What is a Securitized Real Estate Investment?
When assets are “securitized” it means a sponsor—a firm that creates securitized investments— has created a separate company and is offering interests, units or shares of “securities” that investors can purchase in order to invest (directly or indirectly) in the assets. For example, a sponsor may acquire a property for development, then invite additional passive investors who will participate in the financial success or failure of the project. Economically, each investor is a co-owner of the project, but their legal ownership depends on the structure of the offering. Investors could become tenants-in-common, LLC members, general partners, limited partners or REIT shareholders, just to name a few common possibilities. Regardless of the entity or legal ownership, the investment offering represents a sale of securities because the ultimate performance of the development project depends on the efforts of the sponsor, rather than the investors. Such an investment may seem like a real estate transaction AND a securities purchase. However, real estate agents cannot offer programs that require a securities license.
For purposes of this guide, securitized alternative investments are “non-traded.” Non-traded investments are neither bought nor sold on a national securities exchange. Instead, investors purchase interests, units or shares directly from the issuer/sponsor. Investors typically redeem their interests back to the issuer when a redemption program exists. In limited circumstances there may be a thin secondary market for non-traded interests, but in most cases there is no opportunity to cash out before the entire program liquidates. Buyers should expect to hold their shares for multiple years. Conversely, traded or “listed” investments— stocks, exchange traded funds (ETFs), commodities and options—are securities that trade on an exchange such as the New York Stock Exchange (NYSE). The prices of traded securities fluctuate widely throughout the week, day or even hour ( volatility ), but on average they tend to move together over time. This tendency of a security’s market value to move similarly to other securities or indices is known as correlation . Traded securities are considered highly liquid, but liquidity comes at the cost of increased volatility and higher correlation .
The short-term price movements of a traded security may bear little resemblance to actual changes in the value of its underlying assets.
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