Blackstone's BREIT and others limit investor redemptions

Open-end real estate fund managers are dealing with a flood of requests from retail investors to get their money back. Meanwhile, clients of institutional funds are trying to get their money out in a more quiet way, either to take profits before more possible write-downs or to rebalance their portfolios.

Private REITs are a type of real estate open-end fund, and more and more people are asking to get their money back.

Blackstone Inc. and Starwood Capital Group said in December that they had put up gates, which means that they slowed redemptions to a trickle at the end of last year. Insiders in the industry say that institutional real estate open-end fund managers are also getting more requests to get their money back.

Many managers of open-end funds said they started getting requests to cash out in the summer, when interest rates started to rise and real estate investment trusts started to fall. The number of requests to cash out rose dramatically in the third quarter of 2022, when interest rates were still rising.

Insiders in the industry say that investors are taking a lot longer to get their money back from open-end funds as a whole.

Christy Loop, a senior director at Willis Towers Watson PLC in Atlanta, said that redemptions have been going up all through 2022.

Ms. Loop said that redemptions from open-end funds can now take anywhere from four to eight quarters, depending on the manager. In normal economic times, it only took a quarter or two. "It could take longer depending on how well the manager can get investors' money," she said.

Open-end fund managers have had to put up barriers or at least slow down the rate of redemptions and reduce the amount of capital that investors can get back. Managers do this so that they don't have to sell their best properties in a falling market to meet redemption requests.

There's a good amount of money at stake. Pensions & Investments data show that as of June 30, real estate managers were in charge of $339.4 billion in open-end funds for tax-exempt institutional investors in the United States. This is a 21.5% increase from the year before. Also, as of September 30, privately held real estate investment trusts owned $1.5 billion in gross real estate assets. This is about 50% less than the $3 billion in real estate assets owned by listed and non-listed REITs. These numbers come from Nareit, a trade group for real estate investment trusts based in Washington.

"Requests for redemptions have gone up for both private and institutional REITs," said Donald Hall, managing director and head of research for the Americas at Nuveen Real Estate, which is part of Nuveen LLC and is based in Boston. Nuveen Real Estate is in charge of $156 billion worth of assets.

But he added, "Real estate has done what was asked of it and more," giving positive returns that were not linked to stocks or bonds when both were way down.

For the year ending September 30, the NCREIF Fund Index—Open-end Diversified Core Equity—had a net return of 20.96%. This was better than REITs, where the FTSE Nareit All Equity REIT index had a net return of -16.27% and the S&P 500 had a net return of -15.47% for the same time period.

Returns were down from quarter to quarter. For the third quarter, the NPI-ODCE index had a net return of 0.31%. This was down from 4.54% in the second quarter and 6.59% in the same quarter last year.

According to an NCREIF Insight report from November 30 by NCREIF senior consultant Jeffrey D. Fisher, write-downs hurt real estate a lot in the third quarter. Mr. Fisher said that more than half of the properties in the NCREIF Property Index, which is a free index, were written down. He also said that no real estate has been sold since the third quarter of 2020. (There is some leverage in the ODCE index.)

Mr. Hall said that most investors wanted to cash out because of the "denominator effect." This means that the falling value of their public market investments pushed their private capital portfolios, which included real estate, above their target allocations.

Mr. Hall said, "Some investors have pretty strict rules" about their allocations, which means they have to take steps to make sure their portfolios are in line with their target allocations.

He said, "They can't wait for stocks to get better."

He said that most of the big people in charge of open-ended real estate funds have been able to handle redemption requests, even though those requests have been growing in the second and third quarters.

Faris Mansour, head of business development in the Americas and EMEA for PGIM Real Estate, said, "Frankly, investors will learn which (open-end real estate fund) managers are good at managing liquidity in a troubled time." As of June 30, PGIM Real Estate was in charge of $136 billion worth of assets.

Mr. Mansour said that this means keeping available credit on hand, managing portfolios so that there is always some cash on hand, and managing assets to stay ahead of loan maturities and lease expirations.

"You don't want to sell your best assets," he said, so it's important to keep track of cash flow. But, he said, a portfolio's best assets are usually the ones that can be sold quickly.

At the same time, Mr. Mansour said, inflows aren't as strong when the market is like this, and managers can't count on new investor money coming into their funds as a source of liquidity.

Mr. Mansour said that the people in charge of PGIM Real Estate work hard not to "gate," which means to slow down the release of investor money to a trickle.

Mr. Mansour said, "When they ask for it (redemptions), we have to make sure investors can get liquidity in a smart way. It doesn't always happen as quickly as some investors would like."

He said that most investors are looking for liquidity to bring their real estate portfolios into line with their allocation goals. A small number of investors are looking for redemptions because they have made a significant change in strategy, such as moving a larger portion of their real estate portfolios from core to non-core.

Mr. Mansour said that most of the requests to get out of PGIM's open-end real estate strategies came from its core and core-plus open-end funds.

"We do have open-ended strategies with higher risks and higher returns," he said, "but we haven't seen any significant redemption requests from those funds."

Mr. Mansour said, "In this market, taking more risks can actually make you more money right now."

So, he said, when the economy is going down, the first money spent is on riskier, more opportunistic strategies.

The BREIT private REIT fund from Blackstone Inc. is a core-plus strategy that uses moderate leverage to invest in logistics, residential, office, life sciences office, and retail assets in global gateway cities.

Blackstone's private REIT, Blackstone Real Estate Income Trust Inc., had effectively slowed redemptions to a trickle in December, with money to be returned to investors down to 0.2% of its $69.5 billion net asset value because redemption requests were too high. Under its policy, it had already cut the amount it gave back to investors.

In November, BREIT gave $1.3 billion back to investors who wanted to cash out. This was about 43 percent of the total number of shares, Breit said in a document filed with the SEC. The company said that $1.8 billion in redemption requests were met by BREIT in October.

On January 1, the University of California Board of Regents, Oakland, put $4 billion into BREIT by buying 4 billion Class I common shares. The University of California Board of Regents' $81 billion defined benefit plan and $18.2 billion endowment are both taken care of by UC Investments.

The promise from UC Investments is locked in until January 2028.

In exchange for not being able to get its money back during that time, UC Investments will get a minimum annualized net return of 11.25 percent, which will be backed by $1 billion of Blackstone's current holdings in BREIT.

Jagdeep Bachher, UC Chief Investment Officer, said in a written statement on BREIT's website, "We consider BREIT to be one of the best-positioned, large-scale real estate portfolios in the U.S., managed by one of the world's best real estate investors."

Blackstone will contribute up to $1 billion to make up the difference between BREIT's return and 11.25 percent. Blackstone will be able to get an extra 5% cash promotion payment from UC Investments for any returns that are higher than the minimum. This is on top of the existing management and incentive fees that all Class I shareholders of BREIT pay.

Stephen Nesbitt, CEO of consulting firm Cliffwater LLC, said, "I think the UC/BX (UC Investments and Blackstone) deal is good for both companies and investors."

Mr. Nesbitt said in an email that UC gets the real estate portfolio it wants managed by "a leading alternative investment firm" for lower fees in exchange for giving up some liquidity.

Blackstone's deal with UC Investments gives BREIT $4 billion in "additional equity," which Blackstone said in its fact sheet "provides increased balance sheet flexibility and meaningful capital at what we believe to be an opportune deployment time."

In a document filed with the SEC on December 15, BREIT executives said that the company did not lack cash. They said that the company had "immediate liquidity of $9.3 billion."