CONTRIBUTORS
Ashton Reid
Portfolio Manager
The news of the recent freeze in redemptions for the US$70b Blackstone Real Estate Income Trust (BREIT) and Starwood’s US$15b Starwood Real Estate Income Trust (SREIT), has ‘pulled the curtain’ on the potential undesirable consequences of too great a reliance on unlisted assets.
There is a very important distinction to make between publicly traded listed REITs and unlisted non-traded REITs. While unlisted, non-traded REITs allow investors to invest in real estate assets without having to buy or sell individual properties, they are not listed on a stock exchange. Consequently, they cannot be bought or sold on the open market like traditional stocks and listed REITs. An important consequence of being unlisted is that price discovery does not occur through the open market. In practice, this means that investors rely on subjective valuations of the underlying assets to understand performance and their holdings worth.
In simple terms, listed pricing reflects the voice of the many, and we know this to be true as prices are determined in listed markets with deep pools of liquidity. While we are talking REITs here, the same principle rings true for other forms of Real Assets such as unlisted infrastructure and utility funds, and even private equity for that matter.
This conversation becomes really interesting due to the fork in the road that the past year has presented to us. In that time, where rising interest rates have put real estate values under pressure, a large disparity has emerged between listed REIT pricing (the voice of the many) and their private, non-traded cousins.
A case in point being our Martin Currie Real Income and Global Real Income Funds. These Funds invest in listed (publicly traded) REITS, alongside other listed utilities and listed infrastructure across various regions. The listed REIT portion of these Funds is priced at a significant discount today to the unlisted valuations or NTA’s of those same REITS.1
When untraded (but so-called liquid) products have invested in relatively illiquid assets, we can get a mismatch in the valuations of similar assets. This drawn curtain reveals that these issues can become particularly exacerbated within a balanced portfolio, as investors become ‘overweight’ these more illiquid assets that have not been marked to market. As one unlisted manager put it to us, this “denominator effect” creates natural selling in the unlisted assets.
With these redemption freezes creating global headlines such as “How the gates closed..”2, getting frozen can in-turn create a greater rush to exit. A compounding issue in the case of Blackstone’s BREIT, is that its more liquid assets in the form of their stake in the MGM Grand Las Vegas casino were sold to another co-investor, to help partially fund redemptions.
While this fork in the road between the voice of the many and the unlisted world plays out, one thing for certain is the opportunity to withdraw from an unlisted fund at NTA and re-invest elsewhere is an interesting step that could see things accelerate from here.
Our Martin Currie Real Income and Global Real Income Funds remain focussed on owning listed REITs, alongside other Real Assets more broadly, that are both attractively priced and enjoying strong pricing power when it comes to raising rents in a more inflationary world.
It’s in times like these that liquidity becomes critical and the transparency of listed pricing from ‘the voice of the many’ offers great piece of mind!
Ashton is portfolio manager in the Real Asset team and is responsible for the Property Securities and Real Income strategies.
Endnotes
- Source: Martin Currie, FactSet, as of 7 December 2022.
- How the gates closed on Blackstone’s runaway real estate vehicle | Financial Times (ft.com)
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