Blackstone announced earlier this month that it would limit withdrawals from its US$69-billion unlisted Blackstone Real Estate Income Trust after a surge in redemption requests from investors worried about valuations.ANDREW KELLY/Reuters
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A series of redemption freezes across the private real estate sector has raised concerns about the alternative asset class amid soaring borrowing costs and a cooling economy. It also underscores the need for advisors to educate clients on the limits of what they own.
New York-based asset manager Blackstone Inc. announced earlier this month it would limit withdrawals from its US$69-billion unlisted Blackstone Real Estate Income Trust after a surge in redemption requests from investors worried about valuations. Starwood Real Estate Income Trust of Miami also reportedly curbed redemptions on its non-traded real estate investment trust recently after investor withdrawal requests exceeded its monthly limit in November. And Toronto-based Romspen, one of Canada’s biggest private mortgage lenders, announced in November that it would freeze investor redemptions, citing some trouble with loan repayments.
When a fund freezes redemptions, known as “gating,” it prevents investors from pulling their money out of the investment product. Advisors say the potential of it happening should be explained to investors before they sign up for these types of investment vehicles.
“It’s really important for advisors and clients to understand the product,” including the liquidity restrictions, says Ida Khajadourian, portfolio manager and investment advisor with Khajadourian Wealth Management at Richardson Wealth Ltd. in Toronto. Her team invests in both public and private real estate investment funds, none of which are currently subject to redemption freezes.
Ms. Khajadourian notes that private funds – whether in real estate or other asset classes – aren’t suitable for all investors.
It’s up to advisors to do their due diligence – including knowing the product and the client – before adding them to a client’s portfolio, she says.
In addition, advisors and investors need to be comfortable with the management teams behind their investments “and have confidence they’ll work through stressful periods by imposing redemption freezes, if necessary,” she says.
While gating is concerning, Ms. Khajadourian says it could signal the fund is being managed carefully and that providers are working through challenging market conditions, such as the rising interest-rate environment currently affecting real estate.
“[Investors] should understand that, under extreme circumstances, gating might be necessary to protect the fund, unitholders and investors,” she says.
“It’s not something you see often, but in times like this, as an investor, I would want companies to manage the situation for a positive outcome versus having a run on the fund that’s impacting everybody negatively.”
Ms. Khajadourian cites examples during the pandemic-induced market drop in 2020 in which some private debt funds were gated and “came out very strong and stable on the other side.”
Publicly traded real estate ‘a better buy’
Dean Orrico, president and chief executive officer of Middlefield Capital Corp. in Toronto, says more investors are coming to realize the pitfalls of private asset classes, particularly the inability to sell them quickly if needed.
“These investments are private for a reason – you’re trading off liquidity with the hope that they provide you with better risk-adjusted returns ... and increased diversification,” he says.
“What’s happening now is that some investors are saying, ‘I want my money back,’ and they haven’t come to appreciate that it’s not that easy. It’s not like owning a portfolio of public assets.”
Mr. Orrico believes publicly traded real estate – which his firm mostly holds – is a better buy today, given that valuations in North America have fallen by about 20 per cent in 2022 while some private real estate has been marked up.
“I would be looking a lot harder at the publicly listed market because it’s pricing in a lot of bad news, I think excessively,” he says.
He also says investors buying private real estate right now should “be cautious,” warning that some private real estate funds might experience writedowns in the coming months as valuations are restated and more investors seek redemptions.
How much should you allocate?
Martin Pelletier, senior portfolio manager at Wellington-Altus Private Counsel in Calgary, believes private assets like real estate should only make up a small portion of portfolios, partly because of liquidity concerns.
“You may want to have investments that you can sell and take advantage of mispricing, especially during a market correction like we’ve seen this year,” says Mr. Pelletier, whose practice has steered clear of the private real estate sector, concerned about the impact from rising rates.
Still, he says there are some good private real estate assets suitable for larger, long-term investors, and believes it’s up to advisors to discover which ones are best for their clients – and how much they should hold.
“Before investing in private real estate, make sure you are fully aware of gating provisions, liquidity rights, and that it matches your time horizon,” he says.
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