? Regulatory changes around fee transparency and a drop-off in liquidity events is behind the decline in nontraded real estate investment trust sales, not industry reputation issues stemming from bad actors or negative investor sentiment.
? Newly arrived institutional sponsors will create a bigger pie rather than detract from traditional nontraded REIT sponsors' share of business.
ADISA President John Grady Source: ADISA
John Grady is a partner in the multinational law firm DLA Piper and president of the Alternative & Direct Investment Securities Association, or ADISA, the national trade association for nontraded alternative investments.
S&P Global Market Intelligence spoke with Grady about the impact new regulatory measures around pricing transparency, and the coming and going of key sponsors, among other things, have had on the nontraded real estate investment trust business in 2017. Nontraded REITs are on track to close a challenging year at a multiyear low in sales, at around $4.4 billion.
The following is an edited transcript of the conversation.
S&P Global Market Intelligence: Would you briefly outline why you think nontraded REIT sales have dipped so low?
John Grady: It's a confluence of a number of factors. There are the new regulatory rules around fee transparency. There have not been as many liquidity events driving money back into the space. And then there has been plenty of economic uncertainty related to tax reform and other political issues. The sales numbers are down now, but I'm not certain they're going to stay down.
Would you say the nontraded REIT industry is still suffering a "crisis of confidence" on the Street as a result of the behavior of the bad actors?
The decline in sales we've seen has been more a result of the regulatory pressure and more sporadic liquidity events. I don't think it's the case that people have soured on the space or the investment.
At one point the Department of Labor had proposed, with its fiduciary rule, to take certain nontraded products out of client retirement accounts. You can imagine how firms would turn away from products until there's clarity around that issue. We have that clarity now, but those kind of events weigh on sales.
It's worth pointing out also that there are a lot of new firms entering the field, though there will be a lag between their entrance and seeing an uptick in sales.
Would you talk a little about Blackstone Group LP and what contributions you think they've made so far to resuscitating, or giving new life, to the business?
People were excited to see new sponsors of that kind in the space, particularly ones that have such institutional reputations for sound fundraising and capital deployment. They also introduced different ways of pricing the distribution piece and timing purchases and redemptions. They built out new structures also — multiple classes of shares — and opted to sell through the wirehouse channel, an area that hadn't been a terribly fertile ground for the nontraded industry for awhile.
Blackstone did a lot of things at once that were different that brought a lot of positive attention to the space. I think the same is true for Cantor Fitzgerald LP's offering, Rodin Global Property Trust Inc. We're excited to see new ways of doing business. I can't see a downside to having these new entrants to the marketplace. If sales are still low overall, it's because there is a lot for the new entrants to study, take in and understand to really move forward.
Do you think the arrival of institutional players with Blackstone's pedigree will skew the industry to its manner of doing business? Are they playing a zero-sum game with the traditional nontraded REIT managers?
I'm hopeful that it's not a zero-sum game. I suspect the big firms moving in would like to increase the overall interest in the space, and pique investor interest in new structures. We now have more ways to approach owning real estate, in traded and non-traded vehicles, with different ways of paying distributions and different pathways to liquidity.
ADISA's hope has been that the effect of their arrival will be to grow the industry, as a whole.
What do you make of the departure of a long-time sponsor like W. P. Carey Inc. from the space?
Firms have to explore the balance between raising new capital and managing existing raises, and I think W. P. Carey decided, in light of all the changes taking place on the capital-raising side, to put its emphasis on managing the assets for which it had already conducted a raise. I think that was purely a business decision, rather than a judgment about the industry as a whole. But that's just my sense. W. P. Carey is a client, but I did not advise on that issue.
Do you have a specific sales projection for 2018?
I don't have a clear crystal ball, but I would certainly like to see an increase off this year's number. And there's no reason why sales shouldn't increase, as the newer products become more well known and as momentum picks up also with sponsors' traditional products.