Search for Yield
When interest rates were ultra low, investors turned to commercial real estate as a source for higher yields than they could get by owning Treasuries and other low-risk bonds.
That was part of BREIT’s appeal, drawing in high-net-worth clients lured by the 13% annualized returns in one major share class through October. BREIT raked in money to buy apartments and industrial buildings, properties that the private equity firm bet would keep growing in value because demand outstripped supply. People who couldn’t afford to buy a house needed to rent, the reasoning went, and shoppers increasingly buying online drove up the need for warehouse space.
“Our business is built on performance, not fund flows, and performance is rock solid,” a Blackstone spokesperson said Thursday after the firm announced the redemption limits.
Much of the money withdrawn from BREIT was from overseas, with offshore investors redeeming at eight times the rate of US ones in the past year. Blackstone shares dropped 2.7% Friday to $82.76 at 10:47 a.m., after tumbling 7.1% the day before.
Commercial-property owners are getting hit with financing challenges after years of paying for deals with cheap loans. Expensive debt has pushed some borrowers into negative leverage, which means that debt costs are outpacing expected returns. Dealmaking has also frozen, with transaction volume plunging 43% in October from a year earlier, according to MSCI Real Assets.
Debt costs for commercial-property owners are outpacing expected returns. Photographer: Jeenah Moon/Bloomberg
“With the benefits of leverage severely limited and owners who are not being forced to sell, the price expectations gap between sellers and potential buyers has been wide enough to limit deal closings,” Jim Costello, an MSCI economist, wrote in a Nov. 16 report.
Despite all the pain points, the housing and commercial real estate industries are in better shape than in some previous downturns, with more tightly underwritten loans and less of a risk of markets being oversupplied.
With BREIT, the fund is still outperforming the S&P 500 Index, even as investors increasingly want out. And Thursday’s announced sale of a stake in two Las Vegas hotels is expected to generate roughly $730 million in profit for BREIT shareholders, Bloomberg previously reported.
Relative Value
What’s changing most drastically across the industry is the relative value of real estate to other investments.
Thanks in part to the Federal Reserve’s hiking campaign, investors have other places to earn money that could generate more yield than in years past and tend to be more liquid than commercial real estate, including Treasuries, investment-grade bonds, and mortgage-backed securities.
“Real estate is quite cyclical,” Wharton’s Wachter said. “It’s bad for real estate when rates go up and you can get higher yields from Treasuries and other assets.”
--With assistance from Natalie Wong, Prashant Gopal, Hannah Levitt and Dawn Lim.
This article was provided by Bloomberg News.