Key Takeaways
- • Blackstone Real Estate Investment Trust (BREIT) gained 8.4% in the first 11 months of 2022, while the average real estate mutual fund in the Morningstar Real Estate Category lost 26% for the full year 2022, according to Morningstar.
- • In December 2022, BREIT limited shareholder withdrawals to 0.3% of fund assets after repurchases equaled 4.7% of NAV in October and November, against a monthly cap of 2% of NAV.
- • BREIT charges 2.1% annually on S shares (1.25% management fee plus 0.85% servicing fee) plus a front load of up to 3.5%, and takes 12.5% of gains above 5%; its I shares, requiring a $1 million minimum, carry only the 1.25% management fee.
- • BREIT's net asset value was $68 billion as of Nov. 30, 2022, dwarfing Starwood Real Estate Income Trust (SREIT) at $14 billion, with other prominent private REITs each under $3 billion.
- • Morningstar concludes that private REITs share the same liquidity, risk and fee trade-offs as BREIT, and that retail investors should approach them with caution, with public real estate mutual funds sufficient for most investors.
Summary
Real estate mutual funds struggled through 2022, with the average fund in the Morningstar real estate category losing 26% and the MSCI US REIT Index falling 25%, according to Morningstar. Against that backdrop, Blackstone Real Estate Investment Trust (BREIT) gained 8.4% over the first 11 months of 2022, a period in which the category lost 22%. In December, however, BREIT restricted withdrawals, a move that unsettled investors and pushed parent Blackstone's stock price lower.
The structural differences between mutual funds and private REITs are central to the analysis. Public mutual funds must hold publicly traded securities, generally REITs, and offer daily liquidity. BREIT, by contrast, is a non-listed REIT that owns property directly, may place up to 20% of assets in real estate fixed-income instruments, and repurchases shares only monthly. Its prospectus states the vehicle is intended for investors "who do not need near-term liquidity." Repurchases are capped at 2% of NAV per month or 5% per quarter. In December 2022, BREIT said repurchases in October and November equaled 4.7% of NAV, leaving only 0.3% of assets available to shareholders that month.
BREIT is also not registered with the SEC and is open only to investors meeting income or net worth thresholds: a net worth of at least $250,000 excluding home, furnishings and automobiles, or gross annual income and net worth of at least $70,000 each. Some states cap investment at 10% of liquid net worth. Morningstar notes BREIT's prospectus runs to 90 pages of risk factors, compared with five for the largest actively managed real estate mutual fund, Cohen & Steers Real Estate Securities (CSEIX), reflecting complex debt instruments and derivatives use. A 2022 interest-rate derivatives position aided performance, but such bets can amplify losses when they fail.
Fees are substantially higher than for mutual funds. BREIT's S shares, with a $2,500 minimum, charge 2.1% annually plus a front load of up to 3.5%, while I shares with a $1 million minimum charge 1.25%. Morningstar notes that even the I share fee exceeds that of 66 of 68 institutional share classes of U.S.-sold real estate mutual funds. BREIT also takes 12.5% of gains above 5%, a structure similar to hedge fund performance fees.
BREIT is by far the largest private REIT, with NAV of $68 billion as of Nov. 30, 2022. Starwood Real Estate Income Trust (SREIT), with $14 billion, has similar liquidity limits, investor requirements and fees, outperformed BREIT with an 8.7% total return over the first 11 months of 2022, and also restricted repurchases in December. Other prominent private REITs have net asset values below $3 billion. Morningstar concludes that all private REITs carry similar advantages and drawbacks, and that real estate mutual funds remain sufficient for most investors' sector exposure.
The structural differences between mutual funds and private REITs are central to the analysis. Public mutual funds must hold publicly traded securities, generally REITs, and offer daily liquidity. BREIT, by contrast, is a non-listed REIT that owns property directly, may place up to 20% of assets in real estate fixed-income instruments, and repurchases shares only monthly. Its prospectus states the vehicle is intended for investors "who do not need near-term liquidity." Repurchases are capped at 2% of NAV per month or 5% per quarter. In December 2022, BREIT said repurchases in October and November equaled 4.7% of NAV, leaving only 0.3% of assets available to shareholders that month.
BREIT is also not registered with the SEC and is open only to investors meeting income or net worth thresholds: a net worth of at least $250,000 excluding home, furnishings and automobiles, or gross annual income and net worth of at least $70,000 each. Some states cap investment at 10% of liquid net worth. Morningstar notes BREIT's prospectus runs to 90 pages of risk factors, compared with five for the largest actively managed real estate mutual fund, Cohen & Steers Real Estate Securities (CSEIX), reflecting complex debt instruments and derivatives use. A 2022 interest-rate derivatives position aided performance, but such bets can amplify losses when they fail.
Fees are substantially higher than for mutual funds. BREIT's S shares, with a $2,500 minimum, charge 2.1% annually plus a front load of up to 3.5%, while I shares with a $1 million minimum charge 1.25%. Morningstar notes that even the I share fee exceeds that of 66 of 68 institutional share classes of U.S.-sold real estate mutual funds. BREIT also takes 12.5% of gains above 5%, a structure similar to hedge fund performance fees.
BREIT is by far the largest private REIT, with NAV of $68 billion as of Nov. 30, 2022. Starwood Real Estate Income Trust (SREIT), with $14 billion, has similar liquidity limits, investor requirements and fees, outperformed BREIT with an 8.7% total return over the first 11 months of 2022, and also restricted repurchases in December. Other prominent private REITs have net asset values below $3 billion. Morningstar concludes that all private REITs carry similar advantages and drawbacks, and that real estate mutual funds remain sufficient for most investors' sector exposure.
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