In a low-yield environment, payouts of 4% to 6% have many investors thinking about increasing their exposure to real estate. 

In a survey of over 500 high-net-worth investors, 80% said they thought commercial real estate will equal or top stock market performance over the next five years. The Investment Program Association survey indicated these investors expected to boost their portfolio allocations to non-listed REITs and business development companies (BDCs). 

“The compelling point is what these investors are saying,” Kevin M. Hogan, president and CEO of the IPA, told On Wall Street. “They are confident about investing in real estate, and they’re voting with their pocketbooks.”

When asked about future holdings, 45% of respondents said they’d likely own non-listed REITs while 24% planned to include BDCs in their portfolio. (BDCs invest in the debt and equity of small companies; Hogan said such investments are primarily real estate-related now.)  These findings imply a 15 percentage-point increase in ownership of non-listed REITs and an 11 percentage-point jump in BDC investments.

“After the significant downturn in the real estate market, investors are now saying that the market has turned a corner,” Hogan said in a statement. “In today’s low-interest-rate environment, these ownership levels can help provide investors in non-listed REITs and BDCs with significant current income potential over a multi-year investment horizon.”

According to the IPA, many non-listed REITs pay annual distributions of between 4% and 6% while BDCs often have similar payouts.  Generally, investors should expect to hold non-listed REITs for five years or longer before an exit opportunity (via liquidation, merger or listing) arises.

The IPA cited data from Robert A. Stanger & Co. to indicate that sales of non-listed REITs and BDCs have set records recently.  In 2012, estimated total sales were $10.3 billion for non-listed REITs and $2.8 billion for BDCs. In the first quarter of 2013, those numbers were $3.9 billion and $655.7 million, respectively.

Although BDC programs are relatively new, non-listed REITs have a longer history. Some observers have voiced concern that distributions have contained returns of investors’ principal rather than cash flow from operations. Hogan said that such objections have declined recently, due in part to an increasing number of liquidity events from non-listed REITs. “One study of 17 full-cycle programs showed annualized average returns over 10%,” he said. “There’s a reason that sales are up so much. Investors see value in these programs.”

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