Many people were seemingly caught off guard in late 2022 when Blackstone Real Estate Income Trust (BREIT) became the first large non-traded REIT to limit investor redemptions – a process colloquially known as “gating.”
The private equity firm’s move to limit outflows arrived amid a spate of withdrawals from clients in Asia –by some estimates, 70% of 2021’s BREIT departures – and was accompanied by the real estate vehicle divesting stakes in the Mandalay Bay and MGM Grand on the Las Vegas Strip to bolster liquidity.
Unnerving as the news of gating at BREIT and other large real estate investment trusts (REITs) may be for advisors and market participants, it’s worth remembering that a fund’s board of directors has a fiduciary duty to existing investors – not to the court of public opinion. The ability to limit redemptions is meant to potentially reduce the risk of a fund getting into a situation where it may be forced to sell assets into an unfavorable market in order to meet redemption requests from a small number of investors with short-term liquidity needs – a scenario that would likely have a negative effect on the fund’s remaining investors’ long-term returns.
A fund’s ability to offer regular redemptions is typically a key selling point for many investors, and the ability to limit periodic redemptions to an amount that would not trigger forced selling is one of the primary mechanisms that can make providing liquidity possible for funds investing in an illiquid asset such as real estate. With the news of gating, it’s inevitable that there’s increased scrutiny, leading to a review of how these funds are generally structured and where they fit in client portfolios broadly.
Illiquid Assets Available in Liquid Structures?
For many private commercial real estate projects, the typical investment period is five to seven years or longer. And while we believe the number of non-traded REITs available has transformed the industry by making it potentially easier for investors to access commercial real estate through “investor-friendly” structures, many advisors may now be obliged to revisit their allocations and consider whether they should actually be viewing these funds as illiquid investments.
On a related note, this is a reminder that not all REITs are created equal. There are publicly traded REITs, which many everyday clients may be familiar with, as well as illiquid and semi-liquid options. REIT strategies that are reliant on rapid access to liquidity can subject investors to higher risk.
Solving the Correlation Conundrum
In 2022, correlations confounded public real estate investors and publicly traded REITs declined in unison with stocks and bonds. The widely followed MSCI U.S. Investable Market Real Estate 25/50 Index slumped about 26% last year.
However, private commercial real estate tends to behave differently. “Historically, real estate has had a low correlation to traditional assets like stocks and bonds,” notes CrowdStreet Advisors, a private commercial real estate fund manager. “Additionally, private real estate has exhibited a low correlation to public real estate.”[1]
Advisors and investors have possibly been drawn to private commercial real estate recently because, in addition to providing a potential source of diversification from public markets, this type of investment offers other potential benefits, including mitigating the effects of inflation and the potential for reduced volatility due to the illiquidity of the underlying assets. While many advisors may be familiar with income-oriented real estate funds like BREIT, certain types of private commercial real estate funds may provide a way for advisors to allocate a portion of their clients’ real estate portfolios to growth-oriented strategies like value-add and opportunistic. These growth-oriented strategies are typically higher on the risk-return spectrum and generally focus on capital appreciation and generating potential returns. When constructing private commercial real estate portfolios to fit their clients’ needs, advisors have more choices now than they have historically. They can invest across multiple strategies, including growth-focused strategies that are oftentimes complementary to existing core holdings, to potentially provide their clients with exposure to the full spectrum of opportunities in the space.
Related: Private Commercial Real Estate Is a Key Component in Alts Conversation
This article has been prepared solely for informational purposes. All information is from sources believed to be reliable. Nothing herein should be construed as an offer, recommendation, or solicitation to buy or sell any security or investment product issued by CrowdStreet or otherwise. This article is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. Investing in commercial real estate entails substantive risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. All investors should consider their individual factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate.
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[1] Information provided by CrowdStreet Advisors as of March 2023. Private real estate is, by nature, generally less volatile than the stock market. This lack of volatility does not necessarily translate to private real estate not fluctuating in or losing value. Further, the value of private real estate investments will fluctuate, and the value of real estate often lags behind general market conditions.