Analysis - Blackstone REIT restriction is a possible warning sign for markets

Analysis – Blackstone REIT restriction is a possible warning sign for markets

By Yoruk Bahceli and Dhara Ranasinghe

LONDON (Reuters) – While there has been little bigger fallout from the spike in redemption requests this week at an unlisted Blackstone real estate income trust (REIT), some see it as a warning sign.

Blackstone on Thursday limited withdrawals from its $69 billion unlisted REIT after redemption requests hit preset limits amid fears it was slow to adjust valuations as interest rates rose , said a source close to the fund.

This development is another reminder of the risks facing not only sectors sensitive to higher interest rates, but also broader financial markets, which have rallied strongly on hopes that interest rate hikes will slow down.

“We have to be careful – rates have risen sharply and there will be fallout for some asset classes,” Seema Shah, chief strategist at Principal Global Investors, a $500 billion asset manager, said about potential pitfalls ahead.

“REITs have been doing fantastically for a few months, but when you have that outperformance, investors don’t react to traditional fundamental signals like rising rates,” she said.

Blackstone shares fell about 0.2% on Friday afternoon after falling 7.1% on Thursday.

To date, major developed economies have raised rates by 2,440 basis points during this cycle of monetary tightening. This excludes Japan, which kept rates at -0.1%.

The US Federal Reserve has raised its key rate by 375 basis points this year to a range of 3.75% to 4.00% in the fastest rate hike cycle since the 1980s in its fight against inflation .

But over the past few weeks, the Fed is expected to “pivot” from aggressive tightening, prompting investors to price in lower interest rates.

This helped trigger the biggest monthly drop in 10-year Treasury yields since the peak of the COVID-19 pandemic in 2020. Public REITs rallied along with the US stock market, which rose more than 15% since mid-October.

“As long as you have some complacency, and there’s some complacency that the Fed can engineer a soft landing, that can trigger some pain and so events like this are little flags for the ramifications of gradually rising rates,” Shah said.


Investors said they expected further declines in REITs and the real estate sector.

“The fact is that most retail investors and defined benefit plan investors due to risk reduction strategies, choose to reduce their real estate holdings at all levels where they can as values ​​in the direct revaluation of real estate in parallel with the normalization of rates,” said Chris Taylor. , managing director of real estate at Federated Hermes.

But there is a broader caveat for markets seeing their fair share of warnings this year following bets placed at a time of low rates.

Crucially, September’s mini-budget of unfunded tax cuts sent the UK bond market tumbling as pension funds faced huge collateral calls on interest rate hedges that never had been really tested by sharp changes in rates, which prompted an intervention by the Bank of England.

And while the mini-budget briefly triggered a spike in BoE rate hike bets, UK REITS fell 17% to their lowest level since 2012, before recovering.

Kaspar Hense, portfolio manager at BlueBay Asset Management, which manages assets worth more than $92 billion, said the REIT news was an example of the risks private markets face in a bullish environment. rates.

“If yields go up, investing in rather illiquid assets can be a challenge, just for a rather weak (yield) recovery in illiquid markets, which will suffer very significantly if yields go up,” Hense said.

“That’s certainly what we’re seeing here and we should really expect that to happen again over the next six to 12 months as yields rise and central banks keep rates higher. That will have an impact on net worth, it will impact investors’ losses,” Hense added.

Blackstone reported a 9.3% net return for the REIT year-to-date, while the publicly traded Dow Jones US Select REIT Total Return Index fell more than 22% over the same period.

A Blackstone spokesperson declined to comment on how the New York-based firm calculates its REIT’s valuation, but said its portfolio was concentrated in rental housing and logistics in the South and West of the United States. United States, with short-term leases and rents above inflation.

At least one analyst, Michael Cyprys of Morgan Stanley, said the market’s reaction to the news was “overblown”.

While limitations on redemption requests, year-end tax planning decisions and investor reallocations could spur more near-term redemptions, “a strong track record, favorable market fundamentals and the potential for an improved macroeconomic backdrop should help ease potential exit pressure,” he wrote in a research report.

Others were less optimistic. One concern is the potential for large differences between the valuation of public and private assets, which often are not priced to reflect movements in public markets.

For investors who piled into private markets and riskier assets in an effort to boost yields during years of low rates and easy liquidity, it could now prove even riskier.

“The prolonged period of very cheap money and abundant liquidity has encouraged some asset managers to offer relatively liquid products that invest in relatively illiquid assets. These products behave differently in a world of uneven liquidity,” said Mohamed El-Erian, advisor to Allianz. in a Twitter post.

(Reporting by Dhara Ranasinghe, Yoruk Bahceli and Chiara Elisei; additional reporting by Samuel Indyk and Ira Iosebashvili; editing by Alexander Smith and Chizu Nomiyama)

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