Nontraded REIT Redemptions Fall After Starwood Spooked Investors
Nontraded REITs saw redemption requests wane in June after a surge in May, but some of the largest funds continue to go beyond their redemption caps to fulfill requests and maintain investor confidence.
Investors in the semi-liquid real estate funds requested to withdraw 34% less in June than they did the month before, according to a research note from Robert A. Stanger & Co.
The decline follows a 65% leap in May requests driven by a rush of investors looking to cash out after Starwood Real Estate Income Trust moved to sharply limit redemptions.
Despite the decline in June, redemption requests at the 10 REITs analyzed by Stanger remained 10% higher in June than they were in April.
“The pace of redemptions has been picking up in general, but it seems like the [May] surge was a knee jerk reaction to Starwood’s plan,” said David Inauen, the head of research at Stanger and author of the report.
Starwood CEO Barry Sternlicht has justified the restrictions — which cap withdrawals at 0.33% of net asset value per month, well below the firm’s previous 2% cap — as a necessary move to protect asset values and avoid forced sales of properties.
The tight cap led SREIT to fulfill just 3% of redemption requests in May.
Eight of the top 10 REITs were able to return all the equity requested by stockholders in June, Inauen estimates.
At least two REITs had to authorize exceptions that allowed the funds to return capital beyond the typically allowable caps in order to meet all requests.
Investors requested to withdraw around $806M from Blackstone Real Estate Income Trust in June, the largest nontraded REIT at $57B net asset value. Those requests pushed second-quarter withdrawals above 5% of BREIT's net asset value, the stated quarterly limit.
Blackstone executives attributed the surge in May redemption requests to an unnamed nontraded REIT that limited redemptions that month, a reference many assumed was to Starwood.
“Blackstone basically, not naming Starwood by name, blamed Starwood for a temporary surge in their own redemptions,” Inauen said, adding that they used Starwood’s limiting of withdrawals as a reason to say June was an outlier and that going beyond its NAV limit for the month was warranted.
“The last thing they needed was the Starwood news that hit” after Blackstone had spent a year overcoming its own withdrawal limit issue.
The board of directors for Brookfield’s REIT also authorized the full repayment of redemption requests in June despite the value exceeding the 2% monthly and 5% quarterly NAV limits.
The 10 funds analyzed by Stanger are managed by Ares, FS Credit, Hines, JLL, KKR, Nuveen, Starwood, Blackstone and Brookfield.
Starwood’s announcement in May put a spotlight on these types of funds and their ability to return capital that is tied up in real estate that their managers may be loath to sell because of sagging property values.
Uncertainty in several real estate asset classes is holding back nontraded REIT fundraising, which totaled $1.5B in the first quarter of the year compared to $12B at the start of 2022. Redemption requests are simultaneously rising, from $12B in 2022 to $18B in 2023 and on track to surpass that this year, as high interest rates continue to weigh on real estate.
Public REITs are currently trading at a significant discount to their overall net asset values, Inauen said, making them attractive investments for those looking for real estate exposure, therefore sapping funding from the nontraded REITs.
“Once you get back to being not upside down on that formula for where the traded REITs rates are, now all of the sudden [private REITs] become more attractive again,” Inauen said.
