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Individual investors aren’t having a great time in the markets at the moment, so the last thing they need is a new restriction on where they can invest their money.
But that’s what the North American Securities Administrators Association (NASAA) is recommending with its proposal to cap at 10% of liquid net worth the amount that individual investors can put into real-estate investment trusts (REITs) that aren’t traded on public exchanges. While NASAA doesn’t promulgate regulations, its suggestions are often adopted in U.S. states and Canada.
REITs aren’t complicated or exotic financial instruments. In a typical REIT, someone buys a building or piece of real estate, rents out the space, and then distributes the income to shareholders. They’re popular with people looking for dividend income.
The rap on non-listed REITs has been that they have high fees and are comparatively illiquid, making it hard for investors to get their money out quickly. But the market has adjusted for that criticism and created Net Asset Value REITs that provide more liquidity and regularly calculate and disclose the value of shares, creating more transparency and less volatility.
NAV REITs now represent 99.9% of money raised for REITs, according to Robert A. Stanger & Co., an investment bank that tracks alternative investments. In a letter to NASAA in September, Stanger Chairman and CEO
Kevin Gannon
wrote that NASAA seemed to be confusing the new REITs with the previous generation’s.
The studies used by NASAA were “outdated” and “flawed,” Mr. Gannon wrote, and “mischaracterize the structure, performance, and liquidity” of the REITs it proposes to target. The new NAV REITs, he noted, provided an 11.35% annual return in the five-year period up to June 30, 2022, and made retail investors some $26 billion. As for liquidity, they provided an estimated $9.3 billion in redemptions from 2011 though June 30, 2022.
NASAA’s proposal would apply to all individual investors, even “accredited” ones deemed more sophisticated by the Securities and Exchange Commission. That means small investors would be cut out of a lucrative strategy available to pension funds and others. The same restriction would apply to investors in non-listed Business Development Companies, which are a key way for small businesses to raise capital.
The usual suspects are not in their usual positions on this one. On the side of restricting REIT investments has been Ohio Republican Gov.
Mike DeWine’s
Securities Commissioner
Andrea Seidt,
who is also the chairwoman of the NASAA committee leading the effort. Her support of the proposal has alarmed the Ohio Chamber of Commerce, which wrote that the change would affect more than 31,000 Ohioans who are invested in the REITs with an average investment of $60,000.
Meanwhile, California’s Democratic regulators have put on the brakes. In an August letter to NASAA on the REIT proposal,
Jan Owen,
the former financial regulator for then-California Governor
Jerry Brown,
wrote on behalf of the California Business Roundtable that concentration limits on NAV REITs should have an exemption for accredited investors. California Commissioner of the Department of Financial Protection and Innovation Clothilde Hewlett said the same of concentration limits in BDCs, noting that letting accredited investors “exercise their own discretion” about the concentration levels of their portfolios helped ensure “traditionally underserved markets have access to capital.”
Over-concentration is an investment risk, but REITs are more often used by investors as a way to diversify. Efforts to “protect” small investors from putting their money in REITs deprives them of a chance to earn better returns. Let’s hope this proposal is withdrawn.
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the October 11, 2022, print edition.
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(This article is generated through the syndicated feeds, Financetin doesn’t own any part of this article)
