For Blackstone’s Property Fund, Resilient Valuations Might Have a Downside
Investors pulled more than $13 billion from BREIT last year. Luring them back will take time.
By Carol Ryan
Blackstone’s property fund has trounced its rivals in terms of investment performance, despite upheaval. PHOTO: TAIDGH BARRON/ZUMA PRESSBlackstone’s flagship property fund spent 2023 trying to staunch the flow of shareholder cash out the door.
A quiet spell for fundraising is its next challenge.
Investors pulled more than $13 billion out of Blackstone Real Estate Income Trust last year, a non-traded fund with a diversified property portfolio, including fast-growing types such as data centers and e-commerce warehouses as well as apartments in the Sunbelt, where rents are slowing.
The redemptions were equivalent to almost 20% of the fund’s net asset value at the start of 2023.
They could have been worse if BREIT hadn’t limited how much investors were able to withdraw.
To avoid having to sell properties quickly, BREIT’s terms stipulate that no more than 2% of the fund’s value can be redeemed each month, or 5% per quarter.
Investors have wanted more cash back than Blackstone was obligated to give them for 14 consecutive months.
Withdrawals are slowing.
In December, BREIT’s clients wanted to sell shares worth $1.1 billion, compared with a monthly peak of more than $5 billion a year ago.
Blackstone met about half of last month’s requests, buying back $570 million worth of shares.
Blackstone President Jonathan Gray said on a company earnings call Thursday that if current trends continue, BREIT should be able to meet investors’ redemption requests in full some time in the first quarter.
To pay back investors, BREIT used its existing cash and sold at least $12 billion of real estate last year, most of it at prices above net asset value.
The deals covered hotels, casinos, self-storage properties and apartments.
It also got a welcome $4.5 billion cash injection from UC Investments, although BREIT had to guarantee the University of California’s investment arm a beefy annual return of 11.25% for a set number of years to get its hands on the money.
Despite the upheaval, BREIT trounced its rivals in terms of investment performance.
The Blackstone fund was the top U.S. non-traded real-estate investment trust of 2023, returning -0.5% including distributions.
The second-largest player, Starwood Real Estate Income Trust, delivered -8.6%.
Similar products offered by KKR, Brookfield and JLL also ended last year deeper in the red than BREIT.
Blackstone does give BREIT more leeway than its peers to calculate the value of its own property portfolio, though.
According to analysts at Stanger Investment Banking, the portfolios of most non-traded REITs are appraised by an independent valuer at least quarterly.
BREIT asks an outside appraiser to give it a range of values, but has the final say on calculating the value of its assets.
Ironically, BREIT’s resilient valuations could make it hard to tempt investors back, if they think they can buy into similar properties at lower prices elsewhere.
BREIT has cut the value of its property portfolio by a net -1.2% over the past two years, according to Stanger’s data.
Its main competitors lowered theirs by -7.8% on average over the same period.
BREIT says its exposure to data centers and student housing, which make up around a fifth of its portfolio and are generating strong rent growth, is one reason why its NAV hasn’t slipped as much.
Nontraded REITs in general may be a bit optimistic about the value of their portfolios.
The property owned by publicly listed peers was worth 14.2% less at the end of 2023 than it was two years earlier, based on analysts’ consensus estimates.
And according to the RCA CPPI National All-Property Index, which tracks the value of buildings that have actually sold, commercial real-estate prices have fallen 11% from peaks seen around the time the Federal Reserve began raising interest rates.
So far, investors aren’t rushing back into BREIT.
It received $6.4 billion of new investor money in 2023, 66% less than in 2022.
Strip out the UC Investments deal, with its unusual guaranteed terms, and BREIT’s fundraising dropped 90% last year.
Only Starwood REIT had a sharper fall in funds raised, at 94%.
For now, investors might find better deals in the public market for all but the most sought-after types of property.
Based on implied capitalization rates, which measure the income expected to flow from real estate relative to its value, BREIT is more expensive than listed stocks for rental housing, stores, offices and hotels, according to estimates by property consulting firm Green Street.
Its data centers and warehouses are valued more cheaply than in the public markets.
The roughly 5% annual distribution offered by non-traded REITs is also less compelling in a higher interest-rate environment.
Today, investors can get a similar rate from a low-risk certificate of deposit.
Blackstone’s fund is bleeding less cash these days.
But investors should also keep an eye on what is flowing in.
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