World's Largest '10 Billion Dollar' Real Estate Fund, Reasons for Redemption Restrictions [Song Seungseop's Financial Light]

Investor Withdrawal Limit Reduced from 2% to 0.33%
US Real Estate Prices Plummet... Cash Also Shortage
Capital CEO Writes Direct Letter to Shareholders
"Real Estate Market at Bottom Now, Selling Is Not Good"

Recently, the U.S. real estate market has been unsettled. This is because the world's largest real estate fund announced that it would limit redemptions for investors. Now, even if investors request to withdraw all their money, they can only receive up to the amount set by the fund itself. Why has this happened?

Investor Redemption Limit Reduced from 2% to 0.33%

The fund that decided to impose redemption restrictions is SREIT (Starwood Real Estate Income Trust), the largest real estate fund in the world. It manages approximately 13.667 trillion Korean won. The fund, which started in 2018, holds various assets. These include the Crown Group’s resorts, the largest hotel and casino company in Australia, large apartment complexes in major U.S. regions, and logistics warehouses in Denmark and Norway.

The company managing the fund is Starwood Capital. Barry Sternlicht is the founder and CEO, and he is considered a legendary figure in the industry. He first established a capital company in 1991 and became very wealthy through bold strategies. During the financial crisis, when prices plummeted and everyone avoided apartments and real estate, he bought them up. Later, by reselling the properties at high prices, he built a giant corporation worth $115 billion.

However, the situation at Starwood Capital is not looking good. SREIT has limited investors’ fund withdrawals. Originally, investors could redeem up to 2% of the net asset value monthly. But now, the redemption limit has been lowered further to 0.33%. From the investors’ perspective, this means they have to wait longer to get their money back.

Cash Shortage Due to U.S. Real Estate Collapse

Why was this measure taken? Simply put, they want to pay back but don’t have enough cash. According to the Financial Times, SREIT has spent a huge $1.3 billion on investor redemptions since last year. As of the end of last month, the fund’s remaining cash and liquidity were about $752 million, while the quarterly redemption obligations were around $500 million. On the 1st of this month, nearly $200 million was already used to pay redemptions.

Investors’ requests to withdraw funds are linked to the troubled real estate market. The U.S. commercial real estate market is in a slump. The International Monetary Fund (IMF) described it as the most severe in half a century. The IMF’s analysis showed that commercial real estate prices fell 11% from March 2022, when interest rate hikes began, through the third quarter of last year. The price index dropped 21.4% from the peak in April 2022 as of last month. With such a poor real estate market, investors naturally want to pull their money out of real estate funds.

Jerome Powell, Chairman of the U.S. Federal Reserve
[Photo by Yonhap News]

The real estate market crisis is closely related to “interest rates.” The U.S. Federal Reserve (Fed) began raising the benchmark interest rate in March 2022 after inflation rose due to the liquidity unleashed during COVID-19. The benchmark rate increased by 5.25 percentage points from a low of 0.25% to 5.50%. When interest rates are high, the real estate market inevitably suffers. Fewer people borrow to buy homes, demand decreases, and housing prices fall.

There is also an explanation that the rise of “remote work” in the U.S. has had an impact. During COVID-19, American companies implemented extensive social distancing and remote work to prevent infections. Even after the pandemic ended, many companies continued remote work. With fewer employees going to offices, companies have been less inclined to lease buildings. According to NH Investment & Securities, the U.S. office vacancy rate in the first quarter of this year was 19.9%, higher than before COVID-19. As vacancies increase, real estate prices fall further.

Despite Difficult Outlook, “Hold, Don’t Sell”

The future outlook does not look promising either. Last year, many companies and economic actors predicted that the U.S. might lower interest rates by the second half of this year at the latest. However, the timing of rate cuts in the U.S. seems to be delayed. Inflation remains high domestically. According to the minutes of the Federal Open Market Committee (FOMC) released after the recent decision to hold the benchmark rate steady, many Fed officials expressed concerns that high rates could persist for a long time. Fed Chair Jerome Powell said, “Inflation remains too high,” and “Additional progress in reducing inflation is uncertain and looks uncertain going forward.”

Barry Sternlicht, Founder and CEO of Starwood Capital

In other words, since real estate prices are unlikely to recover quickly and it is difficult to return money to investors, SREIT took the drastic step of limiting redemptions. There are negative views on whether this was a good decision. While it may be a good short-term solution to liquidity shortages, it can cause fear among investors. This could increase demands for redemptions in the medium to long term and reduce investment appetite for the fund.

Nevertheless, Barry Sternlicht’s stance is to “hold, don’t sell.” He recently sent a letter to shareholders, explaining that he believes the real estate market is near the bottom and will improve. He bluntly stated that “we cannot recommend aggressively selling real estate assets right now.”

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