Here are the top 6 differences between the two:
It’s all about the fees:
Fewer middlemen means lower overhead means lower fees. An eREIT’s upfront costs are 2% while Public REIT’s are around 6-7%. Similarly, ongoing fees are half of the Public REITs
Volatility vs Liquidity:
Traditional REITs fluctuate in value every day irrespective of the fundamentals of underlying real estate versus an eREIT unit value is fundamentally tied to the performance of real estate. Public REITs by virtue of trading on an open public exchange can be sold at any time albeit at half the price sometimes. Moreover, this liquidity tends to be priced into the value of the stock itself, aka a “liquidity premium”, resulting in lower relative returns for investors who otherwise would be happy to own the shares for the long-term.
Given the long term nature of real estate product as an investment class – ideally it should be held as part of long term RRSP/RESP portfolio. While REITs qualify for registered investments, an investor into an eREIT should ensure that it qualifies too!
While Public REITs have to do some rigorous compliance adherence on theirpart, it’s naive to think that a CrowdFunded eREIT is somehow “wild west” of raising capital. The fact is that an eREIT is only able to target an “Accredited Investor” the way the regulations stand now. By definition such AI’s are more sophisticated investors. eREIT will have to be registered with OSC (or other provincial regulators) as an investment fund or a private REIT and in turn will need to follow some very rigorous framework of policy, compliance and investor protection.
Just the same way as in Public REITs there are “Stars” and “Dogs”, in the emerging eREIT world there will be winners and losers. The key for an investor is to look deeply into the management and product that is being bought along with management expertise.
Public REITs have a huge capital base and lobby groups behind them. They have been a well established group for 2 decades now. A Crowdfunded eREIT is the new kid on the block and will certainly have to go through some “initiation rites” and “hazing”.