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 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 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 more 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 three Martin Currie Real Asset strategies - Australia Real Income, Asia Pacific Urban Trends Income and Global Urban Population Megatrend. These portfolios invest in listed (publicly traded) REITS, alongside other listed utilities, and listed infrastructure across various regions. The listed REIT portion of our portfolios are priced at a significant discount today to those same REITs unlisted valuations or Net Tangible Asset book values (NTAs)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..”, 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 Asset strategies - Australia Real Income, Asia Pacific Urban Trends Income and Global Urban Population Megatrend - 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!
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Past performance is not guide to future returns.
1 Source: Martin Currie, FactSet, as of 8 December 2022. Data presented is for representative Martin Currie Real Income, Martin Currie Asia Pacific Urban Trends Income and Martin Currie Global Urban Population Megatrend accounts
Regulatory information and risk warnings
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’), authorised and regulated by the Financial Conduct Authority. It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Martin Currie has procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.
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Some of the information provided in this document has been compiled using data from a representative account. This account has been chosen on the basis it is an existing account managed by Martin Currie, within the strategy referred to in this document. Representative accounts for each strategy have been chosen on the basis that they are the longest running account for the strategy. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The data provided for this account may be different to other accounts following the same strategy. The information should not be considered as comprehensive and additional information and disclosure should be sought.
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Risk warnings - Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile
- Income strategy charges are deducted from capital. Because of this, the level of income may be higher but the growth potential of the capital value of the investment may be reduced