Blackstone's Property Fund Receives Positive Feedback

The primary investment fund of Blackstone received a lift that executives are hoping will prevent investors from requesting a refund. However, they had to accept more favorable conditions than usual.

On Tuesday, a private-equity firm based in New York announced that the University of California would be investing $4 billion in BREIT. The real-estate fund, which is not traded on the stock market, has been receiving more requests from clients to withdraw their money than it is able to fulfill. In December, the redemption requests equaled 5.44% of the fund's total net asset value, surpassing BREIT's monthly limit of 2% and quarterly limit of 5%.

The university has purchased BREIT's net asset value, which increased in the past year and values the property at a 5.6% exit capitalization rate. The cost Blackstone is charging for the fund's real estate, which is about half of it being housing, has been questioned. As interest rates increase, a difference is appearing between the valuations used by private landlords and the more significant drops in property prices that are suggested by the stocks of listed real estate investment trusts.

The University of California could have potentially obtained a more advantageous agreement in the public market, where residential real estate stocks have a cap rate of approximately 5.9%, as estimated by Green Street research firm. Nevertheless, BREIT also owns industrial real estate, such as e-commerce warehouses, which are valued more highly.

The University of California was not given the same terms as other shareholders, but instead was promised an annual return of 11.25% if their money was kept locked up for six years. If BREIT does not reach this goal, Blackstone will make up the difference to a certain limit. To ensure this, Blackstone has provided BREIT shares worth $1 billion as collateral.

When taking into account the fees associated with the collateral, Blackstone must generate a minimum annual return of 8.7% by 2028 in order to make a profit. This would be a decrease from the fund's average of 12.7% since its inception six years ago. To maintain this rate of return, the fund is relying on further rent increases in warehouses and residential housing. If this is not possible, the fund may take on more debt to increase returns, but this carries its own risks.

BREIT had a substantial amount of cash on hand, so they were not in a dire financial situation. However, having the support of a large institutional investor could help to reassure clients and prevent the situation from escalating.

The additional funds from Blackstone will give BREIT the opportunity to purchase new properties. Management has stated that the upcoming years will be a great time to acquire real estate. However, BREIT must explain how they will be able to acquire properties at a bargain without affecting their own valuations. It is possible that some landlords may have to sell their real estate at a lower price due to the increasing cost of refinancing, but if this becomes a widespread trend, it will affect the entire market.

No matter what happens in the property market in 2023, Blackstone will not be feeling the pressure to sell due to the influx of new funds. If they had to accept lower prices for their real estate, it would be difficult to maintain BREIT's current value. Even though the University of California's endorsement was not as strong as Blackstone's executives would have liked, it is still a positive outcome for them.