Non-traded real estate investment trusts have become an increasingly popular offering among private equity real estate firms, but taking the first step in raising capital is far from easy.
One group with such a product is Black Creek Group, which launched a non-listed real estate investment trust on the Morgan Stanley Global Wealth Management Group platform in December, becoming only the second sponsor after Blackstone to do so.
“There’s a lot of competition for access to large wirehouse platforms,” Raj Dhanda, president of Black Creek Group, said of the competitive selection process.
Currently, Blackstone and Black Creek are the only institutional real estate fund managers that are selling net asset value REITs – open-ended non-traded REITs where assets are valued on a daily basis – through a wirehouse, according to Shrewsbury, New Jersey-based investment bank Robert A Stanger & Co.
Meanwhile, Starwood Capital Group and Nuveen both are seeking to raise NAV REITs of up to $4 billion each, according to a January report from RA Stanger. Starwood Real Estate Income Trust became effective in late December, while Nuveen Global Cities REIT became effective last month. PERE understands that both firms are also looking to sell their products through wirehouses.
Compared to its rivals in the space, Black Creek has a particular perspective in that Dhanda, who joined the firm about a year ago, previously was head of investment products and services at Morgan Stanley’s wealth management division. But being selected for the platform was just the beginning, as the designation simply allowed Black Creek to market the product to Morgan Stanley wealth management advisors; this means personally visiting Morgan Stanley’s 650 wealth management branches across the country.
“It’s a long process,” said Dhanda, adding that in the weeks since the product launched on the Morgan Stanley platform, he has visited 23 of those branches, meeting with financial advisors which manage hundreds of billions of dollars’ worth of client assets. This is in addition to numerous other visits by Black Creek’s senior real estate professionals and the firm’s wholesalers.
While being on the road with a non-traded REIT in some ways resembles a typical private real estate fundraise, the nature of the discussions is different, as the sponsor speaks with the branch’s financial advisors rather than the investors they serve, he added.
“You’ve got to simplify a story for a financial advisor and put it in the context of addressing their client goals,” Dhanda said. “Each advisor can have a very different experience with real estate.”
Marketing the non-traded REIT is a “three-touch” sales process, beginning with the initial branch meeting and then a follow-up meeting by one of Black Creek’s 24 wholesalers. A third call or meeting would take place once an advisor has presented the product to his or her clients and can put an allocation into the fund. In the last six weeks, the wholesalers have made 4,000 calls to the financial advisors at the branches and held 1,000 meetings.
Despite the complexities of raising capital for a non-traded REIT, Dhanda said retail investors are an increasingly important source of capital for real estate managers. “You do all of this because of the growth opportunity,” he said, estimating that the non-traded REIT space could grow to about $100 billion in the next 10 years.
By contrast, institutional investors have not recently increased their allocation to commercial real estate meaningfully in the last few years. “That capital pool, while the largest, has been constant in the last few years,” said Dhanda. “If it has increased, it’s come from outside of the US. In the US, most pensions are fully allocated to real estate at 10 percent or higher.”
“It’s clearly different,” Kevin Gannon, managing director at RA Stanger, said of the fundraising process for a NAV REIT versus a traditional real estate fund. “I don’t know if it’s more complicated, but there’s two elements to success. One, you’ve got to educate retail brokers on the product, and two, you have to perform because daily NAV is going to show performance regularly. You have that benchmark immediately coming out. Those two things are going to propel this product to substantial additional fundraises.”
Wirehouses such as UBS, Morgan Stanley and Merrill Lynch “have shown the most appetite for the NAV product,” said Gannon. “The guys who are on the platform early, they’re the first movers. Blackstone was a first mover, and Black Creek is up at the top there. Starwood and Nuveen are also at the top level with the horsepower of the wirehouses. They’ll follow through with an independent broker dealer channel that will also supplement.”
Blackstone was the top non-listed REIT sponsor last year, collecting $1.87 billion for Blackstone Real Estate Income Trust – representing a 44 percent market share – in its first year in the market, according to RA Stanger’s December report. Ninety-five percent of the capital came from wirehouse sales, the report said.
“Black Creek is hoping to get some of that momentum,” said Gannon. The Denver-based real estate investment firm ranked seventh on the list of non-traded REIT sponsors, having raised $189.2 million in 2017 and $604.5 million in 2016, according to the RA Stanger report. Although Black Creek declined to reveal the name of its non-traded REIT, the firm signed a dealer agreement with Morgan Stanley in October for Black Creek Diversified Property Fund, according to a filing with the Securities and Exchange Commission.
Gannon expects that non-listed REITs should raise a total of $5 billion to $6 billion in the coming year, with half of the capital to be amassed through wirehouses. “This will help a lot to juice fundraising by non-traded REITs generally,” he said. “Our assumption is they will be reasonably well-received on wirehouses. They’re big names; they’re well regarded, successful players in the real estate space.”