Blackstone REIT constraint: a potential market red flag

Some are seeing this week’s spike in redemption demands at an undisclosed Blackstone real estate income trust (REIT) as a warning indicator, even if there hasn’t been much of a wider impact.
In response to investor concerns that it was taking too long to adjust values as interest rates rose, Blackstone (BX.N) on Thursday blocked withdrawal from its $69 billion unregistered REIT after redemption requests exceeded pre-set restrictions, a source familiar to the fund said.
The move serves as yet another indication of the dangers that not only industries that are sensitive to interest rate increases but also the broader currency sector, which has sharply risen in expectations of a draught period in interest rate hikes, face.
Seema Shah, the chief strategist at Principal Global Investors, a $500 billion asset manager, said that given the sudden increase in rates and the possible consequences for some asset classes, it doesn’t harm to be cautious.

For a few months, REITs performed incredibly well, but when that happens, investors don’t respond to conventional basic signs like rising rates, she explained.
Following a 7.1% decline on Thursday, Blackstone’s stocks were down just 0.2% on Friday afternoon.
In this cycle of monetary tightening, rate increases in the major developed economies have totalled 2,440 basis points. This does not include Japan, where rates remain at -0.1%.
To combat inflation, the U.S. Federal Reserve has increased its policy rates by 375 bps – basis points this year, bringing it to a range of 3.75%–4.00%.
However, in recent weeks, speculation about the Fed “pivoting” away from aggressive tightening has grown, leading markets to factor in lower record highs interest rates.
The 10-year Treasury yields experienced their largest monthly decline since the peak of the COVID-19 epidemic in 2020 as a result of this. Public REITs have risen alongside the American stock market, which has increased by more than 15% since mid-October. (.SPX)
Investors predicted that REITs and the real estate industry would continue to fall.
As per Chris Taylor, chief executive of real estate at Federated Hermes, the majority of retail investors and defined benefit plan investors are choosing to reduce their overall real estate holdings where they can as values in direct real estate reprice accompanying rates normalisation.
The markets have had their fair share of cautionary tales this year as a result of wagers made during the low-rate era, but there is a larger caveat.
Importantly, the unfunded tax cuts included in September’s mini-budget sent Britain’s bond market into a tailspin as pension funds were forced to meet sizable collateral calls on interest rate hedges that had never been put to the test by sudden changes in rates, leading to a Bank of England intervention.
Additionally, UK REITS dropped 17% to its lowest level since 2012 after the mini-budget briefly caused a ratcheting up in bets on a rate increase by the BoE, before rising again. (.FTNMX351020).
The REIT news, as told by Kaspar Hense, a portfolio manager at the well-known BlueBay Asset Management—which oversees assets worth more than $92 billion, is an illustration of the dangers private markets confront in a climate with rising interest rates.

If yields are rising, it may be difficult to invest in somewhat illiquid assets for only a tiny (return) increase since illiquid markets will suffer greatly if yields are soaring, as implied by Hense.
Given the growing yields and higher interest rates maintained by central banks, that is definitely what is happening in this situation and is anticipated to happen anew over the next six to twelve months.
According to Hense, it will have an effect on investors’ losses as well as net worth.
Compared to the publicly listed Dow Jones U.S. Select REIT Total Return Index, which has declined more than 22% over the same period, Blackstone has announced a year-to-date net return for the REIT of 9.3%.