Investors have yet to start sinking money back into nontraded real estate investment trusts, but they are requesting far fewer share redemptions from the world’s largest commercial property owner — as it dives back into making acquisitions.
The largest of such REITs, Blackstone Real Estate Income Trust, saw its share buyback requests from stockholders decline in March — down 17% from February and down 85% from a year earlier, the REIT has told shareholders. It was the lowest level of requests in 23 months.
The results signal that nontraded REITs are coming to a turning point when their net asset values may again rise. Blackstone REIT’s sponsor, private equity giant Blackstone, this week signaled such a return to growth with a $10 billion offer, its biggest multifamily deal to date, to take Apartment Income REIT private.
However, portfolio growth may not be there quite yet for nontraded REITs, according to Kevin Gannon, chairman and CEO of investment banking firm Robert A. Stanger & Co.
“Redemptions [for the REITs] are lower, but still elevated,” Gannon told CoStar News in an email. “I think they will stay elevated through the end of 2024 and into 2025 and outrun fundraising.”
Nontraded REITs have lost on average 3.13% in net asset value over the past two years, according to Gannon’s data, far less than the 13.78% decline over the same time for publicly traded REITs. Unlike public REIT shares that are bought and sold daily on major stock exchanges, nontraded REIT securities are bought and sold in private transactions. Their values are set by the net value of holdings and the number of shares outstanding.
Investors sense there could be further declines in the net asset value of nontraded REITs to match the value declines in publicly traded REITs, according to Gannon.
That anticipated drop “is the reason for the lower fundraising and higher redemptions in my opinion,” he said.
Plus, other types of real estate investments could offer investors higher yields versus net asset value REITs’ average returns of about 5%, Gannon said.
Blackstone REIT, though, in step with parent company Blackstone, said it’s not waiting for investor sentiment to turn around completely. Commercial real estate is at an inflection point with real estate values bottoming and signs of improvements in the debt and transaction markets, according to the REIT.
“We believe now is the moment in the cycle to increase exposure to the right sectors and markets in commercial real estate,” it said. “It is important to look past the headlines and not wait for the ‘all-clear’ signal to invest capital.”
Nontraded REITs also have built-in share repurchase agreements with stockholders for up to 5% of net asset value per quarter. The agreements allow investors to cash out because their shares are not traded on public markets. Share repurchase requests for most nontraded REITs have exceeded those levels for nearly two years.
Blackstone REIT’s portfolio is concentrated in high-growth sectors, including data centers, warehouses and student housing, and fast-growing Sun Belt markets.
Blackstone REIT’s comments echo those of its parent company, which reported in January it expects deal activity to pick up this year.
True to its word, Blackstone on Monday announced the deal to buy Apartment Income REIT.
“At a high level, we think the transaction will be viewed as a positive read-through for the rest of the apartment sector, as it signals [Blackstone’s] return to the apartment sector after a hiatus amid the Fed hiking cycle,” Adam Kramer, an analyst for Morgan Stanley Research, wrote in a note to clients.
Blackstone said in January that its real estate values are reaching a bottom as inflation has slowed and the Federal Reserve mulls cutting rates this year.
To be clear, the private equity giant indicated that some short-term headwinds remain, particularly for sectors such as office. It also takes time for market confidence to return, according to the firm, adding that also gives Blackstone, with about $200 billion in undeployed capital, or dry powder, an advantage.
Fundraising Decline
Blackstone REIT too has a significant amount of capital to begin investing, but it and other nontraded REITs have continued to see depressed fundraising from the sale of new shares.
For the full year of 2023, net asset value REITs reported $10.2 billion of fundraising and $18.3 billion of redemptions, resulting in negative net fundraising of about $6.2 billion as compared to nearly $23.2 billion of net positive fundraising in 2022, according to data from Stanger & Co.
Nontraded REITs reported $899.2 million of fundraising through February. About $268 million of that came from the issuance of shares to affiliates, according to Stanger & Co. Without the issuance of those shares, 2024 nontraded REIT fundraising is down 42% as compared to the same time last year. The 2023 total excludes a one-time $4 billion investment from the Regents of the University of California in Blackstone REIT in January 2023.
Blackstone REIT led fundraising in January and February this year with $264 million, according to the latest Stanger & Co. data.
Representatives of Blackstone REIT declined to comment to CoStar News on the amount of money raised this year but reported to shareholders it has “started to see an acceleration in subscriptions.”
The sale of properties and other assets over the past couple of years has helped steadily reduce nontraded REITs’ net asset value, according to CoStar data. The net asset value of real estate properties for 10 nontraded REITs that held assets at year-end 2022 had fallen by $11.8 billion in 2023.
Blackstone REITs’ property investments were down $7.8 billion at the end of 2023 compared to a year earlier.
Blackstone REIT reported holding $8.1 billion of liquidity as of March 27, according to its annual report filed with the Securities & Exchange Commission late last month. It also reported it expects to generate an additional $100 million of proceeds from the sale of properties that are currently under contract and for which it had received nonrefundable deposits.
