Blueprint: KKR and ODCE’s redemption queues, real estate’s prominence at Davos, MN’s seed M&G investment

KKR and the ODCE index both face redemptions queues as investors rebalance portfolios; real estate prominent at the World Economic Forum in Davos; MN escalates fund commitment sizes as it seeds M&G's new core fund; and more in today's briefing, exclusively for our valued subscribers.

They said it

“Office should not be a core asset class because it is more volatile than other asset classes”

Adam Gallistel, Singaporean sovereign wealth fund GIC‘s head of Americas, on office’s place in the hierarchy, speaking on placement agent’s Park Madison Partners‘ podcast Real Estate Capital.

What’s new?

Redemption time: Billy Butcher, chief executive of KKR’s Real Estate Select Trust, becomes the latest leader to limit redemptions, although the New York manager’s non-listed REIT is structured differently than some of its competitors. (Source: Getty / KKR)

KREST the Redeemer
Another week, another non-listed REIT has put the gates up. The latest to limit redemptions is New York-based KKR from its KKR Real Estate Select Trust vehicle. The firm received repurchase requests of $128 million in the trailing quarter and, like its peers Blackstone and Starwood, KKR’s vehicle limits redemption requests to 5 percent for a trailing quarter to protect itself and investors alike from the forced selling of assets. KKR’s fund however is structured slightly differently than its peers in that it only limits redemptions for the quarter. It does not have the 2 percent redemption limit for any given month, like Blackstone’s BREIT and Starwood’s SREIT.

While KREST’s woes were described as a “broadening contagion” within the non-listed REIT universe in the Financial Times last week, there are also differences in scale and severity. KREST’s net asset value is smaller at $1.6 billion, given it is a newer fund launched in 2020. The unique structure also means that, alongside unlisted real estate, KREST can hold real estate securities, meaning its holdings are more liquid.

In a letter to shareholders issued Wednesday, KREST chief executive Billy Butcher said the firm had liquid holdings of 36 percent of the fund as of the end of last year, meaning it might be able to fulfill its redemptions faster. Finally, it is worth noting that KKR continues to take in money for KREST, with net inflows remaining positive despite the redemptions, Butcher added. Keep checking PERE’s website for further coverage on this ongoing story.

2023: A price ODCE
Non-traded REITs are not the only real estate vehicles facing mounting redemption requests. Institutional investors are likewise seeking to cash out of open-end core funds before private real estate market values decline further [see our previous coverage here].

Last week, Bloomberg reported the exit queue for these funds had reached $20 billion as of year-end, the largest since the great recession, citing data from IDR Investment Management, which tracks funds in NCREIF’s Open-End Diversified Core Equity index. In a call with PERE, however, Garrett Zdolshek, IDR’s chief investment officer, pointed out that the current withdrawal requests account for 7 percent of the ODCE index’s total net asset value, compared to 15 percent during the global financial crisis.

The large dollar amount of the exit queue was more a reflection of how much the ODCE universe has grown since the crisis. Meanwhile, IDR chief executive Zdolshek said there was a lack of clarity in terms of whether redemption queues would continue to grow. “It depends on when there’s price discovery,” he said.

Dispatch from Davos
GIC’s Adam Gallistel hasn’t been the only investor to provide his take on office assets. Last week, Ivanhoé Cambridge chief executive Nathalie Palladitcheff also shared her thoughts on the challenged sector during a real estate panel at the World Economic Forum in Davos, Switzerland. “Office is probably both a blessing and a curse,” she said.

The property type’s challenges have already been widely discussed, but Palladitcheff considers the issues to also be a blessing because of how they are forcing the industry to tackle the question: “How do we be a solution instead [of] a problem to the world, because we’re a very big carbon issuer?”

One opportunity stems from converting obsolete office assets to housing. “The only common thing we see really everywhere is housing, the supply and demand discrepancy that we see in every country, every city around the world,” she said. “The problem is that there is not one recipe that we can replicate everyone to solve the problem. It is really varied depending on the local authorities.”

Trending topics

For what it’s worth…
We knew it was coming, but the wave of write-downs in private real estate markets has finally begun. Brian Velky, managing director and head of real estate valuation services at US solutions provider SitusAMC, told PERE he has seen cap rates expand by at least 25 basis points over Q4, driving values down by 4 to 6 percent on average for core real estate funds.

“We saw pretty substantial changes between a draft and final process because of the things that were taking place throughout the quarter,” said Velky. This is taking a toll on performance. Net total returns for US data provider NCREIF’s NFI-Daily Priced Index were down 2.96 percent in December. The repricing event will not play out evenly across property sectors, however. Read our full coverage here.

The demographic case for office
While pessimistic views on office properties abound, demographics is one reason to remain positive about the sector. As PERE’s latest webinar, offered as part of our Passport Network, concluded last week, aging populations around the world do not spell the end of city-center office. Neil Blake, global head of forecasting and analytics at brokerage and advisory firm CBRE, pointed to Tokyo as evidence that even in a country whose people are aging and declining in number overall, cities continue to see population growth, which in turn suggests demand for city-center office will remain robust. Read our full coverage here. Email Luca Greene for more information on how to attend our future webinars.

Data snapshot

Clear bifurcation
It is often referenced that the US is behind the other two major investable regions when it comes to ESG in real estate. Regional investor intention reports from global brokerage CBRE confirm as much. While almost 70 percent of Asian investors were willing to pay some form of premium for green or ESG-compliant assets, more than half of US investors signalled they wouldn’t pay more. Read more coverage from the reports here.

People moves

BIG renewable energy
It’s not a secret that the real estate industry is interested in how it can play a role in renewable energy. Real estate managers continue to tool up in that field with Salt Lake City-based Bridge Investment Group becoming the latest to signal its intent in the space. The manager has hired Adam Haughton [his LinkedIn here] as chief investment officer of its Bridge Renewable Energy business, a partnership it launched in July 2022 with tech company Lumen Energy. Haughton has 15 years of experience managing solar investment management, per an announcement, most recently as CIO of Sydney-headquartered investment manager New Energy Solar. In his role, Haughton and BIG’s relatively new platform will be responsible for design, procurement, construction and the operation of solar projects on assets owned both by BIG’s funds and third parties.

Retail promotion for CBRE IM
CBRE Investment Management has appointed Antonio Tarroc [his LinkedIn here] to the new role of retail property platform lead, EMEA. The move comes amid a series of changes for the asset manager’s EMEA division, in what it terms an “operating model evolution” that has seen dedicated leads appointed for the firm’s retail, office, residential and logistics operator platforms in recent months. Based in Madrid, Tarroc will report to Eric Decouvelaere, EMEA head of retail operator division, according to an announcement. Tarroc has spent six years working for CBRE IM and will continue to serve as head of retail asset management, Iberia. Prior to joining the firm, he was asset manager at Carmila España and Incus Capital, and worked in retail property management at Gentalia.

Investor watch

MN gives residential a confidence boost
When Dutch pension fund administrator MN seeded London-based M&G Real Estate’s new open-end European Living Property Fund earlier this month, the €400 million ticket was the fourth in a series of significantly larger commitments to European residential made on behalf of pension fund clients PMT and PME in recent years. “When we started their strategy about seven years ago, we took a more cautious approach for our clients and committed €75 million-€100 million each,” Joep Barten, real estate portfolio manager at MN, told PERE. “Over time this has grown as their confidence has grown, and now commitment sizes are around €400 million-€500 million if both decide to join.” Read our full coverage here.

This week’s investor meetings

Tuesday, January 24

Wednesday, January 25 

Thursday, January 26

Friday, January 27

Today’s letter was prepared by Peter Benson with Evelyn Lee, Charlotte D’Souza and Christie Ou contributing