SREIT’s woes show retail investors are still wary of real estate

Even before the vehicle’s liquidity issues emerged, capital raising from the investor group had fallen off a cliff last year.

Starwood Capital’s private REIT cash crunch is the latest sign that the storm has not yet passed for retail investor-focused vehicles.

Starwood Real Estate Income Trust, or SREIT, received $1.3 billion in withdrawal requests in the first quarter of the year, but met less than $500 million of them, the Wall Street Journal reported this week. Then in April, Starwood reported the redemption queue for SREIT – which at a net asset value of $9.9 billion is second only to Blackstone in the private REIT space – exceeded the 2 percent monthly limitation, according to New Jersey-based investment bank Robert A Stanger. Just 37 percent of requests were satisfied in the month.

SREIT now has just $752 million of liquidity, per SEC filings. That is less than what is needed for two quarters’ worth of redemptions and, overall, “dangerously low,” according to Robert A Stanger’s chairman Kevin Gannon. Starwood will need to create liquidity for the vehicle either through financing or selling, he said.

Private REITs have faced liquidity challenges since 2022, but this year started off with a rosier outlook. First-quarter statistics showed fewer investors were trying to cash out after redemption requests began to spike a year prior. In February, Blackstone fulfilled all $961 million in requests for Blackstone Real Estate Investment Trust – the first time the firm had managed a full payout since November 2022 – and also made full payouts in March and April. Gannon said Blackstone raised $493 million for BREIT for the first quarter but redeemed $2.9 billion.

As big-name behemoths, BREIT and SREIT are emblematic of the challenges in the private REITs market. Overall, non-traded REITs reported $2.2 billion of fundraising year-to-date, of which $758 million was raised in April alone, according to Robert A Stanger data released on Tuesday. A large portion of April fundraising came from Delaware Statutory Trust UPREIT transactions by Ares Industrial Real Estate Income Trust and Ares Real Estate Income Trust. Without the UPREIT deals, the year-to-date fundraising volume represents an almost 40 percent drop from last year. The drop follows a very slow 2023, which recorded net fundraising totals for NAV REITs of -$6.2 billion, a steep drop from nearly $23.2 billion in 2022.

Gannon said the issue is that many investors believe the market has not yet hit bottom and that not all pricing has softened. As a result, retail investors are less willing to commit to real estate right now, he said.

But even as people take chips off the table, managers have launched unlisted REITs at a rapid clip in the last two years – with the view of expanding their real estate platforms with the backing of retail capital. Just in the last four months, for example, S2 Capital set up a new nontraded REIT targeting the multifamily sector, as did Bridge Investment Group with Bridge Investment Group Industrial Real Estate Income Trust.

Certainly, private real estate fundraising has been challenging across the board, but institutional investors are getting more comfortable with making commitments. For example, Brookfield Asset Management’s president Connor Teskey said on the firm’s first-quarter earnings call that Q1 was a “tremendous” quarter for fundraising and investors are now “seeing the upside.” It is a longer road ahead, however, for retail investors.