A “Syndication Guy” Does a Hard Analysis

[Don Konipol]

Ok, I'm a professional "syndicator", "sponsor", "fund manager" specializing in real estate and real estate debt. But a question that always played in the back of my mind was "can an investor do just as well (or better) investing in publicly traded REITs rather than private equity real estate (passive limited partner or LLC interests)? Until recently I firmly believed the answer was yes. Now, I'm not so sure.

First, let’s get rid of the “elephant” in the room.  Many investors avoid REITs because their Value is “marked to market” every day.  So, while a valuation decline in private syndication might not be recognized for a long time, a bear market in REITs is “shouting” at the investor every day. This is purely psychological- but you have to sleep at night.  If you panic, sell at the bottom, become depressed by negative changes in the value of your assets, then DON’T invest in anything with a publicly traded market.  Your sanity is worth more than any potential opportunity missed. 

Sans, the psyche part, here as I see it are the advantageous of REITs vs Syndications

1. Liquidity

2. Diversification

3. More professional management (usually)

4. Management interest more aligned with investor interest (usually, for internally managed REITs)

5. More and “better” information available 

6. Track record easier to access

7. Lower risk 

8. Easier evaluation 

9. More defined regulations 

10. Less management cost 

(The above applies to SELECTIVE REITs, randomly investing in any old REIT isn't going to produce the results you want)

Here are the areas Private Syndications may have the advantage

1. Single property vs diversified portfolio makes analysis on per property basis doable 

2. More likely to be able to hit “home run” due to concentration of property interests

3. Possibility of “one on one” relationship with sponsor/management

4. Definitive “liquidity event” , (property is sold).

5. Not reliant on public market valuation 

So, I don't have any "hard" stats (which can be quite misleading anyway). My gut feel is that REIT investing is easier, less risky, and return would be only slightly less than as a passive investor in private deals for all but the investor who wants to work passive deals as a full time job.

what do you think?