Nontraded REITs Will Give Back $20B In Redemption Requests After Battering Year

Nontraded REITs are poised to grant some $20B in redemption requests by the end of 2023, doubling last year’s total and reflecting the impact of a year in which investors made the unprecedented decision to ask for their money back. 

That number is the largest annual total of redemptions fulfilled by nontraded REITs in their short history, according to Kevin Gannon, chairman and CEO of investment firm Robert A. Stanger & Co. But the number is likely to taper off heading into 2024 as property valuations are lowered and wary investors’ fears are soothed by the money that has already been repaid.

“The NAV REITs raised over $100B in the last seven years,” Gannon said. “A lot of money was devoted to it. Now people are saying, ‘Hey, that price ought to correct a bit.’ I don’t think it’s corrected as much as it should have. It just seems they’re slow to revise.”

In other words, investors wanted to strike while the iron was hot.

“It means that if you already own it and you can hit the redemption button, you hit it,” he said. “The price might come down, so you hit it. So I think investors are kind of overweighting their redemption requests because the values are still somewhat high.”

Investors rushing to get their money back out before asset values fell further triggered the redemption limits put in place in November 2022, a first for nontraded REITs, a type of vehicle formed in the wake of the Global Financial Crisis. The threat of falling asset values, along with the restrictions on their ability to get their money out, spooked investors even further.

But the pace of redemption requests slowed consistently through 2023. The largest nontraded REIT, Blackstone Real Estate Income Trust, saw its requests fall from a January peak of $5.3B to $2.1B in September. 

BREIT fulfilled just 29% of those requests but told Bisnow that since Nov. 20, 2022, when the redemption caps kicked in, shareholders persistent enough to submit repurchase requests monthly have received 97% of their money back. The company also said it has paid out $11.3B in repurchases in the last year. 

BREIT said it has sold $15B of real estate at a 4% premium to net asset value since January 2022, generating over $3B in profit. Dispositions include trophy properties like the Bellagio Hotel in Las Vegas, in which BREIT owned a 22% stake until August.

Some of that total has gone to meet redemptions, but it has also enabled the company to make new acquisitions, especially data centers.

“The real takeaway is the sponsors are meeting those redemptions. In the old days — the old days meaning before NAV REITs — when redemption requests built up, they shut down the redemption program,” Gannon said. “And so all of a sudden you’re stuck. You might be stuck for a couple of years.”

Nontraded REITs held big reserves of as much as 20% of NAV and replenished as the money bled out, Gannon said. 

“The fact they're meeting those massive redemption requests is the most significant event in alternative investment history,” he said. “Because I think what it does, it proves out the alternative investment concept of 2% a month, 5% a quarter in redemption.”

But the future of nontraded REITs also depends on their ability to continue bringing in money. Investor interest in fundraising for nontraded REITs has plunged. In 2021 and 2022, nontraded REITs achieved fundraising totals of $34.4B and $33.2B, respectively, according to Stanger data. As of the end of the third quarter, fundraising in the sector dwindled to a year-to-date total of $8.9B.

Despite the lull in investor interest, at least among retail investors, a number of nontraded REITs have been formed this year by such sponsors as EQT Exeter, ExchangeRight, Invesco Real Estate and Sculptor Capital Management. 

According to Gannon, the new entities are supported by deep-pocketed investors biding their time as real estate valuations continue to decline. Properties bought at a discount will probably mean strong returns in the long run.

“Private CRE valuations are only halfway to our projected declines of 25% to 30%,” Cohen & Steers Head of Real Estate Strategy and Research Rich Hill told Bisnow in an email. “This magnitude of private CRE declines has only occurred in the early 1990s and post-2008, creating a potential opportunity for historically strong returns.

“Investors are raising capital across a variety of vehicles in anticipation of these opportunities. They are selectively starting to emerge and we believe will continue to do so over the next 12 to 18 months.”

Along with the rest of CRE, these investment funds have to cope with a down market. As of the end of Q2, an index generated by Stanger showed an annualized total gain of 0.08%, roughly on par with overall REIT indexes kept by MSCI and Nareit. The S&P 500 gained more than 19.5% over the same period.

Some nontraded REITs managed to generate positive returns despite market conditions. BREIT turned in an annualized return of 1.86% for the second quarter. Its annualized returns over the last three years were 16.66%.

Fifty-six percent of BREIT's $125B in holdings is in rental housing, with another 23% in industrial properties. It has much smaller portfolios of net lease, hospitality, retail, office and data center properties.

At the other end of the return spectrum is InPoint Commercial Real Estate Income, which recorded an annualized negative return of 7.53% in the second quarter. 

More nontraded REITs suffered losses during the quarter than gains, including Hines Global Income Trust, Starwood REIT, Ares REIT and KKR Real Estate Select Trust.

Nontraded REITs with concentrations in office have performed worse. KBS Growth & Income REIT, an office specialist, experienced negative returns of 78.85% for the year ending in the second quarter, according to Stanger. But even specialists in more popular property types are seeing weak returns because of the overall malaise in real estate.

“Real estate fundamentals as a whole are decelerating even for what were fairly strong core sectors a year or two ago,” Green Street co-Head of Strategic Research Daniel Ismail said.

“But there are still major differences between certain property sectors. I would characterize office as having a fairly weak fundamental outlook over the next few years. That's no surprise. But even apartments and industrial are weakening.”