The decision of two of the nation's largest private real estate income trusts (REITs), managed by Blackstone and Starwood, to limit and prorate investors' repurchase requests because they exceeded redemption restrictions rocked the fast-growing private REIT market, which had flourished during the low interest-rate era from 2017 and 2021. 

Industry experts tied the surge in investor redemptions directly to a perceived gap between the performance of these nontraded REITs and public REITs. Given the expectation that interest rates will continue to rise, market conditions are likely to make it difficult for the private funds to perform well in the near future. Analysts said these pressures are unlikely to ease in the next few months, leaving Blackstone and Starwood—and perhaps other nontraded REITs—facing a period of uncertainty.

Blackstone Real Estate Income Trust (BREIT), with a net asset value (NAV) of about $70 billion and $125 billion in assets under management, announced the closing of redemptions for this quarter in a letter to shareholders last week that was also posted on its website. Starwood’s announcement came over the weekend, according to Barron’s, which received a copy of the letter from a shareholder. Starwood Real Estate Income Trust (SREIT) is valued at about $14.6 billion.

In 2017, Blackstone, believed to be the nation's largest owner of real estate, began marketing a new variant of private REITs, called NAV REITs by industry professionals. The new product had noticeably lower commissions and fees than prior generations of private REITs, some of which were viewed in a negative light because of high costs and poor performance.

BREIT also allowed investors to redeem 2% of their assets monthly and 5% quarterly, providing investors with more liquidity than other private real estate investment vehicles. The product, sold through brokers and advisors, proved hugely popular and Blackstone's success attracted imitators, including Starwood, Nuveen and Griffin Capital, now a subsidiary of Apollo Investments, among others.

The new vehicles also gave Blackstone and others access to smaller, high-net-worth, accredited investors who historially had lacked the resources to invest in its traditional products. This move to democratize private alternative assets is now revealing a problematic side, some think. One major reason some investors now are flocking toward the exit, sources said, is because they’re applying short-term thinking to a long-term investment.

“BREIT is in so many people’s portfolios,” said Zac Boca, founder and CEO of AltExchange, a New York-based data and technology company focused on alternative investments. “Like many other alternatives accessible through custodial platforms, they offer some redemption and liquidity. For a lot of investors, this looks like any other public investment. But it’s not.”

While public REITs are traded on the major securities exchanges, nontraded REITs are considered private investments. Redemption programs can vary. Moreover, public REITs are regulated by the SEC and must file audited financial statements, while private REITs are sold to accredited investors and have far more latitude in determining their short-term prices.

In the case of BREIT and SREIT in 2022, both funds  held their value while public REITs with similar portfolio assets are down around 30%, sources said. According to their websites, SREIT’s 2022 return through October was 10.2%, and BREIT’s was about 8.5% over the same time period.

For much of 2022, these so-called NAV REITs were still posting increases in net asset value, while publicly traded REITs were declining sharply along with the stock and bond market, sources said. This has made redemptions attractive to investors seeking to raise cash without recognizing capital losses. Some reports said BREIT received significant redemption requests from Asian investors in recent months.

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