While there has been little huge fallout from this week’s rise in redemption requests at an unlisted Blackstone real estate income trust (REIT), it is being seen by some as a warning sign.
Blackstone (BX.N) restricted withdrawals from its $69 billion unlisted REIT on Thursday after redemption requests reached pre-set limits amid investor worries it was slow to adjust valuations as interest rates hiked, a source immediate to the fund said.
The development is so far an additional reminder of the risks facing not just sectors that are sensitive to rising interest rates but also broader financial markets, which have picked up sharply on expectations that interest rate rises will slow.
“We have to be careful – rates have risen sharply and there will be a fallout for some asset classes,” Seema Shah, chief strategist at $500 billion asset manager Principal Global Investors, said of the possible pitfalls ahead.
“REITS had a fantastic performance for a couple of months but when you have that outperformance, investors don’t react to traditional fundamental signals such as rising rates,” she said.
Shares in Blackstone tumbled around 0.2% on Friday afternoon after sliding 7.1% on Thursday. Major developed economies have hiked rates by a joint 2,440 basis points in this monetary tightening cycle until now. This rules out Japan, which has maintained rates at -0.1%.
The U.S. Federal Reserve has hiked its policy rate by 375 basis points in 2022 to a 3.75%-4.00% range in the fastest rate-rising cycle since the 1980s in its inflation fight.
But in recent weeks hopes have risen that the Fed will “pivot” from aggressive tightening, causing investors to price in lower peak interest rates.
That helped prompt the largest monthly fall in 10-year Treasury yields since the height of the COVID-19 pandemic in 2021. Public REITS have picked up with the U.S. stock market, which has surged over 15% since mid-October. (.SPX)
“As long as you have complacency, and there is some complacency that the Fed can engineer a soft landing, that can trigger some pain and so events like this are small flag posts for the ramifications of progressive rising rates,” Shah said.
Blemish To Market
Investors said they expected more plunges in REITs and the property sector. Chris Taylor, chief executive of real estate at Federated Hermes, said:
“The fact is that most retail investors, and defined benefit scheme investors due to de-risking strategies, are electing to reduce their real estate holdings across the board where they can as values in direct real estate re-price alongside rates normalization.”
But there is a broader warning for markets experiencing their fair share of warnings this year from bets made in a low-rates era.
Critically, September’s mini-budget of unfunded tax cuts sent Britain’s bond market into a downturn as pension funds experienced big collateral calls on interest rate hedges that had never been truly tested by fast moves in rates, resulting in a Bank of England intervention.
Notably, as the mini-budget briefly sparked a boost in BoE rate-rise bets, UK REITS dropped 17% to their lowest level since 2012, before rebounding. (.FTNMX351020).
Kaspar Hense, a portfolio manager at BlueBay Asset Management, which handles assets worth more than $92 billion, said the REIT news was an example of the risks private markets encounter in a surging rates environment. Hense stated:
“If yields are rising, being invested in rather illiquid assets can be a challenge, just for a rather small (return) pick-up going into illiquid markets, which will suffer very significantly if yields are rising.”
“That is certainly what we’re seeing here and we should really expect to happen again over the next six to 12 months as yields are rising and central banks are keeping rates higher. It will have an impact on net worth, it will have an impact on investors’ losses.”
Blackstone has posted a 9.3% year-to-date net return for the REIT, while the publicly traded Dow Jones U.S. Select REIT Total Return Index has fallen more than 22% over the same period.
A Blackstone spokesperson refused to comment on how the New York-based firm determines the valuation of its REIT, but said its portfolio was concentrated in rental housing and logistics in the western and southern United States that have short-duration leases and rents avoiding inflation.
At least one analyst, Morgan Stanley’s Michael Cyprys, said the market’s reaction to the news was “overdone.”
While restrictions on redemption requests, investor reallocations, and year-end tax planning decisions could prompt more redemptions in the near term, a “strong performance track record, supportive market fundamentals, and scope for an improved macro backdrop should help alleviate potential outflow pressure,” he wrote in a research report.
Others were less optimistic. One concern is the possibility of large differences between the valuation of public assets and private assets, which are often not priced to display movements in public markets.
For investors who jumped into private markets and riskier assets in a bid to increase returns during years of easy cash and low rates, this could now turn out even riskier. Mohamed El-Erian, an advisor to Allianz, said in a Twitter post:
“The prolonged period of very cheap money and abundant liquidity encouraged some asset managers to offer relatively liquid products that invest in relatively illiquid assets. These products behave differently in a world of patchy liquidity.”
