It's not just BREIT
WSJ article in the Friday paper: "Property Funds In U.K. Delay Redemptions"
RE professionals, please explain if this is a larger problem while trying to set aside your obvious bias. We saw this happen with BREIT, but this appears to be a much larger industry phenomenon i.e., not an isolated occurrence.
At the minimum, I think this will hamper fundraising for these funds down the line as investors get frustrated with the redemption delays. Yes, we all know this is what the investors/LPs signed up for, but I have a hard time believing most of them thought something like this would happen on a larger scale.
I think the most optimistic scenario is these funds can hold off redemptions long enough until rates come down with the hope that RE & other asset classes make a come back and alleviate the redemption pressure.
By no means am I a RE/fund flows expert, so curious as to what your (unbiased as possible) thoughts are.
I'm an incoming sa, so feel free to consider me a complete idiot but here's how I've been thinking of it.I think this breit/Starwood/other story has been blown completely out of proportion. Think of it this way:
There are three levels of liquidity for investors:
Daily liquidity: i.e. the public markets, where you can effectively become liquid whenever you'd like, regardless of the ramifications to stock price, etc.
Illiquid assets: i.e. private equity/vc/hf stakes, where you will only become liquid when the gp says so (obviously with exceptions, but I'm trying to generalize here). This leads to a lot of what we saw this year in managers refusing to mark-down their portfolios in the hope of a small recession and also, as well as many mangers refusing to return capital with the exception of out-performers like citadel.
Semi-liquid product types: I.e. the non-traded reits which were intended to be a blend of 1 &2.
The long-winded key takeaway here is that if you're an investor in a private equity fund and you have some kind of special clause allowing you to liquidate (or you could sell on the secondaries market), and the manager is not meaningfully marking their assets to market, you want to get out ASAP before your stake loses value. For real estate, everyone knows what's happened with the public reits and how they are trading at a massive discount to nav because the public markets have priced in a massive recession while private real estate is slow to price this in. If I was an investor in a non-traded reit, I would immediately want to liquidate my stake which is still reflective of private real estate valuations and put it to work in the public reit space, where they are due for a massive pop because their share price has already bottomed or close to it.
Give credit to blackstone, they've already raised their overall portfolio cap rate to something like 5.4% from 4.8% (don't quote me on this), a 12.5% value erosion and ahead of their peers as well as most of the private real estate space. This number will certainly continue to rise when q4 numbers come out, so it makes complete sense for people to try and yank their money before blackstone continues to honestly appraise their real estate.
Also true that asian investors had a liquidity crisis causing them to need to liquidate their stakes but to me that's less the focus here.
Anyway, hope this was a helpful ramble! Let me know your thoughts!
Great job, especially for an incoming SA.
The public markets allow the market to set the price. The non-traded REITs set the price themselves - this is an issue. And when they set this price, if it is too high, they are hurting remaining investors and if it is too low, they are hurting selling investors.
The question is what is NAV supposed to be - value of the assets if sold today (not a fire sale but marketed processes without flooding the market)? Then BREIT's value is too high. Discounted cash flows, including an exit at a cap rate that you're kind of making up? That's BREIT's NAV.
I think this is akin to a hedge fund marking their NAV higher than the sum of their underlying publicly traded securities - BREIT's portfolio has enough public market assets (take privates) and is so large it should largely track.
In the hedge fund example, holding off on redemptions until values bounce back would help fix the problem, but obviously that's really not the right thing to do
This is all very well said. There is a key part you are leaving out, however.BREIT and others in their semi-liquid space have been earning HUGE inflated annual fees based on inflated NAVs.
Maybe the semi-liquid investors are waking up to this fact.So while you point out a cyclical reason for the redemptions, there may be structural issues if/when investors lose trust in these vehicles (as they should).
One of my former English teachers used to tell us "show me, don't tell me."
BREIT gave U of California basically the same terms as Warren Buffett got when he bailed out Goldman at the peak of the financial crisis... you don't get those economics unless there is extreme stress brewing...
Second the difficulty fundraising. Hearing that many people are treading water, even with successful track records. You're only as good as your next fund...
More than 10% of all the capital invested in the ODCE funds is sitting in a redemption queue. That dwarfs the issue BREIT is experiencing. The RE secondaries market has ground to a halt. What has transacted has done so at 15% or greater discounts (for core OE funds) and larger discounts 35%+ for CE funds. In no way shape or form is this limited to BREIT. The odd phenomena is that property level fundamentals are still pretty strong, but valuations are down due to rising interest rates and cap rate expansion. Things will normalize, but who knows how long that will take.
Illiquid assets in a liquid wrapper? Who would have thought there would be issues..
A few points that might be of interest (I have worked at firms that have gated open ended funds more than once):
In terms of capital raising, the biggest headwind will be the terrible performance a number of closed ended funds will now be having. Buying in on record low cap rates with debt which was also super cheap and often not fixed is not a good set up..
I'm sure everything is just fine: "KKR Puts Cap on Withdrawals From Real-Estate Fund".. anotha one
I mean in a PREIT wouldn't you want to cash out as much as possible until they rebalance the values??
I am able to redeem at yesterdays price in a falling market, the firms have to stop redemptions until someone can figure out a real value...
Quo ea quia est aperiam quia quo voluptas molestiae. Iure quo excepturi qui ex. Officia temporibus facere omnis quis. Rerum aut deserunt reprehenderit fugit omnis.
Molestiae quo est sequi eos quibusdam qui. Doloribus qui consequatur odio incidunt. Est quia saepe aut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...