Blackstone and Starwood Show a Problem With Overseas CRE Investors

The recent surges in withdrawal requests at Starwood and Blackstone, and the decisions by both to limit redemptions, may be signs less of an issue the non-traded REITs faced and more of a deeper problem. Rather than a pair of curiosities, they might represent the surfacing of a previously invisible developing systemic issue.

Blackstone CEO Stephen Schwarzman spoke about the situation this week, according to the Financial Times. “’The idea that there is something going wrong with this product because people are redeeming is conflating completely incorrect assumptions,’ Schwarzman said at an industry conference. ‘This was not meant to be a mutual fund with daily liquidity. These are pieces of real estate.’”

Starwood’s CEO, Barry Sternlicht, also addressed the restriction this week, as The Real Deal reported. “’We’re not a hedge fund. We can’t liquidate our properties overnight at attractive prices,’ he explained. ‘We have to manage liquidity.’ Sternlicht was speaking with Newmark president Jimmy Kuhn at New York University Schack Institute’s capital markets conference at the Pierre Hotel Tuesday as the biggest non-traded REITs move to curb a surge of withdrawals.”

In a letter to its investors that was forwarded to Barron’s, the $15B Starwood Real Estate Income Trust said it fulfilled 63% of investor redemption requests in November after the repurchase requests exceeded a 2% limit, reaching 3.2% of net asset value.

Blackstone had noted in a separate letter that it has monthly withdrawal limits of 2% of net asset value and quarterly limits of 5% of NAV. It received $1.8B in redemption requests, or about 2.7% of its net asset value, and has received redemption requests in November and December exceeding the quarterly limit. Blackstone allowed investors to withdraw $1.3bn in November, or just 43% of the redemption requests it received. Blackstone would allow investors to redeem just 0.3% of the fund’s net assets this month.

It’s clear why they would do this. Real estate is not a liquid asset. A fund can’t easily sell shares to raise capital if necessary. Especially in the current market, prices and transactions volumes are significantly down and a sale of significant single assets or portfolios takes time.

In both cases, Asia — where investors tend to use higher levels of leverage and many faced margin calls over turns in their domestic markets — was the source of many of the redemption requests. According to a report in the Financial Times, while 70% of the redemption requests to Blackstone came from Asia, non-US investors make up only about 20% of the fund’s assets.

Both REITs were able to use their own rules to keep things steady. It does raise the question of whether some kind of regulation might be needed to guard against what had been likened to a Depression era-style run on a bank. But a limit on how much leverage investors can use going into a non-liquid investment fund would likely be empty, because the investors could use leverage elsewhere, leaving themselves vulnerable, as apparently happened in this case.