Some major REITs limiting cash-out requests from investors

By Doug Bailey

These uncertain economic times – interest rates rising, commercial property values sinking, and rising fears of recession – have real estate investors running for the exits. And some are finding it impossible to get there.

At least three major real estate investment trusts have said they have shut the door, at least partially, on honoring investor cash-out requests following a huge surge in withdrawals as economic worries climb.

The private equity firm KKR said last week it would limit redemptions after it received requests that would have pulled out more than 8% of its Real Estate Select Trust, way over its 5% per-quarter limit in net asset value.

Blackstone Group and Starwood Capital Group also notified the Securities and Exchange Commission last month, saying they had fulfilled only a portion of the redemption requests received in November and December. Blackstone’s BREIT, in fact, said it honored just 43%, or $1.3 billion worth, of the cash-out requests it received in November.

$20B in withdrawals last quarter

Those withdrawals were part of a panic trend not seen since the Great Recession of 2009.

An estimated $20B in withdrawals from core real estate equity funds occurred in the last quarter, according to IDR Investment Management, which tracks an index of open-end diversified core equity funds.

JPMorgan Chase, Morgan Stanley, and Prudential Financial all acted to limit their exposure as a stampede of redemption requests occurred. Similarly, California-based REIT KBS Real Estate Investment Trust said it is cutting dividends and suspending withdrawals to curb expiring leases and soft office demand.

The rush started in the third quarter of last year when UBS Trumbull Property Fund said it had more than $7 billion in pending withdrawals, about 40% of the firm’s net worth. Rising interest rates were mostly blamed on an overall 29% drop in returns among publicly traded real estate trusts in 2022.

But the reasons behind the sudden surge in withdrawal requests, and more important their repercussions, vary depending on who is pontificating. Some see the redemptions as a mere bump in the road caused mostly by tottering foreign markets, while others say what’s happening will have dire impacts on the U.S. markets, worse than the cryptocurrency collapse of last year.

“They're halting withdrawals in order to maintain liquidity and capital reserves because as interest rates have begun to rise a lot of the assets that were financed within these REITs have floating rate mortgages.”Ari Rastegar, CEO, Rastegar Property Company

Speaking at a Goldman Sachs investor conference recently, Blackstone CEO Stephen Schwarzman said redemptions were mostly coming from Asia, where investors tend to utilize more margin debt. With markets plummeting, he said, Asian investors were under tremendous financial pressure and “so they were just looking for cash,” he said.

Others agreed.

“They're halting withdrawals in order to maintain liquidity and capital reserves because as interest rates have begun to rise a lot of the assets that were financed within these REITs have floating rate mortgages,” said Ari Rastegar, CEO of the Rastegar Property Company.

Rastegar and others pointed out that overall REITs have performed well over the last two or three decades and the current situation reveals a temporary liquidity issue.

“I don't believe in the long term, it impacts the overall power value of the REIT in a way to be concerning,” Rastegar said. “This is simply a temporary time that investment managers are being more prudent, more cautious, and this is what they are paid to do.”

Some of the reaction is psychological in nature, with people acting out of fear and not based on economic data, he said.

“As interest cost is a large input to real estate asset profitability, the increases also can reduce the value of these investments,” said Jason Kopcak, CEO of Altisource Asset Management. “Investors are reacting to that with higher withdrawals. While withdrawals may continue, the shock of higher rates has already worn off among investors and I wouldn't expect more of those announcements at this point.”

But some aren’t as certain and fears abound that a slide in real estate values will continue.

A year-end global real estate report by Prequin, an investment data company based in London, 74% of investors believe real estate assets are overvalued, with fund managers saying they expect property valuations will continue to fall.

'A more pessimistic view'

“The optimism for real estate at the end of 2021 is now replaced with a more pessimistic view for the year ahead,” the Prequin report said.

Phil Bak, the CEO of Armada ETF, said there is a wide difference and disconcerting divergence between valuations of private REITs and publicly-traded ones, which mark to market values on an almost daily basis.

“These things fluctuate, you can expect some divergence over time,” he said during an online ETF Think Tank Exchange last week. “But the divergence has widened to a laughable degree, unexplainable by any rational view, other than a systemic one.”

Armada executives said there is $118 billion worth of wholly owned real estate investments with 20% annual redemption requirements. That means in order to meet cash out requests, $24 billion worth of real estate could come to market in the next 12 months, further depressing valuations.

These big REITs were buyers,” said Bak. “Now they’re forced sellers and it’s going to be very difficult for them to find liquidity.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].