Publicly Traded REITs vs. Non-Traded REITs: What’s the Difference?

With the equity market as volatile as ever, investors are increasingly turning to alternative assets to generate cash flow. One investment vehicle, in particular, that’s drawing attention is real estate investment trusts, or REITs. Research by Nareit shows that investments in REITs have more than doubled over the past 10 years.

REITs come in many different forms, with varying criteria. However, many prospective investors might not understand the differences — and relative pros and cons — between publicly traded REITs and non-traded REITs. The latter category includes both publicly registered non-traded REITs and private REITs.

Liquidity vs. Illiquidity in REITs

Publicly traded REITs are probably the most well-known type. These products offer some exposure to the real estate market through companies that invest in physical real estate assets. Rather than investing in a physical property, investors buy publicly traded shares of a company on an exchange, where pricing is subject to market forces and volatility.

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This type of REIT is highly liquid and can offer investors a way into real estate even though traded REITs act more like equities. That said, publicly traded REITs fell about 25% in 2022 due to the combination of a high-interest-rate environment and investor fears. Now, in early 2023, with further interest rate increases likely on the horizon, publicly traded REITs may continue to suffer under volatile and uncertain market conditions.

The recent downturn in the equity market and accompanying decline of publicly traded REITs have opened the door for non-traded REITs to showcase their investment power. Unlike publicly traded REITs, which are susceptible to market whims and Federal Reserve actions, non-traded REITs can be more insulated from stock market volatility.

While non-traded REITs are much less liquid since REIT management controls any redemption process, this potentially offers benefits as well — since REIT managers can remain focused on long-term strategy, and the process of holding periods and suspending redemptions gives the manager more flexibility in executing the strategy without having to reserve cash for redemptions.

Transparency in REITs

Both publicly non-traded and traded REITs are registered with the SEC and file regular, publicly available reports. These help investors understand where their money is going and provide an additional level of transparency that is delivered every few months, depending on the REIT.

Because private REITs don’t have a regular reporting requirement, they’re only available to accredited investors — who are classified by the SEC as qualified to invest in unregistered securities based on satisfying one or more requirements regarding asset size, governance status, income, net worth or professional experience. While the reduced regulatory oversight can be considered a risk of private REITs, the frequently lower operating costs can be seen as a benefit to counter that risk.

Investor Accessibility of REITs

Accessibility can play a key role in which types of REITs an individual might pursue. Private REITs are not only limited to accredited investors but typically have the highest minimum investment amount compared to other REIT options, potentially ranging from $25,000 to $100,000. Both these factors make them accessible only to high-net-worth investors. Publicly registered non-traded REITs, meanwhile, are generally available to non-accredited investors and often have lower minimum investment requirements as well.

Retail investors typically gravitate to publicly traded REITs, since these are open to all and typically have either no investment minimum or at least the lowest entry point of the three types. Publicly traded REITs can also be found on investment apps like Robinhood or Fidelity, while publicly non-traded and private REITs are generally purchased only through specialized brokers.

In conclusion, no matter how you want to incorporate real estate into your portfolio, both traded and non-traded REITs offer industry exposure. Non-traded REITs are less correlated to the traditional equity markets and can add stability to an investment portfolio, particularly during inflationary and uncertain times. On the other hand, publicly traded REITs can give investors real estate exposure without locking down significant cash and still can offer liquidity and dividend potential.