Barry Sternlicht, a billionaire with faith in the recovery of the property market, exerted measures to handle concerns about the liquidity of Starwood Real Estate Income Trust (SREIT), the trust fund under his management now facing multiple investment redemption requests. The invested capital of $10 billion (€9.2 billion) is causing unrest among investors who wish to recuperate their funds promptly.
Last Thursday, the company introduced stricter constraints on investors aiming to take back their money. This step was taken to prevent forced property sales and to ensure the trust fund maintains adequate liquidity. In late April, with merely $752 million available in liquidity and an increasing number of redemption requests, strict actions were indispensable. The new guidelines, which allow investors to retrieve only 0.33% of the net asset value per month equalling roughly $33 million in April, are substantially tighter than the previous limit of 2%. During the implementation of these constraints, which are expected to last 6 to 12 months, Starwood has planned a cut in its management fees.
Sternlicht, in a statement, expressed that though it was a tough decision, they were optimistic about the changes. He recognized the possibility of a recovery in the real estate markets and emphasized that either further leveraging the fund or disposing of their assets to cover monthly redemptions could potentially harm all investors involved.
However, the recent struggle against rate increase exceptions suggests the need for innovative approaches for industry professionals such as Sternlicht. A Bloomberg Intelligence analyst, Jeff Langbaum, commented that the delay in liquidity is a strategy in the hope that future predictions will be accurate, countering erroneous forecasts earlier about the reduction in rates.
It has become evident that commercial real estate problems are yet to be solved. Market values in April fell by 21% from the pinnacle in March 2022, even before the Federal Reserve acted to accelerate interest rate hikes. Property owners’ extend and pretend strategy – asking for loan extensions or collating alternative liquidity plans – is evidence that commercial real estate industry turmoil is still prevalent.
Continuing financial strain is sending shockwaves through the investment world, with those backing high-quality bonds via commercial property debt experiencing losses for the first time since the economic crisis. A landlord from Los Angeles was recently forced to part ways with the city’s third highest office tower, obtaining 45% less than the price secured around ten years ago.
SREIT has been particularly hard hit by the recent headwinds as increased rates offer investors alternative opportunities to gain similar returns on much more liquid assets, thereby reducing the appeal of real estate. Nevertheless, the trust has reported that a vast majority, 80%, of its investors have remained loyal, and the firm’s attempts to curb outflows should bolster the worth for the remaining shareholders.
Kevin Gannon, CEO of Robert A Stanger & Co, claims limiting repayments is a wiser strategy than having to push for distress sales in a tough market. He added that slashing fees helps ensure management’s objectives are more in line with the investors, suggesting that SREIT’s competition might follow a similar path.
“Somebody has to be the first one to make the difficult decision.” remarked Mr Gannon. “But it’s sensible. Investors will have to be patient to regain their liquidity.”
Starlight Capital founder Mr Sternlicht, who’s not unfamiliar with volatile markets, launched SREIT in 2018 to provide retail investors the opportunity to invest in commercial property via non-traded entities. In the subsequent period of lower interest rates, these trusts grew rapidly, securing contracts for warehouses, residential buildings, and Las Vegas hotels.
However, the tide turned mid-2022 when SREIT and similar firms saw an upturn in redemption requests, prompting them to enforce redemption limits and sell assets to boost liquidity. Blackstone Real Estate Income Trust, a competing firm, resorted to asset sales during tight financial periods and even engaged in a deal with the University of California as an investor.
In October 2022, Starwood’s venture faced a significant milestone when redemption requests exceeded the 2 per cent limit. The trust managed to satisfy all of these appeals, but it was unable to meet some demands in the following month.
The pressure of redemption subsided towards the end of the year, with indications that the Federal Reserve was preparing to alleviate interest rates. Investors’ demands plummeted to a mere $314 million in December 2023, a significant decrease from the year’s high of $715 million in January. However, with the economy on the upswing, analysts began to caution that interest rate reductions might not be as imminent as previously predicted, making the real estate prospect seem complex.
This situation led investors to continue withdrawing funds. Over the first quarter of the year, SREIT disbursed upwards of $700 million, primarily using its line of credit. From the commencement of the trust, approximately $4.9 billion of liquidity has been granted to shareholders.
By the conclusion of April, SREIT possessed $752 million in accessible liquidity, encompassing cash, credit, and real estate securities. With the future of interest rate reductions unstable, the fund opted to cap redemptions and hold out for more favourable conditions.
“There is an ample amount of ‘dry powder’ to invest in real estate, although much of it remains idle as bid-ask spreads remain high, indicating a market that is not functioning optimally,” expressed Sternlicht and Sean Harris, CEO of SREIT, in a shareholder letter.