Regulators are about to shine a light on an expanding but opaque corner of the real-estate investment market.
The Financial Industry Regulatory Authority, Wall Street’s self-regulator, is planning rule changes that would require so-called nontraded real-estate investment trusts to improve disclosure on fees and to more quickly report on changes in the value of properties in their portfolios.
The move comes amid a boom in demand for these types of funds, which buy office buildings, stores and other commercial real estate and send most of the properties’ income to shareholders. Unlike typical REITs, shares in these funds don’t trade on public exchanges, making them less liquid.
Investors are on pace to buy $20 billion of new shares in these funds this year, according to Robert A. Stanger & Co., an investment bank based in Shrewsbury, NJ. That is the highest amount ever and almost twice the $10.3 billion raised last year. Many investors are attracted by dividends that can top 7% a year for some nontraded REITs, according to Blue Vault Partners LLC, a Georgia research firm.
But Finra believes investors aren’t getting a clear enough picture of the performance of their funds, according to Joseph Price, Finra’s senior vice president for corporate finance.
These funds and their brokers can charge fees and expenses of as much as 12%, yet that cost isn’t required to be taken into account when the funds value their stock in reports to investors.