This multi-sector and multi-disciplined approach combines the best of institutional asset managers with broad-based diversification that includes income and value added strategies in multiple asset sectors (multi-family, office, retail, industrial, hotel, storage, mezz).
Over 50 years ago, President Dwight D. Eisenhower signed legislation that enabled small investors to make investments in large-scale, significant income-producing real estate.
This law, named the REIT Act, combined the attributes of mutual funds and real estate investments allowing average investors to pool their capital and invests in large scale, diversified portfolios of income-producing real estate.
In the early years REITs saw little growth in part because the initial law didn’t permit REITs to operate or manage the real estate they owned. The investment marketplace did not accept this arrangement readily.
The Tax Reform Act of 1986 radically changed the REIT landscape in two important ways. First, the Act took the handcuffs off REITs by permitting them not only to own, but also to operate and manage, most types of income-producing commercial properties. The second part of the Act drastically reduced the potential for real estate investment to generate tax shelter opportunities. This meant that real estate investments had to be more economic and income-oriented. These changes took hold in 1991 with the successful IPO of Kimco Realty (KIM)–one of the first equity REIT offerings of the “Modern REIT Era.”
Wall Street Influence
Since 1992 REITs have matured into a massive $407.43 billion industry (FTSE NAREIT market cap as of Dec 2011) garnering the support of Wall Street and institutional investors worldwide. Widespread Wall Street ownership has absolutely brought REITs into the mainstream as a highly transparent, liquid asset class. It also has made REITs highly correlated with traditional equities because of heavy trading and pressure by research analysts on REITs to demonstrate growth quarter after quarter.
Back to Basics for Institutions
As REITs have become more and more correlated with the broader equity markets many institutional investors (pension funds, endowments & foundations) have decided to utilize real estate private equity funds for their allocation to real estate. In fact, between 2003 and 2012, more than 300 real estate private equity funds have raised around $670 billion in institutional capital (source: Preqin). A bulk of real estate private equity funds (core open-end commingled funds) focus on and are built to deliver the traditional benefits of real estate ownership; income, low-correlation to other assets and a hedge against inflation.
Mainstreet Investors Painted into a Corner
Because real estate private equity funds typically require minimum investment between $5 and $20 million, the option has been unavailable to individual investors. However, similarly to institutions, individual investors are hard pressed to navigate between low-yielding bonds and high-risk equities.
As a result, retail investors (like institutions) are seeking greater exposure to non-correlating alternative investments that provide consistent income with low volatility. High-quality income producing real estate has emerged as a favorite among retail investors, but the question for many investors is: “how should I get my exposure to investment real estate.”
Since 2002, individual investors have flocked to non-traded REITs to the tune of $81.3 billion (source: Blue Vault). By definition, the key benefit of non-traded REITs is that they are not yet publicly traded. Subsequently, they offer the reasonably predictable cash flow without the volatility incumbent in the public markets. However, as noted by an Investor Alert by FINRA, non-traded REITs come with issues including high fees (up to 15% upfront), little or no liquidity, conflicts of interest and a lack of transparency.
Faced with the prospect of low-yielding bonds, high-risk equities, and the issues of non-traded REITs, where does the average investor turn when it comes to real estate? A bulk of real estate private equity funds (core open-end commingled funds) such as the Morgan Stanley Prime Property Fund and AEW Core Property Trust, focus on and are built to deliver the traditional benefits of real estate ownership; income, low-correlation to other assets and a hedge against inflation.
The Next Big Wave for Real Estate Investors
Many real estate leaders have imagined the next generation of real estate to come from a way for individuals to invest in real estate private equity. That time has come. One uniquely innovative new product promising to deliver direct real estate ownership to individual investors with the underwriting transparency and fee structure of inherent in institutional structures is Versus Capital Multi-Manager Real Estate Income Fund (VCMRX).
This differentiated new product takes individuals out of the corner of non-traded REITs into the world of institutional real estate private equity funds. Versus Capital provides a differentiated platform in which the retail investor can participate in diversified, non-correlated, income producing institutional quality real estate.
Versus Capital is a multi-manager mutual fund that invests with some of the most highly sought after private equity funds. Structured as a 40-Act mutual fund, Versus seems to be more investor friendly and features no upfront load, daily NAV pricing, quarterly liquidity and 1099 tax reporting. By assembling a diverse group of institutional funds, Versus seeks to provide a sound “margin of safety” by investing in a focused cross-section of commercial real estate managed by some of the best real estate fund managers in the world.
This multi-sector and multi-disciplined approach combines the best of institutional asset managers with broad-based diversification that includes income and value added strategies in multiple asset sectors (multi-family, office, retail, industrial, hotel, storage, mezz). In addition, the geographic diversification is also balanced with the majority of the assets held in the U.S. and the remaining exposure in Asia and Europe. The risk-averse fund was developed with the core strategies designed for investors seeking income, diversification, inflation protection and attractive risk adjusted returns.
Ultimately, this wave of opening up institutional fund managers to the retail market lies with the success of the Versus fund and the willingness of investors to embrace a new structure. Time will tell but it looks like this offering is well aligned with the investors’ investment objectives of stability, income, and growth (in this order) with a liquidity feature that helps investors sleep well at night.