By Konrad Putzier | Updated December 06, 2022 05:30 AM EST
Blackstone and Starwood funds limit withdrawals after surge in redemption requests
Investors big and small are queuing up to withdraw money from real estate funds, in the latest sign that a jump in interest rates is threatening to topple the commercial-property sector.
Blackstone Inc. Last week, it said investors would limit withdrawals from its $69 billion flagship real-estate fund after a surge in redemption requests. Starwood Capital Group soon notified investors that it was also restricting withdrawals in the $14.6 billion fund, according to a person familiar with the matter.
The Blackstone and Starwood funds are the two largest non-traded real-estate investment trusts, a popular investment structure with wealthy individuals.
According to the companies, BlackRock Inc. And other private real-estate funds in the UK target institutions managed by companies including CBRE Investment Management have recently taken similar steps to stem outflows. Some advisors to these big investors say some US pensions are also taking money out of real estate funds.
The rise in cash-out requests comes as more investors and financial companies turn their backs on real estate. Rising interest rates are threatening to push down property values in this debt-laden industry. Meanwhile, concerns are rising about weak demand for office space and slowing rental growth in the apartment sector.
“Commercial real estate values need to come down,” said Joe Gorin, head of US real estate acquisitions at financial firm Barings, referring specifically to office buildings. “How much is the question.”
The FTSE NAREIT All Equity REITs Index, which tracks publicly traded landlords, is down more than 20% this year, and office owners have seen a much sharper decline. Brokers say banks are issuing fewer commercial mortgages than last year, and building sales volumes have shrunk because buyers are no longer attuned to the worsening prospect on prices.
The increase in redemption requests is still relatively small, and may prove to be short-lived. At the peak of the pandemic in 2020, many pension funds asked to move their money out of investment vehicles, but many changed their minds when the real estate market outlook brightened the following year.
Nevertheless, if the number of investors seeking their money back keeps increasing, it could become a problem for the real estate market. This is because funds that need to raise cash to pay back their investors often have no choice but to sell the buildings.
“That puts pressure on prices overall,” said Nate Kellogg, president and director of manager search at investment advisor Marquette Associates.
Mr. Kellogg said his firm advises that a growing portion of pension funds and university endowments are trying to move money out of real estate funds.
Unlike in 2020, individual investors are also running for the exits. Non-traded REITs paid $3.7 billion in redemptions in the third quarter. While they were still raising more new money from investors than they were losing from withdrawals, that was the highest withdrawal figure in years and a 12x increase from the third quarter of 2021, an investment Robert A. According to Stanger & Company – the banking firm that tracks the market.
These funds generally allow investors to withdraw money every month or quarter, but only up to a specified limit. Blackstone’s $69 billion fund, known as Blackstone Real Estate Income Trust Inc. or BRETT, has a quarterly redemption limit of 5% of the fund’s net assets. Last week, Blackstone said redemption requests had exceeded the cap, meaning some investors would not be allowed to cash out before next year.
On the day Blackstone announced the redemption limits, its shares fell 7%. A person familiar with the matter said Starwood’s non-traded REIT imposed the same limits as Brett’s.
Individual investors are pulling their money out partly because they expect losses in the future, said Nori Litz, a senior lecturer at Harvard Business School who advises pension funds on real estate investments. Real-estate funds typically base their valuations on valuations which can be slow to adapt to changing markets. This has kept the fund valuations high despite the downturn in the real estate market. But eventually, reality will catch up.
“Valuations look backwards, and markets look forward, and people are trying to arbitrage and get their money out before the write-down happens,” Ms. Litz said.
Pensions usually set a target as to what percentage of their assets should be in real estate. Because valuations of real estate funds remain high while stocks and other markets are down, private real estate’s share of pension-fund assets relative to stocks has increased. Mr. Kellogg said selling pressure builds on property funds to restore balance.
That was the case with the Washington State Investment Board, said James Eber, the board’s director of institutional relations. The State Pension Fund reported that real estate made up 22.4% of its portfolio as of September 30, but its target was 18%.
Large institutional investors are turning instead to the less-risky strategy of borrowing or simply hoarding cash for the bargains that inevitably crop up during downturns.
In the UK, more than 15 billion pounds in assets, equivalent to $18.3 billion, have withheld redemptions from institutions this fall, citing needs such as preserving cash and avoiding forced sales. The managers of these funds, including BlackRock, M&G Group, Schroders plc, CBRE Investment Management and Legal & General, confirmed that they had taken gating measures.
Real estate funds are still raising money, but less than before. US-focused asset funds raised $15.6 billion in the third quarter, according to Prekin, the lowest quarterly figure since 2020.
Higher interest rates have also made non-traded REITs less attractive to new investors. When rates were low, non-traded REITs were attractive because they offered yields much higher than bonds.
But bonds are now offering much higher returns and are more liquid and less risky than non-traded REITs, advisors say.
Kelly Nilsson, founder of Brava Financial LLC, a San Diego financial planning firm, asked why investors would lock their money away in real-estate funds, which yield little more than some government bonds that pay 4.5% or 5%. Provides higher returns.
“It’s not a fair trade-off,” she said.