Are REITs Redeemable? What Investors Need to Know

Real Estate Investment Trusts, commonly known as REITs, represent a distinctive investment vehicle that allows individuals to participate in large-scale real estate portfolios. A REIT is a company that owns, operates, or finances income-producing real estate across various property sectors, such as office buildings, shopping malls, apartments, and hotels. By investing in a REIT, individuals can gain exposure to real estate assets and potentially earn dividend income without the complexities typically associated with direct property ownership. This structure was designed to make real estate investing more accessible, similar to how mutual funds provide access to diversified stock portfolios.

Publicly Traded REITs and Liquidity

The most common type of REIT encountered by the general public is the publicly traded REIT. These investment vehicles are listed on major stock exchanges, such as the New York Stock Exchange, and their shares are bought and sold just like shares of any other publicly traded company. This means that publicly traded REITs are not “redeemable” in the same way mutual fund shares are, where an investor sells shares directly back to the fund at their net asset value. Instead, an investor wishing to exit their position sells their shares on the open market through a brokerage firm.

The price of publicly traded REIT shares fluctuates throughout the trading day based on market supply and demand, economic conditions, and investor sentiment. This market-driven pricing provides significant liquidity, allowing investors to buy or sell shares relatively quickly during market hours. While this liquidity offers flexibility, it also means share prices can be volatile and may not always directly reflect the underlying real estate values.

Non-Traded REITs and Share Repurchase Programs

Non-traded REITs differ significantly from their publicly traded counterparts because their shares are not listed on national stock exchanges. This absence of an open market means they lack the daily liquidity inherent in publicly traded REITs. While direct “redemption” is not a feature, some non-traded REITs may offer limited, voluntary share repurchase programs to provide investors with a potential exit mechanism.

These repurchase programs are subject to various restrictions and are not guaranteed. A non-traded REIT’s board of directors has the discretion to suspend or modify the program at any time. Repurchases are capped, often limited to a percentage of the REIT’s net asset value (NAV) per period. If repurchase requests exceed these limits, requests are prorated, meaning investors may sell only a portion of their desired shares, or requests may be deferred. The repurchase price may also be at a discount to the estimated NAV, and early repurchases may incur fees.

Private REITs and Exit Strategies

Private REITs represent another distinct category, offered through private placements to a select group of investors. Given their private nature and limited investor base, these REITs are highly illiquid and do not offer redemption mechanisms or formal share repurchase programs. Investors in private REITs should anticipate a long-term holding period, as immediate liquidity is not a design characteristic.

Exit opportunities for private REIT investors depend on broader liquidity events. These include the eventual sale of the underlying real estate assets, allowing for the distribution of proceeds to investors. Other exit strategies involve a future public listing of the REIT through an initial public offering (IPO), or the acquisition of the private REIT by another entity. Selling shares on a secondary market is also a possibility, though such markets are less developed and transactions may occur at a discount due to the inherent illiquidity.