In just over five years, a Blackstone Inc. real estate fund for small investors has turned into a $70 billion force in the US economy.
It has swallowed up apartments, suburban homes, dorms, data centers, hotels and shopping centers. It owns Las Vegas’s lavish Bellagio hotel and casino; a 76-story New York skyscraper designed by Frank Gehry; and a sprawling Florida complex for interns working at the Walt Disney World Resort.
Unlike with many real estate investment trusts, its shares don't trade on exchanges. But fueled by billions of dollars from affluent individuals, Blackstone Real Estate Income Trust has become one of the firm’s top profit drivers, expanding property investing in private markets to the masses.
Now, the money machine is facing its biggest test. Rising interest rates threaten to drag down property values and make cheap debt harder to come by. The Federal Reserve hiked its key rate by another 75 basis points on Wednesday and said “ongoing increases” will likely be needed.
Even though the BREIT strategy is outperforming stocks — total net returns for its most popular share class were 9.3% in the nine months ended September — inflows are slowing and redemptions are up.
Wealth advisers at some banks are growing cautious about client exposure to more illiquid investments. At UBS Group AG, some advisers have been shaving their exposure to BREIT after the fund’s massive growth made it too big a piece of clients’ savings, according to people close to the bank. Staffers at Bank of America Corp.’s Merrill Lynch have been reviewing client portfolios more closely in this market to assess customers’ exposure to REITs that don’t trade on exchanges, other people said.
After years of attracting investors chasing yield at a time of rock-bottom interest rates, BREIT is coming under new pressure. It has thresholds on how much money investors can take out, meaning if too many people head for the exits, it may have to restrict withdrawals or raise its limits.
BREIT was built to weather challenging markets, said Nadeem Meghji, head of Blackstone Real Estate Americas, with its portfolio heavily weighted toward rental housing and warehouse assets in the US Sun Belt.
“This is exactly what you want to own in an environment like we are in today,” he said in a statement.
The REIT has piled into $21 billion worth of interest-rate swaps this year to hedge against higher debt costs. Such swaps have appreciated by $4.4 billion, helping to buoy the portfolio’s overall value.
BREIT “is operated with substantial liquidity and is structured to never be a forced seller of assets,” Meghji said. “All of this enables BREIT to deliver outstanding performance for its investors.”
Blackstone executives are personally invested: President Jon Gray has put $100 million more of his own money in BREIT since July, as has Chief Executive Officer Steve Schwarzman, according to a person close to the company. All told, the firm’s employees have some $1.1 billion of their own money in the REIT.
Still, money going into BREIT fell sharply in the third quarter. It took in $1.2 billion in net flows, down from roughly $7.7 billion in the year-earlier period. Investors added about 50% less new money. Withdrawals have risen approximately 15-fold. A chunk of redemptions have been tied to Asian investors seeking cash in volatile markets, the person close to the firm said.