I saw this article in Investment News today. Calling them a "new breed" of REIT, it discusses the effectiveness of non-traded REITs being offered American Realty Capital and Clarion Partners Americas. I glanced through the prospectus for the Clarion Partners Property Trust, Inc, and have come to the conclusion that the liquidity function will be similar to that of Hines REIT. The article notes that the innovation of these two funds is in investing 20% of the portfolio in liquid real estate-related assets.
Clarion and American Realty Capital are to be commended for trying to bring some liquidity to real estate investing with out losing the advantages that come with private market transactions and the deliberate nature of real estate markets. In general this structure will serve all participants effectively; institutional real estate investing followed a similar model through the 90s.
The model comes apart in a market in which valuations decline precipitously. That is because the sticks and bricks portfolio will continue to be valued based on appraisals that are on average six months old. and these appraisals are based on transactions that have taken place as much as three years earlier. As Hines REIT found out in 2008 and 2009, investors can figure out that share valuation lag actual portfolio valuations, and the will stampede for the redemption window. The negative arbitrage (from the REIT's perspective) will be deemed detrimental to the REIT, and management will close the window. And it becomes just another non-traded REIT. In other words, liquidity is provided as long as shareholders in general do not need it, but once they do, it will be taken away.
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