Breit’s blues

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Good morning. It looked, for a brief moment yesterday, like World Cup group E was going to deliver a perfect outcome: underdogs Japan and Costa Rica going on, and overdogs Spain and Germany going home. In the event, Spain snuck through. But it was a great moment. Email your picks for the round of 16: and


Well, this is interesting:

Blackstone has limited withdrawals from its $125bn real estate investment fund following a surge in redemption requests, as investors clamour to get their hands on cash and concerns grow about the long-term health of the commercial property market.

The private equity group approved only 43 per cent of redemption requests in its Blackstone Real Estate Income Trust fund in November, according to a notice it sent to investors on Thursday. Shares in Blackstone fell as much as 8 per cent . . . 

In October, Breit received $1.8bn in redemption requests, or about 2.7 per cent of its net asset value, and has received redemption requests in November and December exceeding the quarterly limit . . .

We’re all a little jumpy about liquidity problems and hidden leverage and bank run-type situations these days, what with rates shooting up, the British pension crisis, and that kid with the shaggy hair blowing up his crypto casino. So it’s important to note that this is not almost certainly not one of those situations.

Breit is not particularly levered (as of September, it’s debt/equity ratio was 1.6), and less than 10 per cent of the debt secured by its real estate is due in the next two years. By reputation, it has high-quality properties. And if anyone on Wall Street can come up with liquidity, it’s Blackstone.

All that said, why do some Breit investors suddenly want their money back? Here’s the FT story again:

About 70 per cent of redemption requests have come from Asia, according to people familiar with the matter, an outsized share considering non-US investors account for only about 20 per cent of Breit’s total assets.

One partner in the fund told the Financial Times that the poor recent performance of Asian markets and economies may have put pressure on investors, who now need cash to meet their obligations.

Stock markets in Shanghai, Hong Kong, Taipei, Seoul and Mumbai have not done much worse than the US indices this year, so this is not a completely satisfying explanation. We’d like to speculate about another.

Below is a chart of the net asset value of Class I Breit shares, compared to the stock market performance of a few publicly traded real estate investment trusts. Breit’s property mix includes 55 per cent residential housing, mainly apartments, and 23 per cent industrial, so I have chosen two large peers specialising in those sectors, plus a broad Reit index:

Line chart of Breit Class I asset value per share, and share prices of selected peers showing One of these things is not marked to market

There is a pattern here. The markets have trimmed about a quarter of the value from the public Reits. Blackstone’s internal models take a more optimistic view of things. David Auerbach, who runs the Residential Reit Income ETF, sums up the puzzle: “How can everyone else’s valuation be going down, and theirs is going up?”

It could be that the Breit team that has the valuation right and the markets have it wrong. But things are not going perfectly in multifamily real estate at the moment.

Rick Palacios of John Burns Real Estate Consulting points that the surge in apartment demand that began in 2020 and lasted through the start of this year was an artefact of the coronavirus pandemic and working from home, and has subsided quickly. “All the public apartment Reits, their perception is that property values are down 10-20 per cent year to date, with a wave of supply still coming” in the first part of next year. Palacios’s firm expects rents to be down by a few percentage points nationally next year.

But let’s say that, despite this, I like the long-term outlook for real estate. Let’s also say I own some Breit shares that, if I get a good spot in line, I can redeem at peak value. Might I not want to sell them, and buy a public reit at 25 per cent off? Seems like a nice little trade.

The bitcoin bubble big picture

Sam Bankman-Fried should stop giving interviews. In multiple interviews this week, he offered an account of how FTX collapsed that amounted to “I had no idea what I was doing, was constantly making mistakes, and everything that could’ve possibly gone wrong did”. (The FT’s Alex Scaggs has the blow-by-blow.) His account made no sense to us. We’ll see how it holds up after John Ray, FTX’s new chief executive, talks to Congress on December 13.

Bankman-Fried, remember, was crypto’s adult in the room. How far the industry has fallen. Bank of America published this half-serious chart last month (h/t Brent Donnelly):

The whole sector is wobbling. Kraken, a major exchange, laid off 30 per cent of staff on Wednesday. Some crypto miners are defaulting on loans as bitcoin’s price sinks below its production cost; lenders are seizing their mining rigs as collateral. Digital Currency Group, a holding company that includes one of crypto’s oldest funds and most important prime brokers, is facing tough questions after Genesis, its prime broker subsidiary, got caught in a liquidity crisis last month. Genesis is reportedly considering bankruptcy.

It was in this context that we read a recent paper from the Bank for International Settlements. The authors looked at usage of over 200 different crypto-trading apps across the world from 2015-22, and their results were ugly:

  • Bitcoin’s early 2021 bull run lured in 511mn new monthly active users around the world. At bitcoin’s peak in November 2021, nearly 33mn people were trading crypto on an average day.

  • When bitcoin prices rise, smaller bitcoin holders buy and big holders sell. The most eager buyers into rising prices are the smallest, holding fewer than 1 bitcoin. Holders of 100,000 or more bitcoin, often called whales, used rising prices to cash out.

  • Some four-fifths of bitcoin investors probably lost money. This is a rough estimate based on debatable assumptions. But the high four-fifths figure reflects the fact that 73 per cent of crypto phone-traders downloaded their app when bitcoin was above $20,000. It is now below $17,000.

  • The crypto traders were disproportionately men under 35. This demographic profile fits with other research from El Salvador, finding that bitcoin adopters were largely educated, young, tech-savvy and male.

This is all to say bitcoin is mostly a speculative plaything — no surprise there. But our question is: can a bubble that burnt tens or hundreds of millions of global investors reinflate? (Ethan Wu)

One good read

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