When it comes to commercial real estate investment strategies for retail financial advisors, there’s water, water everywhere, but not a drop to drink — particularly if you’re a fiduciary. From a strict asset allocation perspective, publicly-traded REITs and REIT ETFs are often highly correlated to equities, especially over a short-term investment horizon. On the other hand, Non-Traded REITs have a much lower correlation to equities (at least on the surface), but they suffer from egregiously high fees, enormous conflicts of interest and a jaw-slackening lack of transparency. For most financial advisors and their clients, the only other alternative is smaller, illiquid direct investment programs which are generally not professionally managed, not widely distributed and often very expensive.
This Hobson’s Choice confronts advisors and investors every day, but Versus Capital has designed an innovative fund of funds vehicle, the Versus Global Multi-Manager Real Estate Income Fund, to address the dilemma. The fund aims to raise $750 million and operate as a publicly registered, closed-end investment fund. If the launch is successful, advisors will no longer have to choose between publicly traded REITs with a high correlation to equities, and Non-Traded REITs that have a high correlation to simply throwing your money away.
Versus Capital Advisors has teamed up with Callan Associates, one of the top institutional real estate investment advisors in the country; Callan will serve as Sub-Advisor to the fund, and together they have assembled a fund of funds portfolio that will include many of the top institutional real estate fund managers in the United States and abroad, including Heitman, Urdang, Morgan Stanley, Principal, Invesco and Security Capital.
The fund will be income-oriented, and while it will seek diversification by geography, it will primarily pursue a conservative U.S. core/core plus strategy, with an annual dividend yield target of approximately 5% after fees and expenses. A liquidity feature will allow investors to cash out periodically, although there is a 2% penalty for withdrawals in the first year.
The Versus Global Multi-Manager Real Estate Income Fund offers a distinct advantage to smaller investors seeking direct investment exposure to commercial real estate: the ability to circumvent the prohibitive minimum investments required by more efficient, institutionally-managed real estate funds — and get much better liquidity. Under the Versus closed-end fund structure, retail investors with as little as $10,000 can effectively buy shares in top institutional real estate funds that would otherwise require a $5 to $10 million minimum investment and a five to seven year capital commitment.
The Versus “fund of funds” strategy will also provide diversification by manager, asset class and market, but it is not cheap to administer or implement (it carries an approximate 3.45% annual expense ratio, all-in, including distribution fees, account servicing fees, underlying fund fees and expenses, and a 90 basis point asset management fee for Versus). Nevertheless, it delivers value by bringing top institutional fund managers to smaller investors, much broader diversification than direct investment programs involving only one or two distinct assets, and last but not least, the potential for higher risk-adjusted returns.
In my opinion, there’s absolutely no question that the commercial real estate market has bottomed. For retail investors interested in making some money on the recovery, the Versus fund of fund’s combination of transparency, liquidity, diversity, and potential for higher risk-adjusted returns generated by top managers should result in high-quality, non-correlated direct exposure to commercial real estate at a fraction of the usual cost (read the Versus registration statement here).