JLL’s Swaringen: ‘There’s a race for shelf space’

With Oaktree becoming the latest private equity firm to launch a non-traded REIT, the market could see the number of competitors double in the next two years, said the president of a competing vehicle.

Oaktree Capital Management has joined its private equity peers in entering the non-traded real estate investment trust space, at a time when the market is growing increasingly crowded.

“The wealth management platforms are more likely to pick two to four managers who they’re comfortable with, support them and see how they’ll perform.”

– Allan Swaringen

The Los Angeles-based firm registered Oaktree Real Estate Income Trust with the Securities and Exchange Commission earlier this month, with intention of raising up to $2 billion. The vehicle has a core-plus strategy focusing on stable, income-generating assets in the top 50 US markets, and can also invest up to 35 percent of its capital in debt, including loans and securities, according to the SEC filing.

A spokeswoman for Oaktree declined to comment.

Oaktree’s entrance comes on the heels of several similar strategies launched by TH Real Estate parent company Nuveen, Starwood Capital Group and Blackstone. CIM Group also entered the space in November through a company-level acquisition.

Oaktree’s fundraising target for its non-traded REIT is notably smaller than that of rival vehicles from Starwood, Blackstone and Nuveen, all of which registered to raise up to $5 billion.

Allan Swaringen

“I don’t think it’s a big deal whether someone files a $2 billion or a $5 billion initial offering,” said Allan Swaringen, the president of five-year-old JLL Income Property Trust. “It’s hard to draw any conclusions about that at all as these are designed to be perpetual, continuous offerings that can register additional shares… Whether someone files for a $2 billion or a $5 billion initial raise, that’s probably their outlook for what they can raise in the first few years.”

What will set these and future offerings apart is not necessarily the target raise, Swaringen said, but which products are endorsed by the industry’s gatekeepers to retail capital: wirehouses, registered investment advisors and independent broker-dealers.

“I don’t think any of the distribution channels want 20 programs on their platforms,” he said. “I think there’s a race for shelf space and there will be some winners and some losers. The wealth management platforms are more likely to pick two to four managers who they’re comfortable with, support them and see how they’ll perform.”

Including legacy non-traded REITs and those in the process of converting to a perpetual-life format, there are about 15 programs currently that are seeking to raise $35 billion – $40 billion in aggregate, said Swaringen. He noted that at its 2013 peak, the non-traded REIT market raised $20 billion, while last year that number fell to $4.5 billion.

Swaringen said he expects the number of non-traded REITs to double in the next two years, including more vehicles from managers – like Starwood, Blackstone and Oaktree – that have historically focused on opportunistic real estate. Those managers, moreover, have expanded into evergreen, core-plus strategies recently, with non-traded REITs – focusing on holding core, income-generating assets – often representing a sub-strategy within the core-plus platform.

“It’s very hard to sort out the long-term success and viability of some of these programs,” Swaringen said. “You’re seeing managers in some ways stray from their core competencies but that doesn’t mean they can’t be successful.”

Austin Mitchell, TH Real Estate’s head of global product and solutions, told PERE that if investors allocate 5-10 percent of their portfolios to real estate, there is opportunity for another generation of products and sponsors.

“It is easy to see the scale potential of this market,” he said. “The investors and platforms we work with are keen to see more institutional quality managers and offerings come to market. If anything, the market is underserved, not overcrowded.”