Blackstone in housing market vortex: freezes repayments from one giant fund and defaults on another

Blackstone is starting to feel the brunt of the rise in the cost of money in the United States. After freezing withdrawals from its REIT fund (Real Estate Income Trust), which is worth about 71 billion dollars, in February as well, Blackstone declared default on a bond covered by a portfolio of offices and shops held by the Finnish Sponda Oy. The overall default is 531 million euros, but it risks being the prelude to a series of similar situations. The commercial real estate sector, both in Europe and in the United States, is under pressure from the constant increase in interest rates to stem the flare-up in prices. The risk, as financial sources explain, is a string of defaults on both sides of the Atlantic. With consequent pressure on credit institutions.

There is excitement around one of the global investment giants. Blackstone’s default is a signal that should not be underestimated in a market, the real estate one, which is being hit on several fronts. On the one hand, from the new normality of the world of work at a global level, which provides for less use of offices due to teleworking and agile forms of work. On the other hand, the normalization of monetary policy, after more than a decade of zero if not negative rates. Blackstone is not immune to the phenomenon. And its exposure to the real estate sector is such that it is a potential source of risk. To such an extent that on March 1, Blackstone sent a letter to investors stressing that they would be prevented from cashing in their investments with BREIT, the maxi real estate investment fund launched a few years ago. In other words, impossible to withdraw the money from the fund, even if the requests for redemptions continue to increase month after month. Blackstone confirmed it satisfied requests of around $1.41 billion in February, just over 35% of the 3.94 billion requests requested by investors last month alone. “Although February gross redemptions are consistent with previous management comments, the overall data continues to align with our view on slowing organic growth in retail-oriented products in general,” Credit Suisse analysts said, led by Bill Katz, in a note to investors.

Another aspect is added to this objective liquidity problem of the US commercial sector. That is to say, the American situation is not isolated. And this is demonstrated by the case of Sponda, a Finnish realtor that Blackstone acquired in 2018 for almost 1.8 billion euros in 2018. Well before the pandemic, well before the war, well before the energy crisis. The market volatility triggered by the combination of these three shocks, to which have been added the bottlenecks in the production chains on a global scale, has created an imbalance such as to create asymmetries between supply and demand, as well as competitive advantage, on the commercial real estate market . Interest rate increases by the European Central Bank (ECB), in the Finnish case, did the rest. That is, they blocked the various processes of selling the assets in the portfolio, leading bondholders to say no to an extension of the repayment of the securitized notes held by Blackstone. Hence, the default. And the transfer of the dossier to a new servicer.

“This debt relates to a small portion of Sponda’s portfolio,” a Blackstone representative said. “We are disappointed that the servicer did not make our proposal, which reflects our best efforts and we believe would offer the best outcome for note holders. We continue to have full confidence in Sponda’s core portfolio and its management team, whose priority remains the provision of high-quality office and retail assets,” explained the US firm. However, the situation remains one of cautious instability, given the macroeconomic scenario that is difficult to read even for central banks.

On the western real estate market, moreover, the crunches are multiple. According to the most recent data released by CoreLogic, the US mortgage default rate has risen over the past year. Slight installment payment delays, between 30 and 59 days, increased from 1.2% in December 2021 to 1.4% in December 2022. Serious ones, between 60 and 89 days late, increased from 0.3 to 0.4%. The serious ones, beyond 90 days, finally grew from 1.2 to 1.9%. Modest increases in absolute terms, but significant in relative value. As for loans linked to the purchase of commercial properties, the insolvency rate is still low, at 1.93%, but in January it recorded the most significant increase for a year now. Enough, this is the evidence, to convince some investors to ask for the redemption of the capital committed to Blackstone’s fund.

Now the contagion, especially on the Nordic real estate market, could spread quickly. As reported by S&P Global at the end of last December, the Scandinavian segment is in trouble. “The credit quality of Nordic real estate companies in 2023 will face pressure from a mix of tighter capital markets, substantial refinancing needs, high leverage and declining asset values,” S&P explained. Although Nordic lenders are well capitalised, 2024 will see a peak in refinancing due to maturities and repayments of hybrid instruments issued over the last few years. In the absence of large and potentially difficult asset sales, S&P warns, “companies will likely turn to shorter-maturity debt and secured debt, even though excessive use of such instruments could weaken the creditworthiness of issuers.” And this could mean new liquidity crises on certain instruments. The Blackstone episode, therefore, may not be an isolated one.