Nontraded real estate investment trust fundraising plummeted by two-thirds through November from the same time last year, a sign of fallout from higher interest rates and declines in some commercial property prices.
What's more, share redemptions remain elevated, investment banking firm Robert A. Stanger & Co. noted in its most recent monthly report on investment in these funds that aren't tied to the stock market. So, with less money coming in and more going out, nontraded REIT net asset values fell 12% over 2023. And these REITS raised $9.8 billion through November, Stanger & Co. said, down from the year-earlier $30 billion.
The trends have contributed to significantly reduced property sales transactions throughout 2023. In 2022, nontraded REITs — considered a better indication of private real estate values because they aren't linked to public sentiment affecting the securities market — bought nearly $50 billion of property. In 2023, they were net sellers of real estate.
The trend is evident in two of the largest nontraded REITs, Blackstone Real Estate Income Trust and Starwood Real Estate Income Trust. Blackstone REIT's investments have shrunk by $7.8 billion through November to $109.7 billion. Starwood REIT has seen its investment in real estate shrink by $2.7 billion through November to $23 billion.
“Higher interest rates continue to impact valuations in all asset classes, including real estate,” Blackstone REIT reported to its shareholders this month.
Nontraded REIT securities are publicly offered to accredited investors but bought and sold in private transactions, with their values set by the net value of holdings and the number of shares outstanding, while publicly traded securities of REITS, companies or funds that own or finance income-producing property are bought and sold on major stock exchanges, with prices set by those transfers.
Investments Slow
The fundraising drop-off in the nontraded REITS from $30 billion to $9.8 billion would be even steeper if not for a $4.5 billion investment by the University of California in Blackstone Real Estate Income Trust in January, a deal that alone accounted for almost half of this year’s fundraising. Blackstone REIT is the country’s largest nontraded REIT with $109 billion in real estate investments as of the end of November.
Blackstone REIT’s decline for the first nine months of this year matched the industry decline of two-thirds. The REIT reported $5.8 billion in sales including the UC investment, down from $15.8 billion in the first nine months of 2022.
The overall decline comes even as a handful of new nontraded REITs began fundraising this year to build up funds to take advantage of opportunistic investment that are expected to emerge from tight credit conditions.
Starwood REIT has seen even steeper decline in 2023 fundraising. For the nine months ended Sept. 30, Starwood REIT had raised $254 million in the sale of its nontraded stock. That is a substantial drop from the same time in 2022 when those stock sales hit $4.2 billion.
This month, the REIT launched a 1031 exchange program in an effort to boost sagging fundraising by diversifying its stockholder base and offering an investment product.
Such exchanges take their name from Section 1031 of the U.S. tax code, which allows investors to sell certain properties and defer capital gains taxes by putting the proceeds into a new property of a similar type.
While nontraded REIT fundraising is down, alternative investments have attracted almost six times the amount of capital as nontraded REITs, according to Gannon.
Alternative Investments
The alternative investments tracked by Stanger & Co. have raised more than $35 billion this year led by non-traded business development companies as well as interval funds, or closed-end mutual funds that don't trade on an exchange and only allow investors to redeem shares periodically in limited quantities.
Other outlets besides real estate for investors have included infrastructure and private equity funds, according to Stanger.
Stanger’s survey of top sponsors tracks fundraising of all alternative investments offered through the retail pipeline including publicly registered nontraded REITs, nontraded business development companies, interval funds, nontraded preferred stock of traded REITs, Delaware statutory trusts, opportunity zone, and other private placement offerings.
While fundraising is down, redemption activity or share buybacks are up, a further indication that investors have pulled money out of real estate, according to Stanger & Co.
Nontraded REITs posted $4.6 billion in redemptions for the third quarter. NAV REITs have met $14 billion of redemption requests year to date through September, according to Gannon.
Stanger & Co. estimates that redemptions for the fourth quarter of 2023 for all NAV REITs will remain elevated at about $4.5 billion with several NAV REITs such as Blackstone, Starwood and others reporting they have reached their 2% monthly limit on redemptions for November.
Blackstone REIT has returned $13.8 billion of liquidity to investors since November 2022, the REIT reported this month. Still, the REIT reported cash-flow growth of more than 6% year to date in its portfolio, which is 85% concentrated in rental housing, industrial and data centers, 70% of which is in Sun Belt markets.
Starwood reported redeeming $2 billion in shares for the first nine months of this year, more than triple the $568 million for the same time last year.
“The industry is well positioned to meet redemptions up to the 5% quarterly cap with sufficient liquidity sleeves on the balance sheets to fund redemptions,” Gannon said in a statement.
The total reported net asset value for all NAV nontraded REITs has contracted to $96 billion for November. This is a 12% decline from the peak of $110 billion in January 2023, according to Stanger & Co.
Blackstone REIT reported more than $109 billion in real estate investments at the end of November. That was down $7.8 billion from the start of the year, according to the firm’s filings with the U.S. Securities and Exchange Commission. Some of that value decline comes from property but also from the impact of rising interest rates.