Blackstone’s REIT Retraction Analysis A Possible Warning Sign For Markets

By Yoruk Bahceli and Dhara Ranasinghe

LONDON (Reuters) – Although this week’s spate of redemptions at an unlisted Blackstone real estate trust (REIT) has had slightly wider repercussions, it is being read as a warning sign by some.

Blackstone limited withdrawals from its $69 billion unlisted REIT on Thursday after buyout requests hit target limits amid investor concerns it was slow to adjust valuations as interest rates rose, he said a source near the bottom.

The development is yet another reminder of the risks facing not only sectors sensitive to higher interest rates, but also broader financial markets, which rallied sharply in hopes that interest rate hikes would slow.

“We have to be careful – rates have gone up sharply and there will be an impact on some asset classes,” said Seema Shah, chief strategist at Principal Global Investors, a $500 billion asset manager, about potential pitfalls ahead.

“REITS has had a fantastic performance for a couple of months, but when you have that outperformance, investors don’t react to traditional fundamental signals like rising rates,” he said.

Shares of Blackstone fell about 0.2% on Friday afternoon after dropping 7.1% on Thursday.

Large developed economies have raised rates by a total of 2,440 basis points in this monetary tightening cycle to date. This excludes Japan, which kept rates at -0.1%.

The US Federal Reserve raised its policy rate by 375 basis points this year to a range of 3.75% to 4.00% in the fastest rate-hiking cycle since the 1980s in its fight against the inflation.

But expectations have risen in recent weeks that the Fed will “pivot” out of aggressive tightening, prompting investors to price in lower peak interest rates.

This helped trigger the largest monthly decline in 10-year Treasury yields since the height of the COVID-19 pandemic in 2020. Public REITs rallied as the US stock market, which rose more than 15% from half October.

“As long as there’s complacency, and there’s some complacency that the Fed can engineer a soft landing, that can trigger some pain and so events like this are little flag signals for the ramifications of progressively increasing rates,” Shah said.


Investors said they expect further declines in REITs and the real estate sector.

“The fact is that the majority of retail investors and investors in defined benefit schemes due to risk reduction strategies, are choosing to reduce their real estate holdings down the line where they can as values ​​in direct real estate repricing together to rate normalization,” said Chris Taylor, managing director of real estate at Federated Hermes.

But there is a broader caveat for markets that see their fair share of caveats this year from bets placed in an era of low rates.

Crucially, September’s mini-budget of unfunded tax cuts sent the UK bond market into a tailspin as pension funds faced huge collateral claims on interest rate hedges that had never really been tested by sharp rate moves. causing an intervention by the Bank of England.

And as the mini-budget briefly triggered an increase in the BoE’s bets on rate hikes, UK REITS fell 17% to their lowest level since 2012, before recovering.

Kaspar Hense, a portfolio manager at BlueBay Asset Management, which manages more than $92 billion worth of assets, said the REIT news is an example of the risks private markets face in a falling rate environment. increase.

“If yields are rising, being invested in fairly illiquid assets can be a challenge, just for a fairly small (yield) recovery in illiquid markets, which will be impacted very significantly if yields rise,” Hense said.

“That is certainly what we are seeing here and we should really expect it to happen again in the next 6 to 12 months as yields are rising and central banks are holding rates higher. It will impact equity, it will impact investor losses,” Hense added.

Blackstone posted a 9.3% year-to-date net return for the REIT, while the publicly traded Dow Jones US Select REIT Total Return Index fell more than 22% over the same period.

A Blackstone spokesperson declined to comment on how the New York-based firm calculates the valuation of its REIT, but said its portfolio was concentrated in rental housing and logistics in the southern and western US that have property leases. short duration and rents that exceed inflation.

At least one analyst, Morgan Stanley’s Michael Cyprys, said the market’s reaction to the news was “overblown.”

While restrictions on redemption requests, year-end tax planning decisions and investor reallocations could spur more redemptions in the near term, “a solid track record of performance, supportive market fundamentals and scope for an improving macro environment should help relieve potential outflow pressure,” he wrote in a research report.

Others were less optimistic. One concern is the potential for large differences between the valuation of public goods and private goods, which are often not valued to reflect movements in public markets.

For investors who have focused on private markets and riskier assets in a bid to boost returns during years of low rates and easy liquidity, this could now prove even riskier.

“The prolonged period of very cheap cash and abundant liquidity has encouraged some asset managers to offer relatively liquid products that invest in relatively illiquid assets. These products perform differently in a world of erratic liquidity,” said Mohamed El-Erian, Allianz consultant. in a Twitter post.

(Reporting by Dhara Ranasinghe, Yoruk Bahceli and Chiara Elisei; additional reporting by Samuel Indyk and Ira Iosebashvili; editing by Alexander Smith and Chizu Nomiyama)

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