Alphavalue / Divancons | Blackstone’s mega property fund (BREIT, $125 billion of assets) has appeared all across financial press headlines in recent days. And it has made it clear there that, according to the terms of the fund, capital withdrawals are limited. The fund manager’s clients can only redeem 5% of their stake in the fund each quarter or 2% every month. All this is leading to investors in other funds in a delicate situation to ask for their money back. Despite Blackstone reaffirming its confidence in the quality of its assets and in its strategy, it is very complicated to curb fears even when the fund has a positive performance. Investors with liquidity do not sell what they want to sell, but what they can sell.
As is usual in a property storm, funds can “dissimulate” much better. They do not just have the best assets, but they can exploit them more in the unlikely case they cannot sell them at the “right” price. They have a double exit, obviously.
The plan in BREIT (and presumably in other funds) is to increase rents and quickly get rid of defaulting tenants so that the new ones can pay “a higher market price”. BREIT argues that demand is significant, especially because they have a much higher relative exposure in the areas where there is greater demand, so this strategy is viable.
History tells us that this kind of stance “we differ” is negating a significant shock in the property sector. Take advantage of clients or companies looking for somewhere to live or develop their business is only viable whilst both clients are “in the business”. An increasingly more pronounced inverted curve indicates that this expectation is not a reasonable proposal.
Hiking rents does not increase prices
The idea that rents can rise is not equivalent to the property being undervalued in terms of gross assets. Professionals in the sector know that ex ante property can generate higher rents and do not wait for a transaction to determine their NPV (net present value). Whatsmore, buying a property offers a 4% return when the current ratio is 5%; if rents could rise by 40% this would simply take the new return to 5.6%. There is not a lot of margin for error. And, obviously, obtaining an increase in the current macro circumstances, is a little daring to say the least. So, in the end, a complex economic context wins and the 4% return becomes 5% by virtue of a decreasing gross value, not thanks to higher rents.
These warnings are aimed at deflating certain pretentions. There is also the question of debts and liabilities which can cost “an arm and a leg”. Although it is possible that some investors think the central banks have finished with the rate hike cycle; over a period of 2-5 years they have risen between +200 bp and +400 bp according to geographical regions. To cope with this, annual rental increases of 5% over 5 years with a current yield of 4% will mean +20% bp per year or +100% bp for the fifth year. This will pay the electricity, but not the financing with the new market conditions. Thus there is no doubt that the managers of BREIT and their peers will put pressure on some tenants opppsed to new conditions in their contracts; but the economy of the real world cannot hide. And the markets know that.
