If the liquidity crisis is contagious and spreads, a real estate storm similar to the Lehman crisis in 2008 may be inevitable.
As the Federal Reserve continued to raise interest rates, troubles in the US real estate industry began to emerge, and a storm similar to the Lehman crisis in 2008 was brewing.
On Thursday local time, Blackstone restricted withdrawals from its $125 billion real estate investment fund BRIET (Blackstone Real Estate Income Trust) due to a surge in redemption requests from investors. According to Blackstone’s notification, the company satisfied only 43% of the redemption requests of BRIET investors in November.
Under Blackstone’s new rules, investors can redeem up to 5% of their shares in any quarter and up to 2% per month to prevent their illiquid real estate holdings from being sold off. Blackstone added in the notice that it only allowed investors to redeem 0.3% of the fund’s net assets in December.
The market is falling, but you are rising?
According to market analysis,The reason why investors are eager to redeem is mainly because they have doubts about the actual value of Blackstone RIET.Rising interest rates are weighing on property values as financing becomes more expensive. And Blackstone is still pricing its products with outdated valuation tools, which can no longer reflect the actual value of the product.
According to Blackstone’s official documents, BREIT’s comprehensive return on investment is mainly composed of rental income and real estate appreciation income.The annualized net return since inception is 13%, three times that of publicly traded REITs, and the year-to-date return is over 9%.As a non-traded real estate investment trust, BREIT is not traded on an exchange, and its issuance and redemption pricing is mainly based on the net asset value data released by Blackstone every month.
Against the backdrop of a downturn in the U.S. real estate market,The Dow Jones U.S. Select REIT Total Return Index (DWRTFT) has tumbled 22% over the same period.
For the high rate of return of its REIT, Blackstone explained that it has invested heavily in rental apartments and industrial real estate (accounting for about 80%), and these two areas have performed very strongly. BREIT rental income increased by 13% year-on-year; driven by e-commerce and offshore business, the rent of industrial real estate signed in the third quarter also rose by a record 38%. At the same time, the company has expected that interest rates will rise, so about 90% are invested in 6.5-year fixed-rate debt.
Investors aren’t buying it. The “outstanding” performance has investors questioning how Blackstone arrived at its REIT’s valuation,Some investors took the opportunity to redeem their take-profit at Blackstone’s “pricing”.
2008 Lehman crisis reappearance?
At present, the market is worried that Blackstone’s action to restrict REIT redemption may trigger a chain reaction and stimulate more investors to participate in redemption. At the same time, new fundraising efforts will also be difficult, as potential investors may be reluctant to put money into closed-end funds. The characteristics of BREIT’s transaction target also make the fund face greater liquidity problems.
BREIT’s main investment targets are low-liquidity private equity and real estate businesses, and real estate investment accounts for more than 30% of its asset management scale.
The leverage level of BREIT itself is not low. BREIT had $9.3 billion in available liquidity at the end of the third quarter, but only $1.4 billion of that was in cash, with the rest in lines of credit and other borrowing capacity. As of the end of September, BREIT had $68 billion in outstanding debt, and the fund is much more leveraged than similar public REITs such as Prologis.
This combination of “low liquidity of assets” + “high leverage” makes BREIT extremely vulnerable to liquidity crisis during the market downturn. Facing the pressure of redemption, Blackstone had to sell it to raise funds.
Wall Street Insights previously published in the VIP article “Blackstone Trapped Real Estate, Lehman’s Phantom Reappears? ” mentioned that in order to meet investors’ redemption requirements, Blackstone has announced the sale of its 49.9% interest in the MGM Grand Hotel in Las Vegas and the Mandalay Bay Resort Casino at a cash consideration of US$1.27 billion.
But this is only temporarily buying some time for Black Stone,If the liquidity crisis is contagious and spreads, it may fall into a vicious cycle of selling assets-satisfying redemption-net value decline-more investors redemption, triggering a liquidity crisis like in 2008.
In 2008, Lehman Brothers announced its bankruptcy and caused market panic. Monetary fund redemption applications that only held about 1% of Lehman Brothers commercial paper surged, and the redemption amount accounted for 65% of its money-based assets.Assets that could have been held to maturity can only be sold in large quantities at a lossresulting in a sharp drop in the net value of the monetary fund, and had to announce a suspension of redemption. Finally, with the aid of the US government, it took a long time to get out of the predicament.
In addition, before the financial crisis, the Federal Reserve has cut interest rates many times, and the market liquidity is not lacking, but it is different now, limited by high inflation, the Federal Reserve is raising interest rates at the fastest rate in history and conducting quantitative tightening (QT), that is, selling The assets held on the balance sheet suck away market liquidity. This year’s market environment is relatively fragile, and it is not easy to find buyers who are willing to pay high prices for assets.
If Blackstone and other institutions cannot gain the trust of investors, in order to cope with the pressure of redemption, other assets in their hands will inevitably be sold. Considering the complex cross-default risks among financial institutions, a real estate crisis similar to the Lehman crisis in 2008 Storms are inevitable.
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