Non-traded REITs have been in the press of late. The most recent headline—the $4 billion investment by the University of California’s endowment fund (UC Investments) into Blackstone’s BREIT—has generated much discussion about the structure of the deal and the attractiveness of non-traded REITs in general.
Commentary has also touched on several large non-traded REIT funds that reached their quarterly redemption caps in late 2022. Once hit, shareholder redemptions for investors were partially unfilled and delayed until a tender offering period in early 2023. The UC Investments move surely offers some reassurance and can be seen as a vote of confidence in BREIT and other similar types of funds. But regarding redemptions, we should not lose sight of the fact that the mechanics of the fund worked as designed.
Non-traded REITs are well-regulated structures. They fall under SEC supervision and must follow a certain set of disclosure and reporting standards. While funds generally limit how much can be withdrawn from the fund, these redemption thresholds are written into fund prospectuses and are disclosed. The liquidity constraints are flagged to advisors and investors alike as one of the potential risks of investment. But these limitations should not necessarily be viewed as overly prohibitive. In fact, they benefit the investor as they allow the fund to invest in illiquid assets and provide access to institutional-grade real estate to a broader population of investors than would normally be able to invest in such assets.
What deserves attention is that shareholder redemption requests from non-traded REITs are handled in an orderly manner and in accordance with the terms of the fund prospectus. When limits are reached (as they were in late 2022), shareholders are provided partial liquidity in a compliant and uniform manner. The efficiency of the process should provide comfort to managers, investors and regulators alike.
Independence and transparency for product valuation are critical. Indeed, the use of specialist third-party firms for recordkeeping, fund accounting and fund administration services is often seen as a prerequisite for institutional or advisor investment. Because such firms provide valued oversight and accuracy, they help ensure the smooth functioning and security of the funds. Specialist firms also support more scalable delivery of investor-sensitive transactions like the recent tender cap processing for the largest non-traded REITs. If shareholder or fund events are not handled appropriately and on a timely basis, it can confuse advisors and investors and quickly erode confidence in the product offerings.
In addition, the capability to provide recordkeeping (or transfer agency) services to non-traded products is not straightforward. Experience is key. Servicing these types of funds can be complex, requiring both recordkeeping expertise and purpose-built technology. Processing requirements are different from those of mutual funds and other private or institutional structures. Service providers must be able to handle the scale of traditional products but with specialized processes that can support the complexity of private or institutional products.
Lack of transparency into the volume of redemptions impacts fund managers. They rely on clarity about how much liquidity they need to raise—or maintain. Real estate is a notoriously challenging asset to value. Impacts of changing interest rates, varying tenancy rates, lease agreements, and fluctuating income streams compound the ability to easily and quickly price underlying holdings and raise cash. This is precisely why redemption caps exist in the first place. They help with the long-term management of the fund. Fund management efforts are further hindered if a recordkeeper cannot account for shareholder redemption requests on a timely basis and advise of cash needs. Potentially significantly so. Which, in turn, can impact returns and thus, the shareholder.
The UC investment is a vote of confidence in non-traded REITs, highlighting their value as an investment option that allows investors to gain needed access to institutional quality real estate. But what should not be overlooked is the behind-the-scenes efforts of recordkeepers for any non-traded product. They play a vital role in assuring market stability by having the right controls and servicing capabilities in place.
SS&C is the largest retail alternatives transfer agency provider, supporting 19 of the top 20 public program sponsors. We have long-standing, proven capabilities for retail alternative products of all types. Our comprehensive capabilities encompass administration, accounting, investor servicing, transaction processing, compliance reporting and distribution support, with automated connectivity across the broker-dealer universe. Online portals bring transparency into transaction processes for broker-dealers and advisors and simplify capital-raising for asset managers.
SS&C offers a seamless, end-to-end solution from fund accounting and administration down to the individual investor statement. We offer the scale needed to handle the volume and velocity of the marketplace. With the recent addition of Blue Prism to the SS&C roster, we are ramping up the introduction of robotics automation to support the growing volume of subscription and redemption activity across millions of current retail investors supported by SSC within these products.
Written by Chris Shaw
Head of Retail Alternatives