- Move follows rule changes aimed at reducing conflicts, costs
- New REIT to invest in properties with stable rental income
Blackstone Group LP is seeking to raise $5 billion for its first nontraded real estate investment trust, targeting individual investors in a market that has been plagued by conflicts of interests, high commissions and poor performance.
The move by the world’s biggest alternative-asset manager follows regulatory rule changes aimed at increasing transparency in the industry for nontraded REITs, which aren’t listed on exchanges and are primarily marketed by brokers to individual buyers. The rules include requiring such trusts to follow stricter guidelines on estimating the net asset values of their holdings and disclosing costs.
Blackstone Real Estate Income Trust will be a perpetual-life fund and will invest in commercial properties that generate stable rental income, including apartments, shopping centers and hotels, according to a regulatory filing Wednesday. The new REIT hasn’t bought any assets yet. Christine Anderson, a spokeswoman for Blackstone, declined to comment beyond the filing.
“Historically, the fee load has been pretty significant for retail investors to get into these vehicles,” said Dirk Aulabaugh, a managing director in the advisory and consulting unit of Green Street Advisors LLC, a Newport Beach, California-based real estate research firm. Blackstone’s new fund appears to be “better aligned than what has historically been the case in the nontraded REIT space, and I think investors are going to welcome that, and they’ll be successful in raising capital along those lines.”
The nontraded REIT is Blackstone’s latest push into less-risky real estate investments. The company already has an open-end fund for institutions called Blackstone Property Partners. That fund buys so-called core-plus real estate -- properties that might require light renovation or leasing work to increase values. The core-plus strategy, which includes separately managed accounts for institutional clients, has grown to about $12 billion in assets, Blackstone Chairman and Chief Executive Officer Stephen Schwarzman said in April.
“The prospects for growth in that business are huge,” Schwarzman said on the company’s first-quarter earnings conference call, on April 21. “As we move into the retail chain of distribution with this, we should be able to create a really very large-scale business.”
Nontraded REITs have been able to attract investors partly by offering higher dividend yields than publicly traded property owners. More attention was brought to such products in 2014 with the accounting scandal at American Realty Capital Properties Inc. The landlord was part of the real estate empire of Nicholas Schorsch, whose AR Capital LLC was the largest sponsor of nontraded REITs.
“The market’s maturing and it is addressing some of the regulatory concerns over increasing the transparency or decreasing the front-end costs associated with these programs,” said Anthony Chereso, president and CEO of the Investment Program Association trade group. “What you’re going to see is a continuing evolution toward a product that’s going to be more broadly received, and you’ll see capital-raising improve as markets adjust to it.”
Sales of nontraded REITs have plunged. They raised $2.79 billion this year through July, down from $6.41 billion in the same period of 2015, according to Robert A. Stanger & Co. The decline followed a 36 percent drop for all of last year, the real estate investment bank said. Nontraded REITs had $90.9 billion of assets under management as of March 31, according to the Investment Program Association, citing figures from the bank.
Returns from nontraded REITs generally lagged behind their publicly traded counterparts, shares of which also are easier to buy and sell, Aulabaugh said. Other nontraded REITs are looking at ways to reduce fees, he said. Blackstone’s track record of delivering strong returns in real estate ought to help it raise money for its new REIT, Aulabaugh said.
“They’re going to make the business better,” he said. Blackstone’s entry “will force other players in the space to raise their game.”