bond vs REIT investment

No comment.

Woodside, from what you said earlier, changes to your REIT-ish fund’s NAVs look pretty well-explained by a blend of 3 quarters of VNQ returns, lagged by 1 month. The low volatility your seeing may be coming from the slow incorporation of known economic outlook into the NAV, and the low correlation from the lag at which it’s incorporated.

Suppose I created a version of VNQ whose NAV was set to the average of VNQ’s NAV over the past year, lagged 1 quarter. Its volatility would be half as large as VNQ, and it wouldn’t be correlated to stocks on a quarterly basis. But at the end of the day, holding that long-term would be just like holding VNQ, right? Same holdings, same diversification, same risk, etc.

Sorry, I meant “lagged by 1 quarter”, not “lagged by 1 months” here:

>> blend of 3 quarters of VNQ returns, lagged by 1 month

inonada

If you can have a version of VNQ that has the same holdings, same diversification, the same long term return but price it at half of volatility of VNQ. I will definitely want this version of VNQ rather than VNQ itself.

I'm afraid that your version of VNQ can not achieve half of the volatility of VNQ with the same return unless you have some rules to guard against the too many sharks, who will take advantage of every bit of the mispricing so that you will have to price your version of VNQ the same way as VNQ to stay in the business.

I'm in a little bit comfortable place where the REIT-ish fund is insulated from sharks to destroy it. Most of the participants are just regular fish and will not take advantage of every bit of mis-pricing opportunity.

BREIT has the problems that it attracts too many sharks and also it does not a good mechanism for maintaining their cash flow to avoid forced selling properties.

At another extreme, you could create another version of VNQ (say v2) that doesn't have the the redemption mechanism to reconcile the differences between net asset values and market values. Of course, authorized participants (APs) make money by reconciling the price difference.

I will prefer the VNQ itself than the VNQ v2. VNQ v2 can deviate from VNQ too much due to the imbalance to supply and command (the market can be irrational). Trading itself increases the volatility.

Many people will prefer a low volatility asset if everything else is equal, this is especially true for the people near retirement or close to retirement, who want to reduce the risk as much as possible.

The above too posts talk about the low volatility.

This post talks about why low correlation is good.

Even with the same volatility, I want a version that has low correlation (or even negative) with Stock.

A mixed of different assets with low correlation will decreases the overall volatility of the whole portfolio. The low correlation also creates asset re-balancing opportunities.

300>> I can say about the quarter but I doubt that they will reach more than 10% of the fund per year vs 20% max allowed.

Good news: redemption requests were only 8% in Jan. That’s less than 10%, and no way it’d snowball any further. Perhaps even some of the 8%-ers will change their mind after some more “confidence” settles in from the free put they had to give the Cal pension to entice them to invest at NAV.

https://www.reuters.com/business/blackstone-real-estate-income-trust-hit-monthly-redemption-limit-january-2023-02-01/

Woodside, I can get rid of the sharks for you by constraining subscriptions & redemptions. For example, all subscription/redemption requests will be honored but need to come with a 1-year notice. Or else, they will be met at 25% per quarter over the next 4 quarters, but with the final one adjusted to reflect the final NAV on all 4.

These subscriptions & redemption constraints you described definitely can keep some sharks away. I guess you don’t have cash flow problems as you can buy/sell the underlying REIT stocks immediately.

It remains unknown if some sharks can still take advantage of the mis pricing until it’s actually tested out in the market.

These subscriptions & redemption constraints you described definitely can keep some sharks away. I guess you don’t have cash flow problems as you can buy/sell the underlying REIT stocks immediately.

It remains unknown if some sharks can still take advantage of the mis pricing until it’s actually tested out in the market.

Nada, You bet would have been in the money.
"Good news: redemption requests were only 8% in Jan. That’s less than 10%, and no way it’d snowball any further."

Nada, BREIT wouldn't have as many assets if they started to require more notice period for redemptions.

I don’t think there are any issues with mis-pricing. You put in your redemption request by Jan 1 2023, it transacts at the NAV of Apr 1 2024. Money comes out quarterly, with an adjustment at the final quarter. The Apr 1 2024 NAV is based on the (yet unknown) values of VNQ between Apr 1 2023 and Apr 1 2024. There can only be mis-pricing if people are allowed to transact at a price based on past values of VNQ, not a future values.

>> Nada, BREIT wouldn't have as many assets if they started to require more notice period for redemptions.

True, but woodside ain’t a BREIT investor. I’m just trying to imagine a fictional product for the woodsides of the world.

FWIW, BREIT Jan Redemtion total request from Jan, includes unfufilled redemtions from previous months.

Do you think they automatically roll unfulfilled redemption requests forward, or do investors need to resubmit every quarter?

I believe, if you don't withdraw your request, it stands and gets rolled when the redemption is allowed.

https://www.bloomberg.com/news/articles/2023-02-01/blackstone-s-breit-hit-monthly-redemption-limit-in-january?sref=8b9zkmXu

> There can only be mis-pricing if people are allowed to transact at a price based on past values of VNQ, not a future values.

I guess the key is to transact based on the future values of VNQ. I understand now that you don't have a mis-pricing problem.

Also with your restrictions, it's very difficult to do asset re-balancing each quarter.

> Pricing the NAVs look pretty well-explained by a blend of 3 quarters of VNQ returns, lagged by 1 quarter.

I don't think that doing by what you said provides a very low volatility.

Check this for the annual return (a blend of 4 quarters) https://i.postimg.cc/pTTzDg3B/VQN-barplot.png

The cumulative return https://i.postimg.cc/tg1VJh6r/VQN-cumulateive.png

The 2 quarters delay comparison https://i.postimg.cc/8CWPxwMV/VQN-comparing.png

Hopefully the image links are working.

"I would gladly redeem a hamburger for you next Tuesday"
WimpyREIT

The link work, Woodside.

I was talking about the averages VNQ more as a thought experiment. Have you tried a plotting BREIT against your REIT-ish? I think they’ll look a lot more similar.

I just checked the return for BREIT, it only has data for 2017-2020.

BREIT seems to have twice return as my REIT-ish. Is the BREIT leveraged? Yes, the overall trend is very similar between BREIT and my REIT-ish with the only exception that BREIT has about 10% down in 2020 March, while my REIT-ish has less than 2% in total down between 2020 April and 2020 Aug.

This plot is based on the monthly return. The previous plots are based on the quarterly return.
https://i.postimg.cc/s2NNRbQ0/BREIT-cummulative.png

It only has data for 2017-2022

BREIT is leveraged in the sense that it hold ~$2 of RE assets for every $1 of NAV.

So how much money can an individual actually transfer in/out of your REIT-ish in any given quarter? How about in aggregate? I know you put some info about its liquidity terms above, but I couldn’t really translate it.

> BREIT is leveraged in the sense that it hold ~$2 of RE assets for every $1 of NAV.

Now it makes sense.

> So how much money can an individual actually transfer in/out of your REIT-ish in any given quarter? How about in aggregate?

Transfer/out: I believe there is no limit, but for most people, it will be at most around 150K due to the balance limitation for the transferring in, see below.

Transfer/in limit: after the transfer in, the maximum allowed balance is 150K. It depends on the balance you already have at the fund, if you already have 100K, then you can transfer at most 50K into the fund either in one quarter (or in several different quarters?)

The contribution from automatic salary reduction is not subject to the tranfer/in limit.

For each quarter, only one transfer is allowed.

The REIT-ish fund also mentioned that "From time to time we may stop accepting premiums for and/or transfers into the Account".

I just fell off the wagon by coming back on here after being many months sober, and am so glad to see the finance discourse that initially sucked me into the site will apparently forever be in full swing. I am in NYC briefly because Mr. MCR has a trial here that involves a hedge fund. I don't understand the bulk of this thread or what the witnesses are talking about in the trial, but I love reading and listening anyway - it is like studying a new language that I hope someday I will begin to understand in the same manner a child learns any language by listening. Many years in and not much progress; thank goodness for index funds. In any event, nice to see all of you are still here. Carry on. :)

Welcome back to the neighborhood spot, MCR.

Woodside, what you wrote kinda reads as:

- You can always transfer out as much of your balance as you want, whenever.

- You can always transfer in a salary contribution, regardless of your balance.

- If your balance is below $150K, you can transfer in cash to top it up to $150K. But if your earlier contributions (salary or cash) have already put you at $150K or higher, then you don’t get to transfer in any more cash, just salary contributions.

Is that about right?

Yes, it is about right on the amount.

There are just also restrictions on the transfer to discourage market timing.
1. Only one transfer is allowed in each quarter.
2. From time to time, the fund may stop taking new money, and so you may not be able to get to transfer in new cash at all even if your balance is still below $150K.

>> discourage market timing

I would characterize it more as “minimize advantage taken from an mis-priced NAV”. The NAV here is super-predictable as far as these things go. Good luck getting 43% correlation on anything robustly predicting the stock market, much less the first random thing you try. Imagine how much better one could do if they put their mind to it by (say) looking at a more asset-matching blend of REITs than VNQ.

To me, it seems perfectly reasonable for people to time their purchases & sales. Take your REIT-ish, for example. If you’re a long-term holder of REITs, buy in the years when NAV is underpriced and don’t buy in the years it is overpriced. If you’re not, build up a position slowly the NAV is underpriced and sell it when it peaks. Take a look at your charts: the smoothing and lagging, relative to VNQ, make this easy to figure out.

You can see the same mentality with BREIT.

I don’t think the issues we’re seeing are from “sharks”. The NAV is underpriced for years at a time, which means they’d have to buy & hold for a long time. And then when it becomes overpriced, it takes years to get out because one can rather easily foresee the redemption restrictions. So the “trade” has a lot of hair on it: it’s years-long expedition that’s not super-appetizing to “sharks”.

With BREIT, I think we’re just seeing the forces of a mass of investors acting in self-interest at any given moment. When BREIT was underpriced, they were all buyers and long-term holders. Why buy traded REITs holding the same assets, but with a 30% runup? But after a while, BREIT became overpriced. Why be a long-term holder of that when the traded REITs give you the same assets at 30% off?

People’s attraction to these non-traded REITs is fascinating for me. People have been taught to seek low volatility and low correlation. But I’m not sure they fully grasp what that means. So these products seem engineered to provide the appearance of low volatility and low correlation without actually providing it.

As woodside notes, the returns in these non-traded REITs are similar to traded REITs over longer periods stretching several years. If you’re holding for periods this long, the several-year volatility and correlations should be similar between the two. However, by smoothing the changes, non-traded REITs have reduced monthly/quarterly volatility, and by lagging, they’ve reduced monthly/quarterly correlations to stocks, etc. The NAV accounting produces low volatility & correlation on a monthly/quarterly basis where none exists on several-year holding periods. Yet several-year holders do not necessarily understand this subtlety and believe they are looking at a product with actual low volatility & correlation.

If I run the numbers, BREIT has had a 1.33% monthly volatility over its 6-year history. If this were an investment product that didn’t have its NAV engineered to be smooth via accounting of one form or other, then you could conclude an annual volatility of 4.6%. And after a decade, 15%. That’s why you want low volatility: you can predict the profit from your investment a decade out to within +/- 15%.

Is the amount you can profit from investing in any REIT for a decade predictable to within +/- 15%? Of course not: it’ll be more like +/- 50%. But the smoothing creates the illusion. The +/- 50% would be evident if you computed correlations based on periods longer than the smoothing — a year or two, say. Conveniently, this is not really the standard set by a financial industry that for the most part does not engage in NAV-smoothing. And with only a short existence, something like BREIT conveniently does not have enough history to compute a meaningful volatility from 2-year returns, were one so inclined.

The whole private equity industry is based on this:
“People have been taught to seek low volatility and low correlation. But I’m not sure they fully grasp what that means. So these products seem engineered to provide the appearance of low volatility and low correlation without actually providing it.”

That’s a rather cynical view. Sadly, this is not the first time I’ve heard some variant of that expressed. It’s disconcerting when you hear it from a person working in private equity. It’s downright jarring when you hear it from the manager of (say) a pension fund. “We like private equity because the way it’s marked results in us showing lower volatility.” I cannot tell whether they truly do not understand what I explained above in 2 paragraphs, or if they do but pretend they don’t.

This is not to impugn the whole private equity industry. It just didn’t used to be like this ~20 years ago from what I recall, with the “appearance” of low volatility being regularly cited as a major component of the private equity value proposition.

I can not comment on BREIT. For my REIT-ish fund, it was established in 1995 and it seems to work OK.

However, I can not dig-up the data of this fund for more than 10 years ago. From the annual return of this fund https://i.postimg.cc/pTTzDg3B/VQN-barplot.png, using two years' return (I know, it has only five data points), the volatility of this REIT-ish fund is still much lower than VNQ and this REIT-ish fund is also having a low correlation with Stock.

The people like to the low correlation of the quarterly returns because they want to rebalance different assets (say between stock and this REIT-ish fund) each quarter, which potentially creates the opportunity of buying stock at low price and selling stock at high price.

I didn't get back to this fund after I got it out in 2008. One reason is that I didn't know the exact time to get back in after the crash. If I got in early, I would miss the high returns from VNQ. If I got in late, it's probably a wash.

I probably didn't trust the REIT-ish product in the back of my mind so I was not eager to get in. Another reason that I was not able to get in was probably (I don't remember, it's too long ago) the fund stopped taking new money at that time.

Yes, for my REIT-is fund, it's easy to identify the peak and then get out so it is possible for an investor to sell high, but it may be difficult for an investor to buy low due to the restrictions of this fund or other factors.

Also remember the peak price of this REIT-ish is much lower then peak price of the VNQ. From the https://i.postimg.cc/tg1VJh6r/VQN-cumulateive.png, it seemed the peak price of this REIT-ish fund in 2022 (or 2020) is the middle point of the peak value and valley values of VNQ (which is probably the fair price of the VNQ), the investor is selling high from his investment history, but probably a fair price from fund's perspective.

"What percentage of investors do you think fully understand any of this?"
30yrs_RE_20_in_REO

>> which is probably the fair price of the VNQ
I think you and I have different views on “fair price”. To me, it involves a price whose future change is hard to predict. To you, it seems to involve be an averaging of past prices, whose change is trivial to predict.

>> 30yrs_RE_20_in_REO
So does that mean you’re one of the “sharks” taking advantage of BREIT ;).

I think all professional investors understand. But they don’t talk about it.

“I cannot tell whether they truly do not understand what I explained above in 2 paragraphs, or if they do but pretend they don’t.”

>> I think you and I have different views on “fair price”. To me, it involves a price whose future change is hard to predict. To you, it seems to involve be an averaging of past prices, whose change is trivial to predict.

My view is that trading increases the volatility. The trading price is not necessarily the true price, but probably the true price plus and minus some speculation noise.

At 2020 and 2022 peaks of my REIT-ish fund, its price is about the average of the the peak price and valley price of VNQ. However, the valley price of VNQ is the future price.

Several months before the 2020 and 2022 peaks, my REIT-is fund was priced lower than the past average of VNQ, but closer to the average of some past and some future VNQ.

It's not that my REIT-ish fund used future VNQ price to do the average. It's more about the future VNQ price will be somehow anchored by my REIT-ish fund price.

My REIT-ish fund somehow is able to predict how far the VNQ can fall. If VNQ falls further down the mirror point of VNQ peak price around the REIT--ish price (check the two valleys of VNQ in 2020 and 2022), then VNQ becomes too cheap and people will come back up to buy back to boost its price.

Yes, the price of VNQ is determined by the transaction, it's a fair price for liquidation purpose, but the price is not necessarily reflecting the fundamental values of the properties.

The price from my REIT-ish fund is more accurately reflecting the fundamental values of the properties, but it may have the lagging problem.

I checked the S&P Case-Shiller index for the last 10 years,

https://fred.stlouisfed.org/graph/?g=ZDBO

This is very similar to the my REIT-ish price, rather than VNQ price. Of course, it is not going to be identical due to that S&P Case-Shiller index is on the residential housing, while VNQ or my REIT-ish fund is on a combination of different types of building.

The point is that the curve https://fred.stlouisfed.org/graph/?g=ZDBO is quite smooth and it reflects the actual transactions, without the volatility introduced by the trading.

Due to the trading feature, VNQ is betting on the future, so it is going to have high volatility and also have some prediction on the future value of the properties, but it can deviate from the true value a lot.

Due to using the actual (or assessed value) of the value of the properties, my REIT-ish is going to have much lower volatility, but the price is lagging.

"So does that mean you’re one of the “sharks” taking advantage of BREIT ;)."

I don't trade crypto either, even when I was fairly sure it was going up. I am probably one of very few who has used crypto transactionally because I had customers for whom it was the only means of payment they had to offer. Even then I mostly converted it immediately to "real money."

It took me a while to digest what you wrote, Woodside. I think I understand where you are coming from.

You said that you think the REIT-ish price more accurately reflects fundamental value, and that VNQ is equal to that plus trading-induced speculative noise / volatility. You also imply REIT-ish can predict VNQ’s trajectory.

If you believe that, shouldn’t you be investing in VNQ rather than REIT-ish? So if you want to be a long-term holder of REIT, accumulate VNQ when it is undervalued but don’t when it’s overvalued. Or even trim/short when it’s overvalued.

I’m not saying you should believe or do this, but rather that it would be the implication of what you wrote.

>> The people like to the low correlation of the quarterly returns because they want to rebalance different assets (say between stock and this REIT-ish fund) each quarter, which potentially creates the opportunity of buying stock at low price and selling stock at high price.

BTW, what’s the difference between a rebalancer and a “shark”? Stocks / VNQ goes down, they need to sell non-traded REIT so they may buy stock / VNQ to rebalance. Perhaps that’s all the BREIT sellers have been doing — rebalancing their portfolios to take advantage of the opportunities created elsewhere. Of course, the blatant predictability in the non-traded REIT NAVs (and not the other way around) means the non-REIT holders are paying the cost, in the form of paying out more cash than where everyone knows the RE is heading. And on the way in, the buyers are just “rebalancing” money from the run-up in stocks/VNQ that has not occurred in BREIT (yet…).

>> Yes, the price of VNQ is determined by the transaction, it's a fair price for liquidation purpose, but the price is not necessarily reflecting the fundamental values of the properties.

Liquidation price is a bit of an exaggeration, no? BREIT is going through convulsions, giving freebies to the UC pension fund, to avoid selling 5% of the portfolio over the course of a quarter. It’s like you own 60 condos in NYC, and your investors ask “Hey, can you sell 3 of those over the next 3 months so we can get a little cash?” and you claim that would be a fire sale. “All is fine, these apts are really worth much more than 3 of 60 can be sold for in the next 3 months.” Uh, really? At this pace of 5%/quarter, it’d take more than 11 years to sell 90% of the portfolio.

The simple fact they they can cut special deals with other large investors (and one's where the actual decisions are being made by people playing with OPM) without going through tons of regulation, disclosures, etc is just to ride with the possibilities of dirty dealings. Especially when there is such a history in the business of front running, self dealing, etc that if it all melts down no one should have any sort of safety net catch them.

And if the portfolio is really THAT illiquid that you can't trade 5% of the assets in a quarter then maybe they are a lot more overvalued than anyone is letting on. How does almost every Ponzi schemes fall apart? When redemptions start and they begin to do more and more stupid shit.

What odds do you put on BREIT invoking the fine print by year-end? From the offering terms:

“We are not obligated to repurchase any shares and may choose to repurchase only some, or even none, of the shares that have been requested to be repurchased in any particular month in our discretion”

And from the prospectus:

“Should repurchase requests, in our judgment, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the Company as a whole, or should we otherwise determine that investing our liquid assets in real properties or other investments rather than repurchasing our shares is in the best interests of the Company as a whole, then we may choose to repurchase fewer shares than have been requested to be repurchased, or none at all. Further, our board of directors may modify and suspend our share repurchase plan if it deems such action to be in our best interests and the best interests of our stockholders. In the event that we determine to repurchase some but not all of the shares submitted for repurchase during any month, shares repurchased at the end of the month will be repurchased on a pro rata basis. All unsatisfied repurchase requests must be resubmitted after the start of the next month or quarter, or upon the recommencement of the share repurchase plan, as applicable.”

>> If you believe that, shouldn’t you be investing in VNQ rather than REIT-ish? So if you want to be a long-term holder of REIT, accumulate VNQ when it is undervalued but don’t when it’s overvalued. Or even trim/short when it’s overvalued.

For VNQ or SP500 in general, sometimes people know that it's over priced or under priced by checking PE ratio or other metrics reflecting the fundamental values but they can not make advantage of it. As we know the speculative market can be very irrational for a long time so that the price of VNQ or SP 500 will go back to reflect the fundamental values. See 2000 dotcom bubble or 2008 subprime mortgage crisis.

>>Yes, the price of VNQ is determined by the transaction, it's a fair price for liquidation purpose,

I misspelled the word "liquidation", it should be "liquidity". Two similar words, different implications. I was not suggesting for the fund to sell their properties.

My REIT-ish fund has some cash flow mechanism to avoid forced selling. e.g. with 15-25% in the fixed income investment and also the restrictions on the transfer and the limits on the balance (at most $150K each person).

I'm not saying my REIT-ish fund is perfect as I'm still on the fence and I also have doubts. There is always the thing about the price lagging. But I think my REIT-ish fund is a little bit better than BREIT.

>>BTW, what’s the difference between a rebalancer and a “shark”
A reblancer is a small fish, eats a tiny bit of food without destroying it. A shark has too much appetite and it destroys the fund.

RE: taking vantage when the price is not reflecting the fundamental value.

Well, in the first post of this thread one year ago, I clearly knew that there was going to be a problem with the BOND, but I failed to take a profit from this observation. I guess I didn't know the exact timing that BOND was going to collapse.

I didn't expect that the FED was going to take such drastic moves on the Fed fund rate (from 0% to more than 4% in less than one year). Of course I was not following the market closely so I didn't know the day-to-day happenings.

If any of us knew exactly what the market was going to do with any degree of certainty, it would be like having a money tree in the backyard. And we would all be incredibly rich.

I've been experimenting with active management. However I'm not fully convinced that active management is more efficient than just long-term investment in the s&p 500. It appears only a small percentage of fund managers out perform this index over long periods of time.

Woodside, your REIT-ish fund probably is a little bit better than BREIT. But it seems to have a similar structure, which is to wrap illiquid RE in a quasi-liquid package.

>> If any of us knew exactly what the market was going to do with any degree of certainty, it would be like having a money tree in the backyard.

Normally, I’d agree with that. And investing based on fundamental value is great. But BREIT isn’t exactly a market. Its NAVs are so predictably smooth that it serves as a money tree for buyers/sellers, to the detriment of holders. And I’m guessing it’s not sharks doing the buying/selling, just thousands of guppies taking their nibble from the money tree at the same time.

An good article about BREIT that does into a degree of depth:

https://www.wsj.com/articles/blackstones-big-new-idea-leaves-it-bruised-d66de361

Good news — BREIT was able to meet 35% of redemptions this month, up from 26% last month. Net redemption requests matched the unmet redemptions last month, which seems good if you want to get out. If this keeps up, one can be completely out in another 3 months.

https://www.reuters.com/markets/us/blackstone-blocked-investor-withdrawals-71-billion-reit-february-2023-03-01/

Do you think they will get another Cal pension fund type deal with guranteed min return?

Who knows. Wanna put a bet down on whether the Feb NAV will print up or down?

At the risk of sounding very naive, I thought REITs we're a more or less straightforward instrument I could use to generate income when we move to Portugal. Just pick a good sector, and a reputable brokerage with a good track record and set it, forget it. Now I know nothing is as simple, straightforward as it may seem.

Nada, I will bet on down.

Ya think????

Ha. The question is how much? Jan was 0.2%. I am guessing 0.2-0.4%.

I love how they call "redemption limit" "repurchase plan" limit. And they never mention the word "redemption".
https://www.breit.com/wp-content/uploads/sites/33/2023/03/Notice-to-Stockholders-March-1-2023.pdf

>> Ha. The question is how much? Jan was 0.2%. I am guessing 0.2-0.4%.

Sounds right. If I was making up a number, I’d go with -0.2-0.4%. Not too big, not too small. Just right. The Goldilocks of numbers.

>> I love how they call "redemption limit" "repurchase plan" limit. And they never mention the word "redemption".

Reading what they write & say, I have often been left with the impression of “The lady doth protest too much, methinks”.

How fun can this be, trying to get your money out potentially to the tune of 2% each month filling out a form each month?

“Under the Repurchase Plan, unfulfilled repurchase requests are not carried over automatically to the next month.”

Next sentence, no joke:

“Additionally, unless you elect to remain in the Distribution Reinvestment Plan (“DRIP”) all shares submitted for repurchase will be removed from the DRIP at this time.”

Sounds like there’s a check mark for DRIPing more in every month but no check mark for DROPping every month.

I am surprised that CNBC and WSJ didn't pick on stuff like that. It is subtle gaslighting of the investors but at least the investors are rich enough and likely somewhat sophisticated.

Then there was a clip on CNBC about flipping in Palm Beach. May be BREIT has been flipping them. Dare I ask about the cap rate on the Tommy Hilfiger property being relisted just 3 weeks after purchase at 30% more.

https://www.cnbc.com/video/2023/03/03/floridas-palm-beach-real-estate-market-soars-as-the-rest-of-the-country-slumps.html?__source=flipboard

Have you seen some of the flops in Los Angeles like Nile Miami's The One or 777 Sarbonne Road?

>> It is subtle gaslighting of the investors but at least the investors are rich enough and likely somewhat sophisticated.

Gaslighting alone would make me head for the exits.

I always found the automatic association of “sophisticated investor” with levels of wealth a bit weird. But then there’s this from their website’s offering terms:

Suitability Standards

Either (1) a net worth of at least $250,000 or (2) a gross annual income of at least $70,000 and a net worth of at least $70,000. Certain states have additional suitability standards. See the prospectus for more information

Another interesting excerpt:

https://www.breit.com/wp-content/uploads/sites/33/2022/12/BREIT-FAQ-Private-vs-Public-Real-Estate.pdf?v=1674250247

BREIT has fixed nearly 90% of its debt for
6.5 years, generating $4 billion of value increase for shareholders [10, 11]

11. Value increases from BREIT’s fixed rate liabilities and corporate and real estate interest rate hedges are $4.2 billion year to date as of December 31, 2022. Excludes value associated with floating rate debt and interest rate swaps against debt investments.

I don’t know exactly what’s going on, but it kinda sounds like:

0) Start with $5M cash.
1) Buy $10M NYC apartment at a 2% cap rate.
2) Finance $5M with 30-year Fed special at 3%.
3) Watch prices drop 5%.
4) Mark apartment down by $500K.
5) Watch rates increase to 6%.
6) Mark value of mortgage up by $2M.

Seems so except their debt is 6 years. If property price declines are not reflecting the change in bond prices (they don’t have to if the rents go up), they will book a gain. They will mark down if the rents stop increasing.

The barrier for investor networks and income seems very low. So not really not “qualified” investor as in hedge funds or private equity.

Seems so except their debt is 6 years. If property price declines are not reflecting the change in bond prices (they don’t have to if the rents go up), they will book a gain. They will mark down if the rents stop increasing.

The barrier for investor NETWORTH and income seems very low. So not really “qualified” investor as in hedge funds or private equity.

I'm wondering where that 'qualification' threshold comes from - it's definitely lower than the SEC's definition of 'accredited investor' (net worth > $1m ex your primary home + personal income > $200k (300k jointly) [some exceptions if you hold securities licenses]). 'Qualified purchasers' are a higher bar ($5m net worth). I do see in the prospectus that they're also enforcing other state limitations. They clearly wanted to offer it to less successful dentists as well.

(BREIT Prospectus: https://www.breit.com/wp-content/uploads/sites/33/2022/03/BREIT-Prospectus-with-previous-supplements.pdf )

I didn’t know what it meant either. I think it refers to this?

https://www.thebalancemoney.com/difference-between-fiduciary-and-suitability-4010117

Kinda reads like “As long as your client has two nickels to rub together, feel free to spew any investment nonsense you might have milling around in your head, especially if you can line your own pocket in the process”. Is there anyone here from the industry who can clarify?

Nada- you've really made me think differently about what I thought were sophisticated and exceptionally well researched investment products designed for 'sophisticated' and well funded investors.

Seems there's more BS coming out of Wall Street than the real estate industry?

This really gave me a good laugh;

“As long as your client has two nickels to rub together, feel free to spew any investment nonsense you might have milling around in your head, especially if you can line your own pocket in the process”.

Now I understand why BREIT forces you to go via a broker so that they can pass on the "suitability" risk to the broker/financial investor of whoever is buying into the fund.

Keith,

Wall street always has more BS and more stringent regulation than Real Estate Brokers. They sell pieces of paper and underlying assets (companies) are very hard to analyze. Real estate buyer at the end of the day can see what they are buying and get any number of professionals (appraisers, home inspectors, lawyers) to analyze the property.

>> Seems there's more BS coming out of Wall Street than the real estate industry?

Perhaps. Investment, the act of sitting on your ass doing nothing while raking in big bucks, is difficult yet beguiling. I find well-meaning professionals typically clueless. But especially beware people dispensing investment advice on products they earn a commission selling, whether it’s a security or a piece of RE.

Regarding due diligence in Real Estate, buyers who think they are being properly represented by brokers and attorneys are often sorely disappointed. At the rates buyers pay attorneys they can't afford to due real due diligence on Coop purchases. At 19-23 West 9th Street there have been tons of purchases over the last decade plus despite unending litigation, enormous assessments, crushing maintenance increases, Board malfeasance including lying to shareholders regarding whether maintenance was covering expenses (and both the then managing agent and accountant went along with on instructions from the Board rather than protecting shareholder interests), etc

And that's just one example. Look at 101 West 23rd Street and 100 West 57th St. Everyone who bought in there was represented by an attorney. Or look at the thread on Brooklyn Point here and see how misunformed people are still trying to claim that it's a condominium on a land lease (some of them even quoting the Offering Plan and then ludicrously claiming that it says something different than is in the plain writing)

Interesting ongoings at SREIT, which is Starwood’s version of Blackstone’s BREIT. Basically, they’re down to a few months of liquidity given rate of redemptions that have been under limit for nearly 2 years:

https://www.wsj.com/real-estate/commercial/starwood-capital-group-real-estate-fund-cash-crunch-409f56d5

The most fascinating thing to me is that one could have gotten essentially fully out easily in a matter of a single month up to mid 2022, a couple of months in late 2022, and a few month in 2023 or even today. All at NAVs that are elevated relative to public REITs. But of course, only a fraction of investors did. To their credit, their NAVs are marked down lower than other private REITs. But still not near public ones.

Options seem to be take on more debt (at high rates with presumably negative carry), sell assets into a market which will likely demand prices lower than NAV (leading to markdowns of NAV perhaps), or freeze redemptions (apparently marking the death of the REIT according to WSJ).

Seems like interesting times for both SREIT and what it will imply elsewhere.

I also read that this morning, and was thinking about this thread. What a mess.

A mess for whom?

The people stuck in SREIT

I don’t think it’s been much of a mess. This is what people signed up for.

The fund has been receiving redemption requests for ~4% of funds per month. The cap is 2% per month and 5% per quarter. So people have been able to redeem 75% of their full investment in just two months. And 90% in 4 months.

I think the mess will be for the people who have chosen to remain, since they’ll be left holding the bag while the redemptions are being done at inflated NAVs relative to what the holdings will be (predictably) worth.

OK, now they are stuck holding the bag:

https://www.nytimes.com/2024/05/23/business/starwood-reit-limits-withdrawals.html?unlocked_article_code=1.uU0.7qGD.9Nu5lqddgZ8W&smid=nytcore-ios-share&referringSource=articleShare&sgrp=c-cb

It's interesting that in 2021, when the inflation is at its peak, REIT was touted as an investment that gave protection against the inflation. This is how I started the thread, at that time, I was even considering the possibility of replacing bond by REIT. Looking back, how naive I was at that time.

I guess long term, REIT (e.g. VNQ) is probably going to give protection against the inflation, the private REIT is a very different animal and it's interesting to see how it plays out eventually.

Short term, REIT (e.g. VNQ), especially the commercial REIT, suffers from decreasing price due to the interest rate increase and the change of working climate (more people are working from home permanently so many offices are still staying vacant).

At the post of the initial thread (2021), we all saw that the rising interest was on the wall due to the inflation. I was only paying attention to the inflation, but not understanding how the rising interest was affecting the pricing so I was not doing much to protect my asset.

Putting REIT aside, even within the Bond category, the TIPS fund, the other asset that was also outed to give protection against the inflation, also suffered since 2022 due to the increase of the REAL interest.

After the initial loss in year 2022, the stock was the only part of my asset has done quite well. Not sure if I need to change the allocation of my assets (stock, bond, cash, real estate) to have a better protection in the next 10 years.

@inonada, From previous conversations, you seem to want to a higher % of money in cash than the usual allocation (or as a replacement of the bond). I'd like to know your updated thoughts on this topic.

I think to be fair to all involved, in 2021 it was probably impossible to predict that CRE would remain in the dog house this long. WFH/Hybrid has gone on for more than 4 years now and shows no signs of disappearing entirely, despite megacap companies best efforts. In most metro areas, the office utilization rate has sort of flatlined at 50-80%ish of 2019 comparable depending on city.

Meanwhile NYC office vacancy rates which were 6-8% from 2006-2019 now sit at double that level around 16% now.

Eventually some of this will have to be resolved by reducing capacity by converting some to Resi, unless they want to take another 10-20 years for the empty spaces to get leased out.

A lot of these stats also obscure the actual utilization of rented space. For example most people I know are officially on a 3-4 day/week schedule, but in practice it's more like 2.5 days/week.

While companies bang the drum on RTO, outside the megabanks, most lack the seats to actually accommodate everyone being in 75% of the time as requested. My wife's Big Co is actually reducing floor space allocated to departments that are not coming in enough (some orgs have 40% of employees flagged in the 'violating RTO rules' report). My company has repeatedly asked for 4 days a week while also excluding those in most major cities because they never leased enough space, lol.

And in CRE CMBS news:

"For the first time since the financial crisis, investors in top-rated bonds backed by commercial real estate debt are getting hit with losses.

"Buyers of the AAA portion of a $308 million note backed by the mortgage on the 1740 Broadway building in midtown Manhattan got less than three-quarters of their original investment back earlier this month after the loan was sold at a steep discount. It’s the first such loss of the post-crisis era, according to Barclays Plc. All five groups of lower ranking creditors were wiped out."
[...]

"...about $52 billion, or 31%, of all office loans in commercial mortgage bonds were in trouble in March, according to KBRA Analytics, up from 16% a year ago. The assessment includes both single-asset single-borrower and so-called conduit CMBS wherein mortgages are pooled together. Some cities are facing more stress than others, with 75% of CMBS office loans in Chicago and 65% in Denver in jeopardy..."

https://www.bloomberg.com/news/articles/2024-05-23/cmbs-buyers-suffer-first-loss-on-aaa-debt-since-financial-crisis

Falling real estate zone! Watch out beloooooooow!!!

Office buildings in large blue cities have been a rough spot. Basically >50% down if you don't have a tenant. This one a lot more. On top, there is foreclosure and CMBS unwind cost.

I am guessing NYC will have to have special zoning rules to allow mechanically ventilated / sprinkled windowless bedrooms. Otherwise, empty office space problem is not going away.

>> At the post of the initial thread (2021), we all saw that the rising interest was on the wall due to the inflation. I was only paying attention to the inflation, but not understanding how the rising interest was affecting the pricing so I was not doing much to protect my asset.

Honestly, I think opinions were mixed about rates circa Aug 2021. I remember threads such as this one:

https://streeteasy.com/talk/discussion/46917-new-purchases-arm-rate-expectations

Some people were debating whether the Fed would ever raise rates again, even in the face of inflation:

inonada>> I guess you are saying that you think we'll either sit at 0% indefinitely, or we'll be in some hyper-inflationary spiral at 10%/year upon which the Fed will act belatedly only after it has lost control. But no middle "ordinary" scenario where the Fed sees sustained inflation at 2.5% or 3.0% and nudges interest rates up.

Less extremely, there was a good contingent who through the were Japan and would remain at ZIRP forever simply because inflationary pressures would remain low forever.

Did I know that interest rates were about to go up, or that they’d end up at 5.25% in just 2 years? Not specifically. I did think that rates rising eventually was a distinct possibility, much more so than rates falling. Partially because the Fed could continue its massive buying of bonds (supporting 1% 10yr) and MBS (supporting 2.x% mortgages) for only so long, partially because when Fed rates are 0% there is only one way for it to go, and partially because “transitory” inflation could prove not so transitory.

I certainly wondered whether people considered the effect of likely-to-rise rates on the prices they’d be willing to pay for assets.

>> @inonada, From previous conversations, you seem to want to a higher % of money in cash than the usual allocation (or as a replacement of the bond). I'd like to know your updated thoughts on this topic.

You know I like to look at Vanguard’s VCMM 10yr projections to consider these questions:

https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/vemo-return-forecasts.html

Cash at 4.2% +/- 1.4% is the baseline. US stocks at 4.3% +/- 17% — geez, that’s a lot of extra risk for not a lot of extra return. US treasuries at 4.5% +/- 6% — same. Ex-US developed market stocks at 7.7% +/- 17% — OK, that’s a consideration.

You may or may not want to use that for guidance, but I personally find their methodology sound. And of course, your personal life situation and investment capacities may differ from mine. But at the moment, my net worth is holding:

- 20-25% cash (T-bill funds)
- 10-15% equities (private US companies & public ex-US developed market stocks)
- 65% alternates

The alternates and the bulk of my equities earn T-bill rates plus some additional amount of expected reward +/- risk. In aggregate, something like 95% of my net worth benefits directly from T-bill rates of 5.25% — as in cash in the door — without asset value exposure to rates.

If my alternates & private companies were not available, I’d probably shift those balances to ex-US stocks (mostly) and cash. The reward +/- risk wouldn’t be nearly as good. I imagine I’d expend effort trying to boost it by picking a small basket of individual stocks, but it’d only be marginally better at best.

Everyone says get ex-US exposure in equities but for the past I don't know how many years they really trailed S&P 500 - just looking at VEA and VOO:

https://investor.vanguard.com/tools-calculators/etf-fund-comparison-tool?Ticker=vea,voo

I didnt realize everyone is now saying that. Regardless, the backward-looking discrepancy between VEA and VOO may be part of the reason for the future outlook.

Aaron2>> Falling real estate zone! Watch out beloooooooow!!!

26% haircut on the AAA tranche… yikes!

CRE being in the doldrums is one thing. But the fact that SREIT, which like BREIT touts its wonderful portfolio of sunbelt residential, etc., etc. cannot manage to sell 5% of its assets per quarter… yeeesh. It’s $500m per quarter, this isn’t even the distressed part of the market.

I get “We had to go to extreme circumstances on stopping redemptions because of a Cat 5 hurricane”, but this is a tropical storm. They hadn’t built the product to withstand even that.

Nada: any reason you use t-bill funds over money market accounts for cash?