It comes down to building limited liquidity funds to attract high-wealth individuals more than institutional investors.
The world of private real estate funds investing is experiencing a major about-face: When Starwood Capital Group tightened withdrawal requests from its $10 billion fund, waves went through the $90 billion industry, according to a report in the Wall Street Journal. “Investors in these funds, mostly individuals who paid as little as $2,500, appear worried that their funds might also tighten the withdrawal spigot, forcing them to wait indefinitely in line if they want to cash out,” they wrote.
But this isn’t a one-month or one-quarter issue. Private CRE funds have been feeling pressure for years now.
Step back to the second quarter of 2022. That’s when the Federal Reserve started raising interest rates to battle inflation. “Managers raised just $19.8 billion in the first quarter, the lowest total since 2011,” wrote PERE. “This has led to longer fundraising periods, which now stretch to an average of 22 months in 2024, more than double the timeframe in 2019, PERE data showed.”
Many investors don’t have the same amounts of capital to invest in new funds than they once did. One reason, according to PERE, is smaller distributions from managers, who are dealing with challenging markets. Another is that, with falling valuations, many investors have found themselves overallocated to CRE and so have to rebalance their portfolios.
The problems have been building and 2024 has become a rough year for real estate funds. Starwood Real Estate Income Trust, struggling with a cash crunch in May, opted to further limit redemption requests instead of selling assets into a discounted market.
The new restrictions cap monthly withdrawals at 0.33% of net asset value. The REIT, which manages about $10 billion, also said it would buy back only 1% of the value of the fund’s assets every quarter, down from 5% earlier. Starwood also said that it would cut its management fees in the face of the mounting withdrawal requests and just $752 million in available liquidity at the end of April.
The wave of withdrawal requests set off backlash withdrawal requests by investors in other private REITs, including Blackstone’s BREIT. “Repurchase requests for BREIT steadily declined from January 2023 until the last two weeks of May 2024 when another non-listed REIT amended its share repurchase program to significantly reduce liquidity to its shareholders,” Blackstone Real Estate Income Trust said in a June 3, 2024, letter to shareholders. Blackstone commented to GlobeSt.com, saying, “BREIT fulfilled 100% of repurchase requests in May. Its semi-liquid structure continues to work as designed and we have no plans to change our share repurchase program.”
On the balance, it’s been tough, and maybe because the vehicles target high-wealth individuals and not institutional investors. “These funds were designed to appeal to individual investors by giving them the ability to redeem their shares on a monthly or quarterly basis,” the Journal wrote. “Sponsors disclosed to investors that the funds retained the right to limit redemptions to avoid being forced-sellers. But they were marketed by financial advisers and others who stressed their liquidity.”
