Unlisted property
Blackstone Real Estate Income Trust (BREIT), the largest US unlisted real estate investment fund, has restricted redemptions. The second largest US unlisted real estate investment fund, Starwood, is about to do the same. A number of UK unlisted real estate funds have done the same.
We’ve met with several clients and prospects recently with unlisted property investments and have received a lot of pushback when we have suggested that listed property investments offer better value at the moment and that they should rotate out of unlisted property investments into listed. But the chart below from Resolution Capital, which compares Blackstone Real Estate Income Trust with several listed US peers, provides a stark comparison. Which is more likely: that Blackstone’s fund has managed to increase in value by 5% in the greatest interest rate raising cycle in recent history or that the valuations are not a realistic assessment of current prices? Naturally, investors would want to sell while valuations appear elevated.
Keep in mind that Blackstone has more than double the debt levels of the listed peers, so overall it should be riskier. And if we were to assume that the true value of its investments had fallen 30% in line with the listed funds, then the debt to assets ratio would go from 46% to around 69%. That’s a dangerously high level and could result in the triggering of debt covenants.
Perhaps we’re wrong. Maybe the listed market has overreacted, and interest rates will very soon fall back to the low levels we’ve seen over the last few years. In this case, you’d still want to rotate into listed property, but this time to capture the upswing as listed funds return to their former heights. Unfortunately, you can’t now because the unlisted funds have closed the gates.
We often read marketing about alternative investments that discusses unlisted investments’ risk mitigation benefits – saying they reduce portfolio risk because they have a low correlation with listed assets. But the current situation shows there’s no benefit to investors if you can’t trade them when they diverge. Resolution quote Warren Buffet’s mentor Benjamin Graham: “it is self-deception to tell yourself that you have suffered no shrinkage in value merely because your securities have no quoted market at all.”
More details on this from Resolution here: Resolution Capital | Blackstone – Reality Bites (rescap.com).
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