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A Real-Estate Fund Industry Is Bleeding Billions After Starwood Capped Withdrawals

Redemptions from real-estate funds are expected to hit $16.5 billion this year while new fundraising shrinks

After the giant investment firm announced the new restrictions in May, sponsors of similar funds said they experienced a jump in redemption requests. Investors in these funds, mostly individuals who paid as little as $2,500, appear worried that their funds might also tighten the withdrawal spigot, forcing them to wait indefinitely in line if they want to cash out.

“When Starwood started cutting redemptions, the first thing you think about is: what’s my guy going to do,” said Kevin Gannon, chief executive of Robert A. Stanger, an investment bank that specializes in real-estate funds. “There’s a natural knee-jerk reaction.”

Some firms indicated that withdrawals are already stabilizing. Blackstone, the sponsor of the largest fund, said that June redemptions fell and were slightly below the level of withdrawal requests in April. That marks an improvement after investor redemptions rose in May following Starwood’s announcement of its new limits.

Still, there is widespread industry concern that Starwood’s move may have a long-term negative impact on investor sentiment. “How it could sour investor appetite is our biggest risk,” said David Steinbach, global chief investment officer of Houston-based Hines, which manages a $2.6 billion fund.

Stanger projects that investors will redeem $16.5 billion from the funds this year, compared with $1.5 billion in 2021. Meanwhile, new fundraising is expected to dwindle to $5.7 billion this year, compared with $34 billion in the funds’ peak year of 2021, Stanger said.

The shrinking fund business is one of the most dramatic signs of the commercial-property downturn caused by the jump in interest rates and flagging demand in the office sector. Investors who enjoyed outsize returns when real estate boomed have lost money in recent months as property values have fallen.

Some fund sponsors, including Blackstone and KKR, started limiting investor redemptions more than one year ago to 2% of the total value of the fund’s assets a month, or 5% a quarter. Earlier this year, it appeared that the industry was turning a corner when Blackstone said that its $60 billion fund had once again started meeting all redemption requests.

But Starwood’s move signaled the storm was still raging in the real-estate fund business. Facing a cash crunch and not wanting to increase leverage or sell property into a weak market, Starwood went further than any other fund by restricting monthly withdrawals to 0.33% of net asset value.

“Further leveraging the vehicle or selling our portfolio’s assets to meet monthly redemptions would negatively impact all investors,” Starwood said in an emailed statement.

Blackstone’s fund felt the repercussions immediately. Firm officials said that in the first half of May, investors were redeeming funds at the same pace as April. After Starwood’s announcement, withdrawal requests increased, they said.

Redemptions in the fund in May were about $1.6 billion, compared with about $800 million in April, according to filings.

“There’s been some news based on this [Starwood] dynamic,” Jonathan Gray, Blackstone’s president, said at an investor conference in late May. “That creates some increase in redemptions, but nothing like what we experienced back in the beginning of 2023.”

With redemptions greatly exceeding fundraising, the total asset value of the funds has fallen to $90 billion from their peak of close to $110 billion last year, according to Stanger. “It will be the middle of next year before they’re raising more than they’re redeeming,” Gannon predicted.

For Wall Street firms, the reversal of fund flows has been painful. Selling these types of funds to individuals at such a large scale has provided a relatively new source of fees for firms that traditionally have sold to institutional investors.

These funds were designed to appeal to individual investors by giving them the ability to redeem their shares on a monthly or quarterly basis. Sponsors disclosed to investors that the funds retained the right to limit redemptions to avoid being forced-sellers. But they were marketed by financial advisers and others who stressed their liquidity.

Some financial advisers question whether individual investors’ appetite for the funds will return, even when the commercial real-estate industry rebounds. “I suspect it will be hard to get that amazing fundraising again,” said Allan Roth, founder of Wealth Logic, a financial-planning firm based in Colorado Springs, Colo.

KKR in June responded to the high redemptions in its $1.2 billion fund by investing $50 million in fresh capital and promising to cancel $200 million worth of the firm’s stake in the fund if its share price, at $25.56 on May 31, doesn’t hit $27 in three years. “We have confidence in a real-estate recovery,” KKR said in a letter to shareholders.

Blackstone said the increase in shareholder withdrawal requests following Starwood’s action in May exceeded the 2% monthly limit.

But the fund’s board decided to honor all redemption requests anyway, thinking the increase was an aberration.

In a letter to investors in June, Blackstone emphasized that the fund had no plans to change its share-redemption program. It also noted several bullish trends in the commercial-property market, such as increased availability of debt and declining new supply.

“Now is a time to look past the headlines,” the letter said.

Joachim Nagel says EU’s biggest economy must address ‘major challenges’ to fuel growth

The head of Germany’s central bank has urged the government to cut taxes, reduce bureaucracy, boost the workforce and increase the carbon levy to boost the country’s fading attractiveness to investors.

Joachim Nagel, president of the Bundesbank, said investors were increasingly avoiding Europe’s largest economy, which “lags far behind in terms of growth” in international comparisons.

While there had been “some economic bright spots” for the German economy, which returned to growth in the first quarter of this year after a year of contraction, Nagel said it was “still facing major challenges” that would require significant investment to address.

Addressing a conference in Frankfurt on Monday, he cited a recent study by development bank KfW that found Germany would require about €5tn of investment to achieve its goal of climate neutrality by 2045. 

But he said corporate investment had been declining recently and there was “widespread concern that investors were increasingly avoiding Germany”. The structural problems deterring investors included high wage and energy costs, a shortage of skilled workers, uncertainty over regulation and a high tax burden, Nagel added.

To encourage more clarity on the need to shift to a carbon-neutral economy, Nagel said the government should increase its carbon levy from current levels of €45 a tonne. “Carbon pricing should be applied as broadly, uniformly and predictably as possible,” he said.

He also suggested reducing taxes, adding that Germany’s high corporate tax rates compared unfavourably with its international peers. “To create an employment and investment-friendly environment, it is important to keep an eye on the tax burden on labour and capital.”

The Bundesbank president said the government should clear the regulatory “traffic jams” stemming from slow and cumbersome bureaucracy, adding this was “clearly evident in the expansion of renewable energies, for example in wind turbines”.

To boost the labour supply to the many sectors suffering from shortages of skilled workers, Nagel said the government should tap into a “hidden reserve” of about 3.2mn people who want to work but cannot as they have to care for children or do not think they will find a suitable job.

Warning the government against relying heavily on financial incentives such as the tens of billions of euros it has offered to chipmakers to build new semiconductor plants in Germany, he said that “we must be careful not to get caught up in the thicket of subsidies”.

Nagel said trying to attract investment with subsidies was “often fraught with bureaucracy, increasingly complex government interventions and a constant burden on public finances” and could risk companies postponing investment in the hope of winning state handouts.

“I am convinced that if Germany is to move on to a higher growth path, there is no way around more investment,” he said. “Politics can remove hurdles in many areas, but not all of them.” 

Nagel said more than half the companies cutting investment last year cited Germany’s “poor macroeconomic environment” as a factor driving their decision in a Bundesbank survey. It also found that the share of German businesses reducing investment was similar to the share that increased it.

A study of international competitiveness by Swiss university IMD last month found that Germany had lost ground, dropping two places to 24th place out of 67 countries ranked.

The German economy grew 0.2 per cent in the first three months of the year compared with the previous quarter. GDP contracted 0.3 per cent last year, making it the worst-performing major economy.

Economists expect consumer spending to pick up after rapid rises in wages and a slowdown in inflation boosted household purchasing power. Data released on Monday showed German inflation fell slightly more than expected from 2.8 per cent in May to 2.5 per cent in June.

Airline says traffic to and from French capital is behind other European cities in run-up to games

Air France-KLM has warned it expects to take a financial hit because a “significant” number of would-be visitors have avoided booking trips to Paris during the Olympic Games. 

The airline group said traffic to and from the French capital was “lagging behind other major European cities” ahead of the games, which will run between July 26 and August 11.

“International markets show a significant avoidance of Paris,” the company said in a statement on Monday, citing bookings patterns at both Air France and Air France-KLM’s low-cost airline Transavia.

French visitors “seem to be postponing their holidays” until after the games or making alternative plans, the company added. It also cited data from the Paris Tourist Office published last month, which forecast that hotel bookings would be down over the summer.

The company expects a negative impact of between €160mn and €180mn on revenues between June and August. 

Analysts at Bernstein said this suggested an overall 13 per cent reduction in the consensus pre-tax profit forecast of €1.35bn this year.

Travel to and from France was expected to “normalise” after the Olympics, Air France-KLM said, with “encouraging demand levels” for the end of August and the month of September.

Shares were down 2.5 per cent by lunchtime trading. 

The warnings come despite forecasts from tourism officials that 15mn visitors will come to Paris for the games.

Polls show that half of the city’s residents plan to leave temporarily, and one government minister has urged people to work from home or go elsewhere to avoid transport disruption.

There have also been signs of an oversupply of accommodation during the games, with a glut of listings on Airbnb pushing down prices.

Neil Glynn, analyst at research company Air Control Tower, said the lingering effects of strikes and disruption at the start of the year were likely to weigh on second-quarter results for the airline’s main European rival Lufthansa.

He added that because different factors at Air France-KLM and Lufthansa had given rise to similar expectations of disappointing revenues, this prompted questions about whether “underlying market softness is also a common factor alongside the Olympics and strike action”.

Legacy airlines fight perpetual war to close significant cost gap on budget rivals

Hands up: when buying an airline ticket, do you choose to pay extra to offset carbon emissions? If the answer is “no”, you are not alone. Percentage uptake of voluntary offset schemes can be in the low single digits. 

Instead, Lufthansa has introduced a compulsory “environmental cost surcharge” on flights from an EU country, the UK, Norway or Switzerland from the start of 2025. This will add as much as €72 to a first class long-haul ticket. On short- to medium-haul flights it will be closer to €1-€7. The German airline is unlikely to travel alone. Expect mandatory green surcharges to pick up among legacy carriers in particular.

A host of environmental regulations are to blame, says Lufthansa. It cites EU requirements for airline fuel to include a blend of at least 2 per cent Sustainable Aviation Fuel (SAF) from next year, plus changes to emissions trading schemes (ETS) in Europe. Air France-KLM laid the groundwork in 2022 by imposing a “SAF contribution charge”, levied at a lower level.

Each regulatory change on its own isn’t extortionate. Admittedly SAF, produced from a variety of materials including recycled cooking oil, should cost at least twice the long-run historical price of kerosene up to 2050, according to a recent report by LEK Consulting. 

But assume Lufthansa’s fuel bill in 2025 remains close to the €8.3bn it forecasts for 2024, a back of the envelope calculation this suggests compliance with 2025 EU blending rules might cost an extra €17mn. Required blending levels increase again in 2030 and 2035.

Changes to the EU’s ETS scheme and similar programmes elsewhere will be more costly. Currently, polluters receive some free allowances but these are being reduced. The impact on legacy airlines will be bigger, argues Goodbody analyst Dudley Shanley, as they were historically bigger emitters and tend to have less efficient fleets. 

This year Lufthansa is expecting to receive free emissions certificates for some 2.8mn tonnes of CO₂, versus 3.8mn tonnes in 2023, according to its last annual report. That reduction could cost €65mn, assuming BloombergNEF’s forecast for an average EU emission allowances price of €65/t this year. These are expected to rise to €80/t in 2025.

In good times, such costs could be absorbed. Lufthansa should produce a net profit in 2025 of nearly €1.8bn on Visible Alpha numbers. 

Yet legacy airlines fight a perpetual war to close the significant cost gap on their budget rivals. Passengers may grumble but the baggage of mandatory environmental levies — at least among the flag carriers — could well become the norm.

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