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Decades of experience has taught Jean-Michel Wasterlain and Edward Yu that real estate funds can pay huge dividends and give an investment portfolio ballast against market volatility, but the pair found such funds were inaccessible to many investors.
Non-traded REITs typically charge high fees and have had to cut dividends because they fail to generate enough income to support them, while institutional real estate funds come with costs and minimums beyond the reach of most investors.
“The institutional funds often have minimums of $1 million to $5 million,” says Wasterlain. “Non-traded REITs have developed poor reputations so advisors often don’t offer them to investors.”
Wasterlain and Yu want to bring institutional-style real estate funds and other real estate investments to an expanded pool of investors and advisors through their new New York-based online platform CapitalFund Realty, or CAPFUNDR.
Earlier this month, the firm launched an online real estate crowdfunding platform on its website, which will allow individuals access to real estate funds that have been thoroughly vetted by industry professionals.
The founding duo have 55 years of real estate experience between them: Wasterlain was previously CEO of ORIX Capital Markets and CIO of NorthStar Realty Finance, a listed public REIT. Yu has held senior posts at Starwood Capital Group, CBRE Investors and Prudential Real Estate Investors.
While they were inspired by the recent proliferation of real estate crowdfunding investment platforms online, Yu says most tend to be marketing and distribution vehicles for investment managers built by tech startups, not real estate professionals.
“We believe that people should be investing in institutionally-managed real estate funds as opposed to alternatives like crowdfunding sites that may offer you ‘deals,’” Yu says. “It’s hard for individual investors to determine what is really a deal and what is not, but at an institutional fund you have people with the background to research the investments.”
CapitalFund plans to conduct a more thorough level of due diligence than its peers when evaluating mangers’ underwriting processes and strategies.
Wasterlain is critical of the performance of publicly traded REITs, arguing they are too-closely correlated to equity markets.
“Traded REITs have merits, but they perform more like stocks than real estate, they’re often correlated with certain sectors,” says Wasterlain.
Non-traded REITs aren’t as closely correlated to stocks and offer a steady income stream in a low-rate environment, says Wasterlain, but investors often aren’t aware of how their dividends are being paid, “often from capital that’s raised and not from investment income. We’re going to make sure that our dividends are sustainable.”
The first fund on the platform, the CAPFUNDR REIT Value Fund I, is designed to purchase shares of non-traded REITs below their intrinsic value. The fund is managed by Wasterlain and Yu.
CapitalFund Realty will raise $5 million for the fund, limited to 100 investors, and buy non-traded REIT shares off the secondary market mainly from auction websites and brokers.
“With the performance of some of these REITs over the financial crisis, there were so many people looking for redemptions that they closed down their redemption programs,” Wasterlain says. “They had no other way to get out than the secondary market.”
Wasterlain says non-traded REIT shares often sell at discounts of 50 percent or more of their net asset value, presenting a value for investors because they continue to pay dividends until a liquidity event like a sale or public listing.
The minimum investment in the fund will be $10,000, and it will pay out a quarterly distribution.
“We’re able to pay out a core five percent dividend payment, and we expect that to grow since we’re buying at a low discount to net asset value,” says Yu. “When they do have a liquidity event, they’re likely to end up with a positive value.”
The fund is limited in size by the relative scarcity of non-traded REIT shares on the secondary market and the lack of any formal exchange for the investments.
Moving forward, Wasterlain and Yu plan to offer additional strategies that invest in multifamily, net lease and retail properties, funds that won’t necessarily be sponsored by the duo, but screened for quality and appropriateness.
“We expect to have ten to twelve funds,” Wasterlain says. “We’re working with a third-party manager that we’re going to partner with that buys apartments that are a little bit old and tired, and then renovating to improve cash flow.”
Most future funds will directly invest in properties, rather than in REITs or other securities, Yu says.
The fund structure and automation allows CAPFUNDR to eliminate commissions and keep their fees below the average for non-traded REITs, and also permits them a rare level of transparency, says Wasterlain. CapitalFund will earn a 1.5 percent annual management fee from the REIT fund.
The duo note that some non-traded REITs carry up to 15 percent in fees and commissions depending on how they are purchased.
“Fees that high make it difficult to generate good returns,” Yu says. “Frankly, what we’re doing is making the market more efficient.”
The downside to the investments on the CAPFUNDR platform? Liquidity — there’s already a limited secondary market for non-traded REITs, and there are few options after buying into the fund.
“These are private equity-style real estate funds,” Yu says “Investors will have a redemption program and there will be a limited availability to redeem shares at a price slightly below the net asset value of the fund, but we really recommend that these should be viewed as a medium- to long-term investment with a life of five to seven years.”
Real estate needs a stronger online presence, says Wasterlain, but does not lend itself to the ‘robo-advisor’ model because the quality and value of the investments depend on too many subjective factors that are difficult to capture in an algorithm.
“There are a lot of checks and balances on the level of underwriting and due diligence,” Wasterlain says. “REITs are public companies, when you look at their 10k or their 10q, there aren’t a lot of detailed disclosures, so you have to do a lot of snooping around to figure out what’s going on. We believe it takes someone with a real estate background and the right relationships in the market to ask the right questions.”
CapitalFund Realty’s funds will only be available through the firm’s website, and the website’s users will be limited to accredited investors.
“We very much plan to work with fee-based advisors because this is a good way for them to be able to offer real estate products to their clients,” Yu says.