Commingled Real Estate Fund Trading: The Emergence of a Formalized Secondary Trading Market

Executive Summary. Since the early 1970s, private commingled real estate funds (CREFs)1have served as a popular investment vehicle through which institutional investors have allocated capital to the real estate market. Because the institutional investment arena is dominated by pension funds that are either subject to ERISA mandates or merely choose to follow ERISA “prudence,”2CREF securities have attracted institutional capital because of their ability to maintain diversity, value and stable returns throughout the years. Although still prevalent as a viable asset class, CREFs however have not survived peacefully without demand for alternative market structures and various criticisms initiated by market participants.This article summarizes and identifies three of the most commonly reoccurring issues, suggested by many industry professionals, to be potential structural flaws with both the CREF market and the CREF vehicle itself. The article further explores an industry reaction to alternative market structure demand; a formalized secondary market for the trading of unregistered real estate securities,3and analyzes the opinions of industry participants as to the possibility of such a market improving the status quo. During the course of research for this article, thirty industry participants (thirteen fund managers, twelve plan sponsors and various representatives associated with formalized secondary market efforts) were interviewed. The interview results, along with review of industry literature, serve as the basis for identifying additional thoughts that could prove relevant to the successful operation of a formalized secondary market for CREF share trading.