Private real estate investment trust is one of the many different types of REIT. A REIT is a type of mutual fund for real estate investment where investors pool their money to invest in property and get dividends in return. REITs come up with an initial public offer (IPO) that is open to investors after which they are listed on an exchange, where they are freely bought and sold.
So what is private REIT? A private REIT is one that is not traded on any exchange, and is generally open only to institutional investors. Private REIT investment is not an option available to Indian investors as yet, but in the US, private REITs are exempt from SEC (Securities Exchange Commission) registration and are purchased by large pension funds and high net-worth individuals.
How to start a private REIT? This is a game that involves big stakes and involves millions of dollars in the US. Since private funds do that have the same disclosure requirements as publicly traded ones, it’s easier to set up a private REIT. The REIT decides on what sector of the real estate business it wants to invest in – like residential, office, retail hotels etc — and get stock brokers to sell the products to clients. A Declaration of Trust, which describes the REIT, has to be prepared as well.
So now you know what is a private REIT, what do you have to know to invest in them?
• High net worth: As we have pointed out earlier, a private REIT definition is that it targets the biggies – institutional investors and high net worth individuals. If you have a few thousand rupees, it’s clearly not for you.
• Tread carefully: It’s better to tread carefully as far as private REITs are concerned. This is because there isn’t much of a record of performance, since shares are not traded on an exchange. Plus disclosure requirements are not as stringent as those for publicly traded REITs.
• Higher returns: A private REIT can offer higher returns, but this will depend entirely on the capability of the people running it.
• Higher costs: They may involve higher costs as private REITs spend a lot on marketing.
• Illiquid: Private REITs are quite illiquid since they are not traded on any exchange and cannot be sold and bought quickly. However, this lack of liquidity may work in favour of long-term investors since capital stays invested longer.
• No volatility: Since private REITs are not traded on any exchange, there is no danger of volatility and panic selling during downturns.