After the Non-traded REIT market peaked in 2013 at nearly $20 billion, the market entered a steep decline, dropping by $15.5 billion over the following 4 years. In 2018, however, spurred by changes in fee structure and how non-traded REITs were valued, the market posted 9.5% growth over 2017. That minor increase may have been the first indicator of a larger resurgence. 2019 saw the non-traded REIT market grow by an astounding 156%, reaching its highest point since 2014. The question now is, how much potential is there for further growth in 2020 and beyond?
While investment bank Robert A. Stanger & Co., is already projecting $15 billion in 2020, the popularity of non-traded REITs may be boosted even further if the market were to stop relying on outdated, manual investment processes, and instead adopt tech-enabled processing. Unlike it’s publicly traded counter-parts, which can be subscribed to online with a few clicks of a mouse, non-traded REITs still largely use paper subscription documents mailed or faxed between brokers or advisors, investors, and sponsors. This paper process comes with numerous drawbacks, including costs, security concerns, investor satisfaction and more. Two of the most prevalent concerns are NIGO error rates on documents and prolonged investment cycle-time.
Paper investment processes are known to be highly error-prone due to complex subscription documents. These documents can be several dozen pages long, and contain sections that may not be relevant to a given investor, leaving it up to brokers and advisors to decipher what information is needed, and what is not. Sometimes the same information is required in several different places. If at any point in the document there is a miscalculation, mismatch of information, omission, or some other type of error, the sponsor will reject the investment as “not-in-good-order” or NIGO and send it back for correction. It is not uncommon when dealing with real estate alternatives to see NIGO error rates over 30%.* This results in more work for financial professionals and can extend the already lengthy cycle-time of the investment.
Even without a NIGO error, an investment into a non-traded REIT can take as long as 3 weeks from origination to approval. The order entry process alone can take hours. For investors who are used to transacting at the click of a button, this process can seem interminable. Investor frustration can be further exacerbated when, during those 3 weeks, the investment becomes fully subscribed and they miss out on the available equity. Prolonged cycle-times not only delay the investment, but for brokers, also delay commission payments, which often don’t come for weeks after the initial order entry.
Straight Through Processing Technology
While non-traded REITs still largely rely on these manual processes, technology platforms are available to streamline the process and address the problems associated with paper. Electronic documents allow financial professionals to avoid costs and delays associated with mailing. Intelligent information collection workflows can help simplify the order entry process by only presenting relevant fields and identifying typos before the information gets mapped to the subscription document. Straight through processing has been shown to reduce NIGO rates to 5% or less, saving financial professionals hours of rework. And with straight through processing technology, the entire process can take days instead of weeks, which means investors don’t miss out on equity, their money gets put to use more quickly, and brokers get paid faster.
SUBMIT A Non-Traded REIT SUBSCRIPTION
IN GOOD ORDER THE FIRST TIME
Alternative investments don't have to be confusing and frustrating. Altigo allows advisors to submit subscriptions in as little as 5 minutes with a 5% NIGO error rate.*
* Internal estimate based on years of processing alternative investments. NIGO errors defined as mistakes in the paperwork that require correction. Non-Traded REITs are subject to substantial risks, including illiquidity, vacancies, general economic conditions, competition, potential adverse tax consequences, and the potential loss of invested capital. Diversification does not guarantee profits or protect against losses.
Disclaimer: WealthForge provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.