Real Estate Investment Trusts (REITs) are investment vehicles that hold income-generating properties. Investors earn dividends from the properties without having to own them individually. Some REITs specialize in specific market sectors – such as office buildings or hotels – while others are more diverse.
REITs have been heavily promoted by investment advisors and stockbrokers in recent years because of high percentage commissions for the brokers. But as a category, REITs are risky and frequently subject to mismanagement. In the fallout of the Covid-19 pandemic, many of these high-risk REIT investments are performing as badly as they did in the 2008 financial crisis, though the details are different:
- In 2008, debt finance vanished, forcing many REITs to raise equity at low valuations.
- Today, loss of rental income due to businesses hurt by social distancing requirements is impacting landlords in almost all real-estate sectors
Many REITs are high risk, unprofitable, unstable, and overvalued in the best of times and have been proven to be particularly unhealthy in downturns. And yet, brokers continue to push these investments to their own advantage with little explanation of the risks to their investors. Adding insult to injury, brokers frequently fail to properly research the holdings of the REITs they are pushing, which can lead to overconcentration in certain market sectors.
Today, in 2020, REITs that hold commercial properties, retail shopping centers, and hotels – to name just a few – are at particular risk of failing due to the pandemic.
Please call the Law Office of Jared Rose if you believe your broker or financial advisor:
- Failed to properly investigate the risks of a REIT that you invested in, or failed to inform you about those risks
- Lied or made misrepresentations about a REIT you invested in
- Recommended a REIT that did not meet your investment risk profile. For example, if you told your broker you were a conservative, risk-averse investor, why did he put you in a risky investment?
- Failed to disclose a conflict of interest, such as the large commissions earned from selling REITs
- Failed to notice that a REIT you invested in put you at risk of overconcentration in a market sector