Posted On Dec 08th, 2022

Here maybe is another sign of trouble ahead as we adjust to our departure from an era in which ultra-low interest rates had made money close to “free” (the latest economic data would not suggest that the Fed will be inclined to offer much relief on the interest-rate front any time soon).

The Wall Street Journal (December 1, 2022):

Blackstone Real Estate Income Trust Inc., more commonly known as BREIT, said Thursday in a letter posted to its website that the amount of withdrawals requested in October exceeded its monthly limit of 2% of its net-asset value and its quarterly threshold of 5%. . . .

Translation: Some investors who want out will have to wait a little longer.

The REIT itself is not publicly traded, but Blackstone is, of course, and the stock took a hit on the news.

More on BREIT:

BREIT, a nontraded real-estate investment trust whose net-asset value now totals $69 billion, has been one of Blackstone’s biggest growth engines in recent years. It has helped the private-equity firm attract a new class of investors who might not be wealthy enough to invest in its traditional funds but want access to private assets.

BREIT is designed to generate steady cash flows for its investors. It has delivered net returns of 9.3% year-to-date and 13.1% annually since inception, with an annualized distribution rate of 4.4%, according to its website. Despite those healthy returns, the vehicle has had an increase in redemption requests from investors in recent months.

With the stock market down and bonds performing poorly, wealthy investors in need of liquidity have few areas of their portfolio where they can sell at a profit. The bulk of the redemption requests for BREIT are coming from Asia, according to a person familiar with the matter…

The fund has invested heavily in rental housing and logistics in the Sunbelt region of the U.S. where valuations have held up, he said.

Blackstone executives have said BREIT’s withdrawal thresholds were designed to prevent it from having to become a forced seller. The firm said the vehicle has $9.3 billion of immediate liquidity and $9 billion of debt securities it could sell if needed.

It should be said that there is nothing particularly unusual about investors selling successful investments during a market crunch, whether to lock in some profits at a bleak time or to, so to speak, pay the bills because in WSJspeak, they are “in need of liquidity.”

What makes this more unusual is that the investors are turning to an unquoted investment, where liquidity is, as they have now discovered, not assured (that can be the case in the public markets, but, absent disaster, it’s rare).

The Wall Street Journal’s Carol Ryan takes up the story today, looking a bit more closely at what BREIT holds.

Blackstone’s $70 billion property fund may have performed too well for its own good. Sky-high rents for the nonmainstream real estate it favors look like another pandemic trend that is about to reverse. . . .

More than most REITs, Blackstone’s portfolio is stuffed with the kind of property that has been in high demand: 55% is rented residential, 23% is logistics buildings such as e-commerce warehouses and the rest is data centers, student housing, offices and retail.

According to the Financial Times, the gross assets of the fund are $125 billion, reflecting the fact that Blackstone used leverage to boost the portfolio’s size.

The WSJ’s Ryan notes that landlords are still able to push up rents on the logistics side but that their ability to do in rented residential property may be limited:

Today’s high mortgage rates make homeownership less affordable and there is a shortage of housing in the U.S. Those trends should be good for owners of rented properties, but vacancy rates in multifamily properties are rising. One threat to Blackstone’s bet on housing is that rents become so expensive that people lower their costs by moving in with flatmates or family. Household formation was abnormally high in the U.S. during the pandemic, but may unwind as inflation eats into incomes.

If that’s correct, rents, which are already coming down in much of the country, have further to fall, and that will hit rental property valuations, something that might please the Fed (given how heavily rent weighs in the CPI) but won’t thrill landlords. Making matters worse is the combination of rising interest rates and falling rents. This will discourage prospective buyers of rental housing, at least at current prices. Follow that logic, and down prices will go.

Meanwhile, from the Wall Street Journal a few weeks ago (November 22):

Investor buying of homes tumbled 30% in the third quarter, a sign that the rise in borrowing rates and high home prices that pushed traditional buyers to the sidelines are causing these firms to pull back, too.

Companies bought around 66,000 homes in the 40 markets tracked by real-estate brokerage Redfin during the third quarter, compared with 94,000 homes during the same quarter a year ago. The percentage decline in investor purchases was the largest in a quarter since the subprime crisis, save for the second quarter of 2020 when the pandemic shut down most home buying.

The investor pullback represents a turnaround from months ago when their purchases were still rising fast.

Those numbers should be compared with the high numbers of a year ago, but still . . .

Original Post: Tremors: Rental Homes

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