This year is destined to be an extraordinary year. There was Credit Suisse’s thunderstorm before, and FTX’s bankruptcy later, and now, Blackstone, the world’s largest alternative asset management giant, is also in trouble. In fact, it took less than two months between Credit Suisse’s financial crisis exposure and Blackstone’s restriction of investor withdrawals. Why did these giants have accidents one after another in just two months? Is it true that the “Lehman moment” is coming again as the media say?
Blackstone is under a run on tide
On December 1, due to the surge in redemption requests from investors, Blackstone suddenly announced restrictions on the withdrawal of real estate investment trust funds (BRIET) with net assets of up to US$69 billion. After the restriction, investors related to the fund can only redeem a maximum of 5% of their shares in the first quarter, and a maximum of 2% of their shares per month. The fund manages as much as $125 billion.
In fact, the collapse of investor confidence in the fund began in July this year. Investors redeemed more than 2% of BRIET’s net assets in July, according to the Financial Times. Beyond this threshold, Blackstone Group has the right to limit the scale of redemption by investors, but due to fear of alarming investors, Blackstone did not take any action at that time. Conversely, Blackstone’s top executives backed BREIT with their own money, and Blackstone’s CEO and president added more than $100 million to BREIT.
In October this year, applications for the redemption of funds reached US$1.8 billion, accounting for 2.7% of the fund’s net asset size. Although it exceeded the standard, it was 100% fulfilled after the approval of the board of directors. In November, the redemption funds greatly exceeded the standard, and Blackstone finally couldn’t stand it anymore, and only approved 43% of BREIT’s redemption applications, totaling US$1.3 billion, accounting for 2% of the fund’s net assets. According to regulations, in December, only 0.3% of the fund’s net assets can be redeemed by investors, which is obviously unable to cope with the current surging tide of runs. As a result, Blackstone decisively sold its shares in the MGM Grand Hotel in Las Vegas and the two casinos at Mandalay Bay. The completion of the transaction will inject $1.27 billion into the fund.
BREIT has been an area of strength for Blackstone, responsible for acquiring student housing company American Campus Communities and data center company QTS Realty Trust, among others. BREITs recorded a net return of 9.3 percent in the first three quarters of this year, while publicly traded REITs fell 30 percent in value.
The incident led Barclays analysts to cut their rating on Blackstone stock from “overweight” to “hold” last week and cut their price target from $98 to $90. If Blackstone’s REIT fails to regain investors’ trust, it risks falling into a vicious cycle of selling assets to meet redemptions, they and other analysts said, though it’s too early to tell.
Real estate is gone
Blackstone is a leading global alternative asset management company. The so-called alternative investment mainly refers to investing in financial and real assets other than traditional stocks, bonds and cash, such as infrastructure, real estate and private equity. Among them, the investment targets in the real estate field are very wide, and its income mainly comes from the rental income and management expenses during the operation period. Compared with stocks and bonds, its income is more stable and more resistant to inflation.
The person in charge of the real estate department of Blackstone once asserted: Even though the price trend of major asset classes in the world has been declining since the new crown epidemic, some core real estate assets will still return to a strong upward trend in the future.
Blackstone obviously underestimated the strength of the real estate market correction and the collapse of investor confidence. In addition, Blackstone did not reserve enough cash to deal with market redemption. According to its prospectus, BREIT’s cash reserves totaled $2.7 billion at the end of October, less than enough to cover redemptions for a month in November.
Subject to the Federal Reserve’s crazy rate hike process, the US real estate market is rapidly cooling down. The latest data shows that housing prices in 20 cities fell by 1.2% month-on-month in September, the third consecutive month of decline. The cumulative decline in home prices in the three months from July to September in the United States was the largest three-month cumulative decline since January 2012.
The 30-year fixed mortgage rate topped 7% in October for the first time since 2002, according to mortgage financier Freddie Mac. Despite the recent pullback in the rate, it remains well above the 3.10% average for this time last year.
The analysis pointed out that housing prices have doubled in the past 10 years, but since the beginning of this year, mortgage interest rates have doubled from 3.3% to about 6.5%, bringing the historic boom of the housing market to an abrupt end.
Average U.S. home prices are expected to rise 13.6% this year and fall more than 5.6% in 2023, as measured by the Case Shiller 20-city home price index, according to a recent survey of 25 real estate strategists. If expected, it would be the first annual decline in house prices in a decade. The measure shows average U.S. home prices peaked in June and have fallen about 4% since then. According to the median forecast, housing prices will fall by 12% cumulatively, with the highest estimate of the decline being as high as 30%.
It can be said that Blackstone’s nightmare is far from over.
The financial crisis follows
There is often a saying in the market, ten crises, nine real estate. Real estate can be both a source of prosperity and a source of crisis for both developed and developing countries.
With the Federal Reserve raising interest rates in large strides this year, the global real estate market has fallen into a cold winter. The demand for housing in the UK fell off a cliff in November. Hong Kong housing prices have fallen to the lowest point in the past five years. South Korea’s November housing prices recorded the largest decline in nine years. New Zealand’s housing price index has recorded the largest decline in 30 years. , Australia, Canada and other countries property markets are no exception.
The U.S. CPI unexpectedly fell sharply to 7.7% in October, and the market ushered in a wave of rebound. Last week, Federal Reserve Chairman Powell confirmed that the Federal Reserve will slow down the pace of interest rate hikes in December, but former U.S. Treasury Secretary Summers warned that inflation was still high in October, and the Fed still needs to continue to raise interest rates at a rate that exceeds market expectations. He stressed that the U.S. economy “has a long way to go” to keep inflation under control.
The latest model established by Bloomberg economists in October shows that the U.S. economy will fall into recession within the next year. The market is currently predicting that the Federal Reserve will cut interest rates in the second half of next year to save the economy. Before then, the Fed may continue to raise interest rates, and the federal funds rate may eventually reach 4.75%-5.25%.
Rising interest rates will increase the cost of borrowing funds. Investors will withdraw funds to avoid risks. Consumption and investment activities will be greatly affected. Assets with high bubbles in the early stage will face a sharp correction, and vicious capital runs may even lead to the collapse of the financial system. Fragile and broken, triggering a systemic crisis and bringing incalculable losses to the economy.
In his new book “Monetary Policy in the 21st Century”, Bernanke, the former chairman of the Federal Reserve and the 2022 Nobel Prize winner, pointed out that the policies of the Federal Reserve will affect the global financial situation and even cause the spread of international financial risks. We must prepare for the next financial crisis Prepare. This is probably not alarmist talk.
The current situation is that the United States is struggling on the brink of economic recession and endless political internal friction, China is still struggling with the epidemic, EU countries are struggling with the energy crisis and rising prices brought about by the conflict between Russia and Ukraine, and the top three economies in the world are all Each is exhausted, the global economy is losing momentum, and the uncertainty of the supply chain is rising. The original global cooperation of fine division of labor is gradually coming to an end.
There are various signs that a global recession is becoming more and more obvious as the Fed continues to raise interest rates. Due to the policy lag, the consequences of the four violent interest rate hikes started by the Fed in June are slowly showing. Whether it is the collapse of the cryptocurrency market or the thunderstorms of Credit Suisse and Blackstone, it seems that they are warming up for a bigger crisis, just like the thunder before the storm. It was planted when the money printing machine was started, and when the tide rises, the tide will eventually recede. (Fortune Chinese website)
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