Solutions to Blackstone’s BREIT Problems

Blackstone’s BREIT has been the go-to investment choice for individuals interested in the real estate market. However, they have faced substantial challenges in recent months that have put into question if it is the REIT structure of the future. Here we will examine BREIT's recent difficulties with capital raising, creating liquidity, and meeting redemption requests, while also exploring potential solutions and the changing landscape of REIT investments.

Traditionally, REITs raise their capital primarily through individual investors. In contrast, BREIT has diversified its investor base by also accessing capital from endowments, pension funds, and sovereign wealth funds, which has contributed to its rapid growth and market prominence, but has also left the door open for risk when some of these larger institutions begin to demand liquidity.

Another area that has set BREIT apart is the overall performance of the fund. It is no secret that the real estate market in the US has been under substantial pressure over the last 18 months, which has made listed REITs in the US see a significant decline of 24% in value over that time. Conversely, BREIT has actually seen a 1.1% increase in value over that same period.

Typically, good performance yields greater inflows, however, BREIT has struggled to raise new capital in 2023 because most advisors view BREIT’s “inflated premium” as a significant disadvantage compared to the listed REIT market. This has further amplified the challenges it faces with redemption requests. Non-traded REITs like BREIT have limited liquidity options, unlike publicly traded REITs that can be easily bought and sold on exchanges. As a result, investors seeking prompt access to funds or the ability to adjust their portfolios face significant challenges.

In a recent Barron's article, the author highlights the tidal wave of redemption requests BREIT has faced in recent months, which has triggered the implementation of redemption caps. To address this challenge, BREIT has explored selling major assets to generate the necessary liquidity for its redemption queue. However, this approach presents its own set of problems and raises questions about the REIT's long-term viability, because selling illiquid assets at the wrong time can have a significant long term negative impact on the portfolio.

Despite the challenges, there is hope for BREIT. In a recent Reuters report, the author highlights a slight decrease in redemption requests in the past month. This, in part, can be attributed to increased secondary trading activity on the LODAS Marketplace. In March, LODAS included BREIT on its marketplace, providing greater liquidity options. This development offers a potential solution to liquidity challenges faced by non-traded REITs like BREIT, enabling investors to have more flexibility and efficiency in adjusting their investment positions.

Because of this, concerns have emerged about the long-term viability of sponsor-led liquidity in the NAV REIT structure, including BREIT. Dan Jones, a Partner at Bain & Company, recently expressed skepticism about the suitability of BREIT's product structure during a Money Management Institute conference. This sentiment has resonated with institutions in discussions with LODAS, who are exploring the development of new products relying on the secondary market as the primary source of liquidity going forward.

Stay tuned as LODAS continues to share thoughts and information around new alternative product structures and solutions that offer seamless access to the real estate market.