Is it safe to invest in Blackstone’s BREIT and Starwood’s SREIT?

Real Estate Investment Trusts (REITs) are beloved assets among dividend-focused investors. Unlike other companies, these funds are required to distribute most of their income to shareholders each year.  Investors can also characterise their distributions as Return on Capital (ROC) instead of income. 

SREIT and BREIT are private REITs

Globally, REITs have a combined market cap of over $1 trillion, with most of them being in the United States. The biggest of these funds are companies like Prologis, American Tower, Equinix, Welltower, and Simon Property Group. 

A relatively new class of REITS has come up and attracted billions of dollars in assets. These REITs are not publicly traded and are managed by large companies in the asset management industry. Blackstone, the biggest private equity company in the world, runs the Blackstone Real Estate Income Trust (BREIT) that has over $14 billion in assets. 

The other big fund is Starwood Real Estate Income Trust (SREIT), which has over $10 billion in assets. It is managed by Starwood Capital Group, a company with over $115 billion in assets under management.

These funds have come into the spotlight for the bad reasons. Blackstone’s BREIT restricted outflows in 2022 as many investors exited fearing the anticipated wall of maturities in the real estate industry. Its investors cashed out about $2.4 billion in 2023 and outflows have continued albeit at a slower rate.

Vanguard Real Estate ETF chart

SREIT pauses withdrawals

Now, focus has shifted to Starwood’s SREIT, which has restricted outflows. In a statement, the company said that it had just $235 million in cash left, meaning that it has a few month’s left to support withdrawals. 

SREIT has no easy options, making restricting withdrawals the best alternative. The other solution would be to sell assets, a tough call because of the ongoing woes in the real estate sector. Also, the company could decide to raise funds, another difficult route at a time when interest rates are at a high level.

People invest in BREIT and SREIT to gain an exposure to the real estate industry. For example, BREIT has invested in properties like multifamily homes, student housing, industrial, data centers, and net lease.

SREIT’s total asset value stands at over $24.8 billion while its net asset value is almost $10 billion. Most of its investments are in market rate apartments, industrials, affordable housing, and real estate loans among others. 

According to its website, SREIT has delivered annual returns of 8% while BREIT has returned about 10.4%. The two have returned 1.5% and 2.2% YTD, figures that are below the US inflation rate. 

Therefore, I believe that these funds are not good investment because of their performance and their illiquidity. Besides, a simple investment in the S&P 500 index generates stronger returns and is highly liquid. 

Their illiquidity happens because of how they are structured. As a BREIT and SREIT investor, the deal is that you can exit your investments easily. However, real estate is one of the most illiquid industries globally, making it difficult to exit trades.