Last week, Blackstone announced that it will limit investor redemptions from its $69 billion Blackstone Real Estate Income Trust (BREIT) in December after being hit with heavy withdrawals in October and November. For those who are not familiar with BREIT, Blackstone Real Estate Income Trust Inc. is a $70.4 billion private real estate fund. Launched in 2017 by Blackstone Inc., it is by far the largest non-traded real estate investment trust in the U.S., with more than 5,000 properties in its portfolio.
With the stock market down and bonds performing poorly, investors have become nervous and are moving to safer investments which means selling positions that worked well in a bull market and moving to conservative investments. But, illiquid investments like BREITs pose a real problem for investors. The irony is that BRIET fund literature indicates that the fund had $9.3bn of “immediate liquidity”.
Future Wealth’s View
With a plethora of investment choices, one wonders why anyone would want to invest in non-tradeable investments. The answer is greed. These non-tradable REITs offer higher returns and investors enjoy the cash flow until the stock market goes south. Now, they are stuck. The REIT limits withdrawals and their money remains locked until the fund decides to open the window for redemptions which may or may not happen for a while.
Investors can only get access to these “high return” investments through a financial advisor. Which begs the question – why would an advisor divert a client’s money into these illiquid investments? The answer lies in higher commission. These illiquid REITs provide advisors with as much as 15% commission vs close to zero percent on a tradable REIT like a VNQ (Vanguard Real Estate REIT). Of course, once the advisor has made his money, he cares little about the fact that clients are no longer able to get access to their money when they need it. And then, the song and dance begins.
In many ways, these non-tradable REITs are akin to a Ponzi scheme. The Blackstone episode is a good lesson for all investors who invest directly with the fund and not through a brokerage. There is nothing that prevents funds – be it hedge funds, mutual funds or private equity funds from limiting withdrawals. In fact, it happens all the time.
At Future Wealth LLC, all our clients’ funds are custodied at TD Ameritrade, providing our clients with 24/7 access to their investments. And, everyone of the investments we place in our clients’ portfolio are liquid and can be cashed out in 24 hours. Our philosophy at Future Wealth LLC is to make money for our clients, not to hold their funds hostage.