Realto Launches Platform for Illiquid CRE Securities Trading

Earlier in December, proptech company Realto had its first transactions on the company’s secondary marketplace for illiquid real estate and alternative securities.

The trades were in Class B restricted shares of grocery-anchored shopping center owner and operator Phillips Edison & Company, according to Realto.

The concept is similar to secondary marketplaces that enable the trade of non-listed shares in high tech companies, though not exactly the same.

“Most of these REITs are public,” Realto CEO Brian King tells GlobeSt.com. “They file their [10-Ks and 10-Qs] with the SEC, so there is transparency into the funds themselves, but it does not mean they are listed or have liquidity.”

Liquidity has long been an issue in many real estate investment opportunities. This has driven various types of innovation, whether using a non-fungible token, or NFT, to sell rights to a San Francisco co-living space, or applying blockchain technology to tokenize a multifamily project in Texas.

Why do people invest in something that is illiquid? 

“In most cases, it’s for the purpose of having yield,” King says. Investors want something that isn’t closely correlated to the stock market, instead offering a different track to a return.

 “There’s some tax laws around a REIT structure that allows you to not only pass back yield, but an investor’s original principal,” King says. “In doing so, a portion of your income is non-taxable. When you hold it to the length of the term, it depreciates your cost basis over time.” 

“When these are originally sold, the idea is they’re going to have some kind of liquidity event in five to seven years,” King adds. “They’re either going to list on an exchange, or they’ll be acquired by some public REIT and give [investors] an opportunity for an exit.”

However, some CRE funds have existed for seven to ten years without a liquidity event, according to King. Investors, especially institutional ones, might want an exit. On the other hand, institutions can see a long publicly documented track record and want the available yield.

“There’s not really a true marketplace for these types of securities,” King explains. “Nobody’s [previously] created a true secondary market for real estate securities. Phillips Edison did get listed on Nasdaq in July. They raised a new set of money, and those were A shares listed on Nasdaq and trading freely today. But all of the shares of the retail investors that invested 7 and 8 years ago are considered restricted B shares. They’re not trading on the exchange.” But they are on the secondary marketplace.

King says the biggest problem is the “archaic” paper-based systems in CRE. “The process we‘ve created has eliminated a lot of that manual process,” he says.