The WSJ asks an interesting question: Public REITs are down, non-traded REITs are up. Which is right? (paywall?). Public REITs are traded in an open market with daily liquidity, and prices are down about 26% overall this year. Non-traded private REITs are simply assigned a value by the sponsors of the REIT, have very limited liquidity windows, and have some sort of increase their net asset values (NAV) slightly this year. It seems rather… convenient.
Valuations differ because public REITs are valued at the price at which their shares trade on the stock market. Non-traded REITs are appraised monthly by their sponsors in conjunction with independent appraisers analyzing the value of the commercial property they own.
As usual, I agree with everything Allan Roth says:
“With unlisted REITs increasing their valuations as markets punish public REITs, I would be running for the hills,” Allan Roth said.
Again, as usual, Matt Levine has a smart take with People will pay for illiquidity:
Another, funnier kind of financial innovation is to subtract cash. If you can buy and sell something whenever you want at a clearly observable market price, that’s efficient, of course, but it can also be boring. Consider the following financial product:
You give me the password to your brokerage account.
I change it.
You can’t view your brokerage account for a year because you don’t have the password.
At the end of the year, I give you back your password and you pay me $5.[…] “It is well known that one of the best services a retail broker can provide is not answering the phone during a crash,” I once wrote; in this product, I charge you for this service. Your mileage will vary – maybe you’re good at market timing – but this service could well be worth more than $5.
This explains one of the reasons why private equity has become increasingly popular with large institutions:
By being illiquid, the private equity fund may appear less volatile. Obtaining similar returns with less volatility is a good thing; getting similar returns and feeling like you have less volatility can also be a good thing.
The inability to sell your unlisted REITs is a feature! The same goes for accepting an invented net asset value instead of open market pricing! They better hide the true volatile nature of “Mr. Market” from you. A bit like telling your children how the dog went to live on the farm. It doesn’t change the truth, but maybe they’ll feel better about it.
If seeing volatile market prices is bad, the best thing a passive investor should do (besides owning private companies) is not checking their brokerage statement. If you really are a “long-term investor”, then what’s the point of looking at daily, weekly or even monthly fluctuations? You don’t need cash, so we should use it as a feature. People also like to anchor themselves to their portfolio’s peak level, even if it’s really just an arbitrary moment in time. If you only check once a year, you will likely have missed a peak or trough.
