Blackstone Real Estate Investment Trust (BREIT) is known as one of America’s largest and most trusted private REITs when it comes to delivering investor returns. However, 2023 has proven to be a tough year for real estate investors and Blackstone is not immune. As of May 1, 2023, Blackstone announced that it is limiting investor withdrawals from its REIT, which is estimated to be worth $70 billion.
This move is not a new trend as Blackstone has been restricting investor monthly withdrawals since November. A clause in Blackstone’s standard shareholder agreement allows the company to limit withdrawals if the aggregate amount of withdrawal requests exceeds 5% of the fund’s net asset value. In what could be seen as a sign of the times for the troubled real estate market, Blackstone has not released an estimate on when it will be able to meet all of the investor’s redemption requests.
Blackstone investors filed for a $4.5 billion combined redemption in April, but the fund only approved the release of $1.3 billion (29%) of total requests. In March, investors also called for a total of $4.5 billion in redemptions, only for the fund to release $666 million in funds or 15% of the total amount.
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So it’s not necessarily Blackstone not cashing out at all, it’s that investors heading for the exit doors may have to wait in line before they can cash out. Understandably, Blackstone is applying the restriction clause to investor buybacks, but the news comes as a serious blow to investors, many of whom have had to deal with the fallout from a falling real estate market in recent months.
It’s not hard to imagine that many of the investors who filed the recent buyback requests saw Blackstone as their safe haven REIT – the REIT they could rely on when other real estate and investment holding companies started to underperform. The general trend of the commercial real estate market is down for several reasons, not least a steady diet of rate hikes by the Federal Reserve.
Why is Blackstone suffering now?
Rate increases hit the commercial real estate market extra hard because of the way commercial real estate is financed. Since 2008, REITs, developers and fund managers have taken advantage of historically low interest rates to borrow aggressively as it has allowed them to dramatically increase the size of their portfolios. However, many of the commercial real estate loans rely on shorter-term financing, such as variable rate mortgages (ARMs) or 15-year mortgages that must be refinanced at some point in the life of the asset.
The need to refinance was not a problem as long as interest rates remained low. The pro forma budget for many commercial assets assumed low interest rates, allowing REITs to pay impressive dividends while also making it easy to refinance or sell the asset for a profit to another REIT that could borrow money at a low interest rate to fund it. to buy .
When interest rates began to rise as the Fed tried to stave off inflation, a period of easy financing conditions and the ability to quickly liquidate assets or turn them profitable after renovations turned into the good old days. The new reality surprised Blackstone and many other REITs. The question facing Blackstone and other investors now is: how long will the problems last and how bad will they get?
Hundreds of billions of dollars in commercial real estate could hit the market for refinancing in the next few years, and it’s already impossible that they’ll be able to complete those refinances at the investor-friendly rates the fund managers intended. Some of the gloomiest forecasts are that of a full-scale slaughter, with foreclosures and plummeting asset values reminiscent of 2008.
Other forecasters are not so bearish. They believe that a market correction will come, but that the increased liquidity requirements imposed on banks after 2008 should prevent mass bank failures if a wave of commercial bankruptcies comes.
Some of the increased liquidity requirements were eased for regional banks (after extensive lobbying efforts), and this move likely played a role in the collapse of several regional banks that collapsed, most notably First Republic Bank, which was acquired by regulators and eventually sold to JP Morgan Chase last month.
What does the future hold for real estate investors and REITs?
So, what’s the long-term future for Blackstone and REIT investors? It probably lies somewhere between the gloomiest forecasts and the most rosy expectations of the current market. At the very least, it could be a bumpy ride for years to come, but investors should keep one important thing in mind: real estate’s performance history has shown it to be a resilient asset and reliable in terms of returns.
The people who run REITs like Blackstone are well versed in their field and have a proven track record of performance. As they get used to the new normal, the next phase of deals and acquisitions they make will be more reflective of the new realities investors face in terms of acquisitions, opportunity costs and returns to investors.
Investors, for their part, will need to remain patient and step up their due diligence. In the meantime, they may want to consider publicly traded REITs or other investments, such as token investments in real estate, which give them more flexibility in liquidating their investment capital when the need arises. However, it is unlikely that real estate will cease to be a vital investment sector.
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This article Blackstone REIT continues trend of bad news for real estate investors originally appeared on Benzinga.com
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