“The compelling fact about the non-traded REITs is that you don't have to endure that [volatility] as an investor,” Mattox says. “Rumor, speculation and that sort of thing isn't part of the experience.” Behringer Harvard sponsors two unlisted REITs, one focused on multifamily assets and another that invests in a variety of commercial properties.

Without the distraction of share price volatility, investors can focus on long-term goals that best complement the gradual appreciation potential of income-producing properties, according to Schorsch. “It gets the investor focused on the right thing: Are you going to make money for me long term, and is that platform the right relationship for me?”

Points of contention

Recent volatility aside, however, share prices provide an important benchmark for investors, according to REIT Wrap's Vinocur, who is an outspoken critic of the unlisted REIT structure. In the absence of daily trading, investors have fewer tools to help determine whether a particular REIT is right for them.

Vinocur says equity REIT share prices suggest that underlying real estate values have declined by as much as 35% since early 2007. That market-wide depreciation will eventually show up in unlisted REITs, he says, when those companies come to the end of their investment term and attempt to liquidate at market prices.

“The fact that your stock doesn't trade daily doesn't mean you escape the value drop; it only means the investor can't see the value drop,” claims Vinocur.

Despite the current turmoil enveloping publicly traded REITs, Vinocur maintains that investors are better off buying shares in a listed REIT rather than a non-listed one. Specifically, he believes the upfront fees or load in unlisted REITs cost the investor more than a similar purchase of REIT stocks.

Proponents of unlisted REITs say the one-time fee paid to buy into an unlisted REIT for a hold period of seven to 10 years may be similar to the cumulative cost of investing in REIT stocks over the same period, when annual costs such as management fees are factored in.

Vinocur also points to a dearth of analyst coverage for unlisted REITs as a disadvantage that deprives investors of insight that is available for traded REITs. The lack of analyst coverage is a legitimate concern, but the sector is making headway, according to Day of the Investment Program Association.

Sector maturity

Both Stanger and the Bank of Montreal have analysts following unlisted REITs, and more analysts will likely step into the sector as it matures. “We want that universe to expand,” Day says.

Proponents of unlisted REITs say their companies provide as much transparency as listed REITs through quarterly data, transaction summaries and other public filings. Offerings by unlisted REITs also are required to be reviewed by securities authorities at the state level, which provides an additional layer of government oversight that isn't extended to listed REITs.

Schorsch predicts the current global capital crisis among listed companies will accelerate investment in untraded REITs and lead to growth in the sector. “This industry has really come into its own,” he says.

The Investment Program Association and other proponents of untraded REITs are working to educate investors and investment advisors about the differences between the two REIT models. Day says investors frequently ask which is the better investment type.

“The reality is that they are both excellent vehicles for investing in real estate, and they have slightly different purposes,” Day says. “Both traded and non-traded REITs have a valuable place in a diversified portfolio.”

— Matt Hudgins is an Austin writer.