Anne Valentine Andrews, the boss of BlackRock’s infrastructure and real estate businesses, says recent issues relating to redemption limits at some of the sector’s largest private REITs will be educational for investors in the open-end products.
Blackstone’s $69 billion Blackstone Real Estate Investment Trust was closed to redemptions last week after exceeding its 2 percent NAV cap for October and receiving further requests exceeding the monthly cap for November. This triggered a proration mechanism in line with its 5 percent quarterly limit to prevent a fire sale.
Starwood Capital also took action after its Starwood Real Estate Income Trust vehicle, which has $14.6 billion of assets, received redemption requests reaching 3.2 percent of assets in November.
Investors being prevented from withdrawing more than stipulated limits has led to criticism and questions around the validity of private REITs, investment vehicles often funded by individual investors via wealth management firms as opposed private real estate vehicles funded with institutional equity.
This scrutiny has led also to concerns over valuation methods and performance lags when private REITs are compared with publicly listed REITs, which have lost considerable market value in recent months, prompting leadership at both Blackstone and Starwood to speak out publicly in their defense.
Talking to PERE in an interview following the publication of the firm’s BlackRock Alternative’s Private Markets Outlook white paper last week, Valentine Andrews said she understood the increased concerns arising from the limits placed on investor withdrawals, but also that this should not detract from the overarching benefits of the vehicles.
“I’m a big believer in the democratization of alternatives, and having these vehicles that allow private investors to gain access to transactions that institutional investors have long had access to is important. I’m an advocate of that,” she said.
“These are fascinating and instructive times for private investors,” she added. “They need to understand that when the underlying assets are illiquid, there are natural constraints.”
“Individuals and companies need to understand what they are getting into when they invest.”
“The challenge is understanding how these things actually work when the market dislocates. We know from operating institutional evergreen vehicles for a long time that when markets go down is when investors often want to get money out.”
Valentine Andrews is keen for greater education around fund redemption limits which protect managers and other investors in the fund from having to sell assets at potentially suboptimal valuations or otherwise take actions that are not in the best interests of the fund.
“It should not take away from the fact they’re actually getting access via these vehicles to underlying assets they want to invest in,” she said.
“This is a good teaching moment. We’re moving in the direction of democratization of alternatives and a lot will be written and learnt as a result of this. The structures are doing what they’re supposed to do. People just need the right mindset when investing into them, given the liquidity of private market assets.”
Asset picking is key
BlackRock invests in private real estate via two broad strategies, core and value-add, and on behalf of both retail and institutional investors. The core strategy is run mainly via open-end funds, the latter by closed-end private funds. The firm currently has approximately $35 billion of real estate assets under management across the two strategies and around the world.
In 2022, BlackRock deployed approximately $1.7 billion into real estate and Valentine Andrews expects about the same level of investment to happen next year, even while the market grapples with higher inflation, interest rates and recessions. “Talk in the US is that we’ve seen the top of rate hikes here and even inflation is starting to moderate,” she said. “There remain differing views on the extent of the recession coming.”
She said the secular trends which proved popular going into today’s macroeconomic crisis, such as the move towards ‘just-in-case’ supply chains and more people working remotely, should endure and drive further shifts in tenant demand.
According to the manager, this means logistics and offices that provide convenience and top amenities will be more attractive to investors. Demographic trends will also bolster demand in more niche real estate segments, like childcare and senior living, the firm said in its Outlook paper, while broad retail will continue to be challenged.
In that landscape, specific property selections will become more important, the firm said. “What’s driving our business now is picking individual assets. There are broad themes which everyone knows about – industrial and residential being preeminent. But within the top sectors, it is important to make sure you’re picking the best properties, the highest ranking from a sustainability angle too.”
“That is my top takeaway for 2023. Spend more time on individual asset selection. It is important to remember that people are getting more selective on the buildings they’re willing to occupy,” said Valentine Andrews, pointing to BlackRock’s move to Hudson Yards in New York as an example of occupational demand for highest quality properties.
“It’s the best of the best,” she said. “It’s what companies are looking for.”