Is the storm over for private REITs?

After a tumultuous year that saw shareholders rushing to pull money out of the industry’s best-known non-traded real estate investment trusts, private wealth investors are showing signs they are regaining confidence in real estate.

First-quarter statistics show fewer people are cashing out a year after a spike in redemption requests. Blackstone kicked off the year trumpeting its plunging requests for Blackstone Real Estate Investment Trust. “BREIT has weathered the storm in real estate markets,” company president Jon Gray assured investors on the New York-based firm’s FY 2023 earnings call in late January.

And quite a storm it was. BREIT recorded a 0.5 percent loss in 2023 – the worst annual performance since its launch in 2017. In late 2022, Blackstone, along with industry peers including Starwood Capital and KKR, began limiting investor withdrawals as requests surged above their caps. Investors in non-traded REITs redeemed around $17.4 billion in the first 11 months of the year, compared to $12 billion in all of 2022, the Wall Street Journal reported, citing Robert A Stanger, an investment-banking firm that tracks the industry. Meanwhile, non-traded REITs raised only $9.8 billion through November last year, less than a third of the 2022 total figure of $33.2 billion.

If positive investor sentiment returns in 2024, it will carry a degree of caution, said David Auerbach, chief investment officer at investment adviser Hoya Capital Real Estate. “Redemptions are going to stop, investor sentiment will continue to improve for REITs and real estate – there is a sweet spot where they converge… we’re getting there,” he said.

As the largest non-traded REIT, BREIT is something of a harbinger for the rest of the market. Blackstone fulfilled nearly 90 percent of its repurchase requests for BREIT in January this year, marking the highest payout percentage since proration began in 2022. Repurchase requests are down almost 80 percent from the peak in January 2023, when requests hit $5.3 billion, the mega-manager said in an investor letter in February. With the backlog of requests nearly cleared, the market is now at an inflection point, according to the firm.

But even amid optimism about investment opportunities ahead, Blackstone’s Gray conceded investor demand will not recover overnight. “Investors tend to take their time in terms of pivoting back to the space,” he said during the earnings call, referring to prior downturns in the early 1990s and 2008-09. “There’s caution so you don’t see huge sort of capital flowing in on a dime. It will take multiple quarters of strong performance where people say, ‘Hey, I’m comfortable doing this.’”

BREIT has delivered an 11 percent annualized net return for investors, according to the company, and outperformed non-listed REIT peers by 600 basis points in 2023. Around 85 percent of BREIT’s portfolio is invested in rental housing, industrial properties and data centers, according to its website.

BREIT’s redemption turnaround is positive news, Auerbach agreed. But not every non-listed REIT will be able to pay redemptions, he pointed out. “Remember, there’s a lot of other smaller vehicles that may be going through it much worse than what Blackstone and Starwood are having to do,” he said. “You can use them as the temperature gauge.”

Peer check

While individual investors remain cautious and are waiting until the moment is exactly right, institutional investors are showing renewed optimism about real estate following a year dominated by fear, volatility and uncertainty, Julia Butler, chief investment officer of KKR Real Estate Select Trust, told PERE in an interview.

“There’s a lot of renewed interest from the institutional side of the market right now. Professional teams that have been investing in real estate through cycles understand the opportunity set,” she said. “It is more gradual, I would say, on the private wealth side.”

New York-based manager KKR launched KREST in 2021 and allows payouts quarterly, as opposed to monthly as with its peers. It first limited payouts in January 2023. While buyback requests have since come down, they still exceeded the firm’s 5 percent cap for the tender offer period ending January 12, 2024. Repurchase requests hit $87 million, or 6.6 percent of the fund’s aggregate common stock for the period, KREST CEO Billy Butcher said in a letter to investors at the end of January. The requests were fulfilled at a prorated amount equal to 76 percent, according to the letter, which noted redemption requests are down 32 percent from the peak a year ago.

Going forward, investor sentiment is expected to improve. “The sentiment is certainly changing. And I think that’s a function of everyone thinking that rates are now coming down, not going up anymore,” Butler said. Also boosting investor sentiment is the emerging opportunity set. “You’ll continue to see [KKR Real Estate] allocating to the opportunity we see in credit, but there are interesting and idiosyncratic opportunities that we’re also seeing on the equity side.”

Educating private wealth investors on just what these REITs are able to deliver is essential, industry insiders said. Certainly, the last three years have demonstrated extreme highs and lows for these vehicles, said Dana Petitto, chief operating officer and portfolio manager of Brookfield REIT.

“2021 and into 2022, there was so much covid correction in the market, that the returns the non-traded REITs were reporting were unprecedented – they were nearing opportunistic returns,” she said in an interview. “Any investor that was expecting high- teen returns to continue in perpetuity was not fully understanding the product.”

Toronto-based manager Brookfield launched its private REIT in late 2021 and seeded the vehicle with a mix of assets it already owned and assets it acquired through its merger with Oaktree Capital Management in 2019. The REIT has 11 percent allocated to real estate-related debt, per its website, with 64 percent of its real estate equity holdings in rental housing.

“[It’s] meant to be a longer-term investment strategy targeting investors that really understand and respect the cyclicality that is real estate,” Petitto said. “[It is] not for an investor that’s looking to hop in and out of it, because then you’ll never really achieve what these products are meant to earn you.”