The real-estate fund industry, long considered a bastion of stability and growth, is experiencing unprecedented turmoil. The catalyst? Starwood Capital Group's controversial decision to significantly tighten restrictions on investor withdrawals from its $10 billion real-estate fund. This move has sent shockwaves through the $90 billion private real-estate fund business, causing a ripple effect that has left the industry grappling with billions in redemptions and dwindling fundraising.
The Domino Effect
Starwood’s announcement in May set off a chain reaction. Investors, many of whom had bought into these funds with as little as $2,500, began to panic. The fear was palpable: other funds might follow suit if Starwood was capping withdrawals. Kevin Gannon, CEO of Robert A. Stanger, encapsulated the sentiment: “When Starwood started cutting redemptions, the first thing you think about is: what’s my guy going to do?”
Indeed, this knee-jerk reaction was swift and severe. Blackstone, the sponsor of the largest real-estate fund, saw a spike in redemption requests. In May alone, withdrawals surged to $1.6 billion, doubling April's $800 million. Despite this, Blackstone reported a slight stabilization in June, suggesting a potential easing of investor anxiety. Yet, the underlying concern remains: has Starwood’s move permanently damaged investor confidence?
A Deepening Crisis
David Steinbach, Global Chief Investment Officer of Houston-based Hines, voiced a widespread industry fear: “How it could sour investor appetite is our biggest risk.” Stanger’s projections paint a grim picture: investor redemptions are expected to hit $16.5 billion this year, a staggering increase from $1.5 billion in 2021. Concurrently, new fundraising is projected to plummet to $5.7 billion, starkly contrasting the $34 billion raised in 2021.
This contraction is symptomatic of a broader downturn in the commercial property sector, driven by rising interest rates and declining demand in the office market. Investors who once enjoyed robust returns are now facing losses as property values decline.
Measures and Responses
To mitigate the outflow, some fund sponsors, including Blackstone and KKR, had already imposed limits on investor redemptions, capping them at 2% of the fund’s assets per month or 5% per quarter. These measures, initially seen as temporary, now seem more permanent in light of Starwood’s drastic action. Starwood has restricted monthly withdrawals to a mere 0.33% of net asset value, citing a need to avoid increasing leverage or selling properties in a weak market.
In a statement, Starwood emphasized, “Further leveraging the vehicle or selling our portfolio’s assets to meet monthly redemptions would negatively impact all investors.” This cautious approach, while fiscally prudent, has not assuaged investor fears. Blackstone’s Jonathan Gray acknowledged the impact, noting that while recent withdrawal requests were not as severe as early 2023, the industry remains in a state of flux.
The Road Ahead
The industry's total asset value has fallen to $90 billion from nearly $110 billion at its peak last year. Kevin Gannon of Stanger predicts it will be a mid-next year before the funds see more inflows than outflows. This reversal has been painful for Wall Street firms, which had found a lucrative new revenue stream in selling these funds to individual investors.
These funds were designed to appeal to individuals with promises of liquidity—an attractive feature that financial advisers highlighted. However, the current crisis has exposed the fragility of this promise. Allan Roth, founder of Wealth Logic, expressed skepticism about the future: “I suspect it will be hard to get that amazing fundraising again.”
Glimmers of Hope
Amidst the turmoil, some firms are taking proactive steps. KKR, for example, injected $50 million of fresh capital into its $1.2 billion fund and promised to cancel $200 million of its own stake if the fund's share price doesn’t rebound. In a letter to shareholders, KKR expressed confidence in a real-estate recovery.
Similarly, Blackstone has remained bullish, deciding to honor all redemption requests in May despite exceeding the 2% monthly limit. In a June letter to investors, Blackstone underscored positive trends in the commercial property market, such as increased debt availability and declining new supply, urging investors to “look past the headlines.”
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