REITs are commonly referred to by two general categories: Private REIT or Public REIT (whether non-listed or listed). Private REITs and public REITs both offer opportunities to invest in real estate, but they have distinct differences that make private REITs more appealing to certain investors.
These are some ways in which private REITs are considered a more suitable choice for specific investors:
1. Access to Exclusive Properties
Private REITs often invest in properties that are not available to the general public or are not traded on public stock exchanges.
This exclusivity can provide access to unique real estate opportunities, such as large commercial properties, development projects, or specialized assets, which may have the potential for higher returns.
2. Reduced Market Volatility
Public REITs are listed on stock exchanges, making their share prices susceptible to market fluctuations and investor sentiment.
In contrast, while private REITs are illiquid investments, private REITs are not subject to daily market price swings and offer a potentially more stable investment environment for those seeking to avoid short-term volatility.
3. Long-Term Investment Horizon
Private REITs typically have longer investment horizons since they are not subject to the same liquidity demands as publicly traded REITs. This long-term approach can be advantageous for investors who prioritize steady income and are willing to wait for potential appreciation.
4. Lower Correlation with Stock Market
Public REITs’ performance often correlates with the overall stock market, especially during times of economic uncertainty. While private REITs are illiquid investments, private REITs may have a lower correlation with traditional stock market movements, providing diversification benefits to an investment portfolio.
5. Limited Redemption Exposure
While public non-traded/non-listed REITs may be perceived to provide more liquidity than private REITs, that is not always the case. When managing large real estate portfolios, liquidity is extremely important.
Should a large investor in a non-traded REIT make a redemption request that would jeopardize the REITs liquidity, the REIT may decide to freeze redemptions or drastically reduce the REIT investors’ ability to redeem shares. Large redemption requests have a ‘run on the bank effect’ to public non-traded REITs that could hinder the REITs ability to honor redemption requests.