Bloomberg reported that Blackstone Real Estate Income Trust (BREIT), the largest real estate fund under the Blackstone Group, the world's largest private equity fund management company, has been restricted from redemption. After BREIT experienced a large amount of redemption in the first two months, Blackstone issued a notice on December 1, and only a very small number of redemption requests could be met in December. This reveals the risk where investors have withdrawn from the real estate investment market, which may put BREIT in a tough position.
In the past two months, BREIT funds have received a large number of redemption requests. According to the rules, the amount repurchased by the fund shall not exceed 2% of the monthly net assets, and the cumulative amount in a single quarter shall not exceed 5% of the net assets. According to reports, the letters Blackstone sent to clients showed that the application for the redemption of funds in October this year reached USD 1.8 billion, accounting for 2.7% of the company's net assets. Although this has exceeded the standard, it was 100% fulfilled after the approval of the board of directors. However, in November, it only approved 43% of the BREIT's redemption requests, totaling USD 1.3 billion. The scale of redemption in the fourth quarter may exceed the standard, causing Blackstone to start restricting redemption. The letter shows that in December, the company only had 0.3% of its net assets available for investors to redeem funds. If there are still a large number of redemption requests in the first quarter of 2023, the redemption amount is still only 2% of the net assets. This abnormal situation made it difficult for Blackstone to deal with and had to restrict redemption applications to avoid falling into a vicious circle of asset undervaluation and fund redemption.
Blackstone Group has always been reputable in private equity investment. In the third quarter of this year, it also bucked the trend and attracted USD 44.8 billion, resulting in its total assets under management (AUM) reaching USD 950.9 billion, making it the largest private equity institution in the world. In addition to investing in traditional stocks, bonds, and currency markets, it is also known as a benchmark for alternative investments. These are mainly real estate, including hotels, shopping malls, office buildings, residences, logistics, and others.
Driven by the unconventional economic and monetary stimulus policies under the COVID-19 pandemic, real estate prices in the United States have risen rapidly, which has promoted investment in it and brought opportunities to Blackstone. In June 2022, compared with June 2019, U.S. property prices rose by 80%. It is the expansion of the real estate market stimulated by the money that has made Blackstone's alternative investment highly attractive for investors. During the pandemic, compared with the weak trend of global real estate prices, the Blackstone Group aggressively expanded its assets in Japan, Australia, India, China, and other places, and was not affected by the global economic downturn and the slowdown in the real estate market. In 2021, the scale of real estate assets managed by Blackstone surpassed the traditional business of private equity and became the largest core asset segment of Blackstone. In the next year, Blackstone's private equity raised USD 22.5 billion, while real estate raised USD 33.5 billion, far exceeding the former.
However, in 2022, as the Federal Reserve continues to tighten policies, the good old days of the real estate market have come to an end as rising interest rates have brought volatility to the U.S. real estate market. With the Fed continuing to raise interest rates, house prices have fallen sharply since June this year. Mortgage rates for home purchases in the U.S. rose from 3% in January to 7% in November this year. According to the Black Knight report, the median house price in the U.S. fell by 105% month-on-month in July, marking the largest monthly decline since the bankruptcy of Lehman Brothers. The month-on-month decrease was 0.98% in August, and the median house price fell by 0.52% in September, continuing the downward trend. Property prices have fallen 13% from their peak this year, according to Green Street's price index for October. Existing home sales fell for the ninth straight month in October, based on information from the National Association of Realtors. Sales in October were down 5.9% from September and down 28.4% from a year ago.
Such a development signifies that the asset value of the real estate asset portfolio is facing shrinking, which prompts investors to cash out and leave the market. As of December 2, the Dow Jones U.S. Select REIT Total Return (DWRTFT) fell 19.19%; Vanguard Group's real estate ETF has a total return of -13% so far this year. Year-to-date, though, BREIT has returned around 9% through October. The asset scale reached USD 125 billion, and the net assets reached USD 69 billion. Although from the perspective of financial indicators, BREIT remains healthy, even much higher than the market average. This, contrary to the performance of the broader market, not only failed to retain investors but instead caused them to doubt its valuation method and led investors to take quick profits. The large-scale redemption of investors also forced Blackstone to sell its assets to cope with insufficient liquidity and to reject related redemption applications. This means that Blackstone's real estate fund is facing a liquidity crisis similar to Evergrande.
Although Blackstone's real estate investment still has a high valuation, its Achilles heel of real estate investment lies in the lack of liquidity and the difficulty in realizing assets. If the selling is concentrated, it is likely to have to be sold at a discount to recover funds quickly. This means that asset valuations have shrunk, which may lead to intensified redemptions of funds. This vicious circle, equivalent to the "run” encountered by banks, will bring a fatal blow to financial institutions. In fact, during the 2008 financial crisis, Lehman Brothers, which collapsed due to lack of liquidity, still had more assets than liabilities after liquidation, but the short-term panic did not give it enough time, and that is the scary part of the liquidity crisis. The plunge in Blackstone's share price is a sign of that reaction.
That being said, the redemption pressure on its main fund is not enough to make Blackstone stuck in the quagmire of bankruptcy and bankruptcy, though it will undoubtedly bring great losses to it. If this panic spreads, it will bring a chain reaction to the entire capital market. Like Blackstone, real estate-focused investment firm Starwood Real Estate Income Trust has also begun limiting redemptions, according to Barron's. This not only means that investment in the real estate market is being kept away by investors, but the recurrence of the Lehman crisis is what investors are currently worried about. This panic mentality may further exacerbate the vulnerability of the market. In particular, some highly leveraged institutions will face increasing pressure as capital costs continue to rise. Even if Blackstone survives, it cannot be ruled out the collapse of some more aggressive and highly leveraged small and medium-sized private equities. In addition, with the real estate market downturn, other financial institutions including banks are also facing risks. In the case of tightening policies, it is not impossible that the spread of this liquidity crisis in the financial system could not be effectively avoided, and ultimately still requires the intervention and disposal of financial regulatory authorities. When this kind of systemic risk occurs, Blackstone may not be able to get out of the predicament in the short term on its own.
Final analysis conclusion:
The large-scale redemption of Blackstone's funds has caused real estate investment institutions such as Blackstone to fall into the quagmire of liquidity risk. This is the result of the downturn in the real estate market, and it also indicates that the risks brought by the tightening of the Fed's policy to the financial sector are gathering and spreading. Whether this will bring about a new round of financial crisis deserves close attention from the market.
