Retail investors flooded the nation's four biggest sponsors of unlisted real estate investment trusts — also known as private REITs — with a whopping $6 billion in 2003. Roughly half that amount was raised by REIT sponsor Wells Real Estate Funds.

Now a private office developer is following Wells' lead: Houston-based Hines has registered a $2.2 billion unlisted REIT offering. For a minimum of $2,500, investors can own 250 shares in the Hines REIT, which will invest in all classes of office buildings. The closely held company already owns or has interests in 48 million sq. ft. of office property around the world, with a $13 billion portfolio.

Front-end fees assessed by the Hines' REIT will be around 10% of the investment. Hines, for its part, refused to comment on the REIT. Still, news of its plan caused quite a stir among REIT watchers, though Wells has garnered the most attention — not all of it welcome.

Wells' steep 16% front-end fees and share liquidity issues have raised the hackles of many on the listed side of the business. Why? Critics say that vehicles like Wells are in fact limited partnerships disguised as REITs, and few can forget the infamous real estate limited partnership (RELP) debacle of the 1980s that spawned myriad investor lawsuits. Such an outcome, they argue, would taint the REIT industry's hard-won reputation.

But there's undoubtedly some jealousy involved. Unlisted REITs have shown a knack for raising billions by offering investors 6% to 8% yields. And a flurry of bad publicity that centered mainly on Wells has so far failed to slow down the stream of new unlisted offerings set to hit the market in 2004.

In fact, Robert Stanger & Co. reports that 10 unlisted REITs registered with the Securities & Exchange Commission between January 1 and mid-December of 2003 (see chart). Between these 10 REITs are roughly $17 billion worth of offerings (excluding dividend reinvestment.) In contrast, only five unlisted REITs registered in 2002 for a total of $1.9 billion.

Wells currently has the largest REIT in registration. Wells REIT II expects to raise more than $6 billion in 2004. “We've got our sights so focused on what we are doing that we aren't looking in the rearview mirror to see who's coming on,” says Don Miller, chief real estate officer for Wells Real Estate Funds. Miller acknowledges that the challenge for unlisted REIT sponsors is finding the right distribution channels. Wells uses independent financial planners throughout the nation.

“For better or worse, private REITs have the advantage. People don't have to read in the paper every day that these things went up or down,” remarked Dale Anne Reiss, Ernst & Young's global director of real estate, at the National Association of Real Estate Investment Trusts (NAREIT) conference last November.

During the same conference, Susan Hudson-Wilson, founder and CEO of Property Portfolio Research, wondered aloud how the mainstream REIT industry can “get in front” of this capital wave. “How can the story be told that this is where the highest-quality assets in that category are? I worry that this is a sucking sound away from the mainstream part of the business.”

Hudson-Wilson's concern about unlisted REITs diverting investor dollars away from their listed counterparts was echoed by others at the conference. One audience member suggested that NAREIT should do something about these unlisted REITs. In a follow-up call last month, Hudson-Wilson remarked, “If I were NAREIT, I would say that you must be publicly traded to be a member.” A NAREIT spokesman says that no such plans were in the works.

It's unclear how Hines plans to market its new REIT. Like all unlisted REITs, which many believe are sold rather than bought, Hines will earmark millions of dollars to motivate its sales force. One observer believes it might be difficult for Hines to raise billions from retail investors, even if major wirehouses decide to sell shares of its REIT.

“But that probably won't happen, since the big wirehouses all got burned back in the 1980s for this stuff,” says Spencer Jeffries, editor of the “The Partnership Spectrum,” a monthly newsletter that tracks the limited partnership industry.

Jeffries doesn't think that the private REIT onslaught is over just yet. “There will definitely be more of these private REITs coming out this year.”

BILLION-DOLLAR PIPELINE
These REITs registered with the SEC between Jan. 1 and mid-Dec. 2003:
REIT Amount Registered (Excluding DRIP)*
Wells Real Estate Investment Trust II Inc. $6 billion
Inland Western Retail Real Estate Trust Inc. $2.5 billion
CNL Income Properties Inc. $2 billion
Hines Real Estate Investment Trust $2 billion
Corporate Property Associates 16-Global Inc. $1.1 billion
Wells Real Estate Investment Trust III Inc. $1 billion
Eisenhower Real Estate Funds Corporate & Government Properties Inc. $500 million
Boston Capital Real Estate Investment Trust Inc. $300 million
Corporate Property Associates International Inc. $275 million
Orion Multifamily Investment Fund Inc. $200 million
Dividend Reinvestment Program* Source: Robert Stanger & Co.