Ares Real Estate Income Trust Inc. (ZARE)

Ares Real Estate Income Trust (ZARE) is a non-traded real estate investment trust that buys commercial real estate and leases it to tenants, collecting the rent to pay shareholders. Unlike REITs listed on stock exchanges, Ares REIT is a closed-end, non-traded fund, which means its shares trade through the sponsoring broker network and are not priced by the market every second. The appeal is supposed to be stability—less price volatility, a steady current yield, and eventual liquidity when the fund matures.

Non-traded REITs: a middle ground between buying property and trading stocks

Ares REIT occupies a distinct niche in the investment landscape. Unlike a listed REIT on the NASDAQ or NYSE, which trades hourly at market prices, Ares REIT shares are not liquid and not publicly priced. Investors buy shares through financial advisors or directly from the fund, and the fund establishes a net asset value (NAV) based on appraisals of its underlying properties and debt.

The practical difference is significant. A trader cannot wake up, see that a listed REIT has fallen 15 percent, and panic-sell within seconds. The non-traded structure forces a long investment horizon. The trade-off is supposed to be twofold: first, the sponsor has more freedom to make long-term decisions without the pressure of quarterly earnings; second, the investor gets fewer surprises and a more direct connection between the property values and the NAV.

In reality, this structure also creates a set of risks that traded REITs do not face: illiquidity, agency risk (the sponsor might prioritize its fees over shareholder returns), and NAV uncertainty (properties are appraised, not market-priced, so valuation is less transparent).

The architecture of a non-traded REIT

Ares REIT began as a fundraising vehicle. The sponsor (Ares Management, a major asset-management firm) sold shares to investors via a registered offering, typically raising money in phases. Phase I might raise $1 billion, Phase II another $500 million, and so forth. The fund charges investors upfront fees and ongoing management fees, taking a slice of the returns.

With that capital, Ares REIT bought commercial real estate properties—office buildings, apartments, retail centers, industrial warehouses, and so on. Each property generates cash from rent. That cash covers the fund’s debt service (if leveraged), operating costs, and property management. What remains is paid out to shareholders as income distributions.

The fund is structured to have a finite life. Eventually, maybe after 10 to 12 years, Ares will begin exiting properties, raising capital, and returning it to investors. At that point, the non-traded structure transitions to a liquidation phase or a merger with a traded REIT, giving investors liquidity after they have held the shares for years.

Real estate selection and leverage

Ares REIT’s properties are screened and managed by Ares’ real estate team. The fund typically buys diversified properties—not just office, not just apartments, but a mix aimed at spreading risk. Each property is selected for its cash flow and potential for value appreciation through improvement or market recovery.

Like most REITs, Ares uses leverage. The fund might buy a property for $100 million and finance it with $70 million of debt and $30 million of equity. That leverage amplifies returns if the property appreciates, but it also increases risk and the fixed cost burden. Debt must be serviced regardless of how much rent comes in.

The leverage is typically prudent—loan-to-value ratios in the 50 to 65 percent range are normal for commercial REITs. But the property market is cyclical. When the economy weakens and tenants default or demand discounts on renewal, cash flow dips and the fund feels the pressure.

Fee structure and sponsor incentives

The sponsor (Ares Management) takes multiple layers of fees. There is an upfront acquisition fee, typically around 2 percent of capital raised, paid as the properties are bought. There is a management fee, usually around 1 percent annually of assets. And if the fund outperforms a benchmark or generates strong returns, the sponsor may be entitled to a performance fee or promote. These fees come directly out of shareholder returns.

This fee structure creates a classic agency problem. The sponsor is motivated to raise as much capital as possible (higher assets under management) and to charge high upfront fees, which are paid immediately. Shareholders benefit if the properties perform well over 10 years. But if properties underperform, the sponsor has already been paid. This incentive misalignment is one reason non-traded REITs have a mixed track record.

The illiquidity trade

In exchange for holding non-traded shares, investors are supposed to get a higher yield than listed REITs. Ares REIT often targets a current yield in the 5 to 7 percent range, higher than what many listed REITs offer. But that yield is not certain—it depends on the properties performing as expected and the debt markets remaining accessible for refinancing.

The illiquidity is the catch. Shareholders cannot simply sell their shares if they need cash. Ares may offer a limited secondary market, a tender offer, or redemption program, but these are not guaranteed and may involve discounts to NAV. Investors who need money before the fund’s exit strategy matures may face losses.

Performance and transparency issues

Non-traded REITs have experienced mixed results. Some have delivered reasonable returns to shareholders while others have disappointed. The problem is lack of transparency. Property valuations are based on appraisals by third parties, but appraisals lag the market and can be optimistic. It is not until a property is actually sold that investors learn whether the stated NAV was real or wishful.

Ares REIT has been a large non-traded REIT, raising billions across multiple phases. The company publishes updates to investors, but the information available to the public through the SEC is limited compared to a listed REIT. Investors must rely heavily on the sponsor’s reporting and on the appraisal data.

Commercial real estate faces headwinds in recent years—rising rates, high construction costs, remote work pressuring office demand, and inflation affecting operating expenses. Non-traded REITs with exposure to these stressed sectors face pressure on valuations and cash flows.

How to evaluate Ares REIT as an investment

If you own Ares REIT shares or are considering them, focus on the quality of the property portfolio. What types of properties does the fund hold? Are they core, well-leased assets or repositioning plays? Review the fund’s financial statements and NAV updates for trends in rent growth, occupancy, and debt levels. Watch for any material property dispositions or write-downs, which signal valuation pressure.

Assess the sponsor’s track record with previous funds. Has Ares delivered returns in line with targets? Were fees reasonable relative to performance? Look at the terms of your shares—do they have redemption rights, and if so, at what discount to NAV?

For current and prospective investors, know that non-traded REITs are illiquid and carry leverage and property market risk. The higher stated yield comes with the cost of being locked in and with the risk that returns will be lower than promised if property values decline. This is a long-term, patient-capital investment, not a liquid alternative to cash or stocks.