

Sales of private REITs by the top four sellers, which make up the majority of industry sales, are on pace to hit $5.5 billion in 2003, up from $3.5 billion in 2002 and $2.1 billion in 2001.

"It is phenomenal, the amount of money coming into these things," says Spencer Jefferies, editor of The Partnership Spectrum, a Dallas-based newsletter on non-traded partnerships and REITs that compiles sales data.

Adviser sales of private REITs - attractive for their sizable dividend payments and commissions, and lack of correlation to the stock market - are smoking.

But it is a trend some real estate investors think should be doused with water.

Questioning attractiveness

"I don't know why anybody would invest in them," says Joe Harvey, senior vice president with Cohen & Steers Capital Management Inc. in New York, which prefers publicly traded real estate, given that it manages several REIT mutual funds. "You don't have liquidity, you don't know what it's worth at any given point in time," he says.

But that hasn't deterred the popularity of these REITs. In an environment where investors are petrified of market volatility and are looking for higher yields, private REITs pay an attractive dividend, which experts peg at between 7% and 9%.

"It is also a good story [for an adviser] to be able to say, `It's diversification against the stock market or your bond portfolio,"' Mr. Harvey says.

Still, he and others think publicly traded REITs make more sense for the average investor.

"You have liquidity, daily valuation, better investment structures and some of the best real estate companies in the country," Mr. Harvey says. "So when I look at the private REITs, they don't make a lot of sense to me."

But some think adviser self-interest is coming into play.hefty commissions. 

"Why do I think financial advisers are selling them? I think they are selling them because they get paid a heck of lot of money to sell them," says Barry Vinocur, editor of Realty Stock Review, citing the 7% to 10% commissions. The newsletter is published by Rainmaker Publications Group LLC of Ocean, N.J.

"Why in the world does anybody want to buy a vehicle where somewhere between 15 and 20 cents of every dollar you invest doesn't get invested in the ground?" Mr. Vinocur asks.

"It goes either into the pocket of the financial adviser, the broker-dealer or the folks sponsoring these deals." However, financial advisers who sell private REITs say the reasons go beyond fat commissions.

For one, the stable value is a benefit. While the companies are publicly registered, the private REITs they offer don't have net asset values listed daily in the newspaper.

"Over the long run, a public REIT is going to perform on the basis of its operations," says Frank M. Gleberman, a certified financial planner and principal of The Century Benefits Group in Marina Del Rey, Calif.

"But in the short run, if the market tanks, people are going to say, `Oh my gosh, the sky is falling,' and they can sell those easily because they are very liquid," he notes.

Mr. Gleberman adds, "so many of them will dump their shares, depressing the price, whereas in a private REIT, those are not reported on the open marketplace ... You're in there, and you are not going to get out of it easily."

Responding to illiquidity concerns, he notes that some companies offer buyback programs for investors who want to get out, though sometimes at a penalty.

"I think they definitely have a place in a portfolio, specifically of a person who needs some type of fixed income or taxadvantaged income," says Jon Lacy, a CFP who is a supervisor of trading services at E*TRADE Group Inc. of Menlo Park, Calif.

"Because of the pumped-up yields, well-managed private REITs that are not highly leveraged are paying out typically between 7% and 8%. And when you look at the 10-year note ... it's quite attractive," says Mr. Lacy,

The appeal is expected to boost sales this year at the top providers: Wells Real Estate Funds in Atlanta, Inland Real Estate Investment Corp. in Oak Brook, Ill., CNL Financial Group Inc. in Orlando, Fla., and W.P. Carey & Co. LLC in New York.

These four companies raised $1.8 billion in the first four months of the year, according to Mr. Jefferies, and the pace appears to be quickening.

Wells Real Estate, the leading seller last year, with $1.3 billion in sales, expects to double that amount this year, says president and chief executive Leo Wells.

"We already probably have raised as much as we raised last year," Mr. Wells says, noting that the company attracts about $200 million a month. That's 200 new investors a day, compared with 20 to 50 a few years ago, he says.

Mr. Wells sees the trend continuing as the Federal Reserve talks about cutting interest rates further. Retirees have few alternatives for high-yield dividend income.

"Where do you go?" Mr. Wells asks. "CDs? Bonds?"