Private real estate investing has long been the playground of the ultra-rich. For years, they were the only ones with access to this market. Many private real estate deals are only open to accredited investors, those with a high income or net worth. They also typically have high minimum investment requirements. Because of that, most individual investors couldn't access a market that has historically produced higher income yields and better risk-adjusted returns than other asset classes.
However, Blackstone Group (BX -2.33%) has changed this game. It created Blackstone Real Estate Income Trust (BREIT) about five years ago to target individual investors. The non-traded real estate investment trust (REIT) has grown into one of Blackstone's biggest funds, raising more than $50 billion.
Here's a closer look at how Blackstone created a non-traded REIT behemoth.
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The draw of investing in private real estate
Congress created REITs in 1960 to allow anyone to invest in real estate. There are currently more than 200 that trade publicly on major stock exchanges, giving investors lots of options.
However, there are some drawbacks to being publicly traded. One of the biggest is exposure to stock market volatility. Because of that, REIT stock prices often decline during a broad market sell-off. Another drawback is that investors usually pay a premium for liquidity. As a result, publicly traded REITs often offer a lower dividend yield than non-traded REITs.
That gives private real estate investments several advantages over public REITs. They've historically produced higher income yields, making them ideal for those seeking to generate passive income. Meanwhile, they help provide even greater portfolio diversification because they reduce an investor's correlation to the stock market.
Because of those benefits, private real estate investments have produced better risk-adjusted returns than public REITs over the last 20 years. That's led more individual investors to look for ways to add private real estate to their portfolios.
Cashing in on investor demand for private real estate investments
Blackstone created BREIT to provide individual investors with access to the private real estate market. It set a low minimum investment of $2,500 for BREIT, which investors can purchase through their financial advisor. Blackstone also structured BREIT differently from other non-traded REITs, which often charged high fees and had limited investor disclosure.
Those features have made it a hit with investors, enabling Blackstone to cash in on growing individual investor demand for private real estate. This demand has been nearly insatiable over the past year and a half. Investors have been pouring in an average of $2 billion into BREIT per month. That's almost 70% of all the money raised by non-traded REITs over the past year.
Several factors have drawn investors to BREIT over competing non-traded REITs. For starters, it pays an attractive income stream. Its annual dividend yield has been between 4% and 5% in recent years, higher than bonds and publicly traded REITs. BREIT has also benefited from its thematic investing approach of focusing on property sectors driven by strong demand tailwinds like industrial, multifamily in the Sun Belt region, and data centers. This strategy has paid off, enabling BREIT to cash in on above-average property value appreciation. Add that to its dividend, and BREIT's total return has averaged more than 15% over the last three years.
Blackstone's success has led other private equity giants to enter the non-traded REIT market. KKR (KKR -1.35%) and Brookfield Asset Management (BN -1.10%) have launched non-traded REITs in the past year. Brookfield took over the management of a portfolio of properties from its subsidiary Oaktree Capital Management to launch a non-traded REIT in November. It also seeded Brookfield REIT with three more assets, bringing its total assets under management to nearly $1 billion. That larger scale should help Brookfield REIT better compete with other offerings in the market.
Meanwhile, KKR launched KKR Real Estate Select Trust (KREST) last year, with an even more investor-friendly structure to further differentiate its offering from those of its rivals.
Despite the increasing competition, BREIT continues to lead in fundraising. It hauled in a record $3.24 billion in November. That brought its year-to-date total to over $22 billion -- four times more than its next closest rival. That's enabling the company to complete increasingly larger deals, drawing headlines and more investors into the fund.
Disrupting the private real estate market
Blackstone created BREIT to address some issues with legacy non-traded REITs and provide individual investors with greater access to the private real estate market. It has been a smashing success. Investors have poured billions of dollars into Blackstone's non-traded REIT to take advantage of its higher income yield and greater diversification benefits. Given its returns thus far, BREIT is worth a closer look for investors looking to add private real estate to their portfolios.
