Last month, Starwood Capital Group announced a significant change to the buyback policy for its $10 billion fund, Starwood Real Estate Income Trust (SREIT). On Thursday, May 23rd, Starwood’s owner Barry Sternlicht and CEO Sean Harris stated that the company would now only buy back 1% of the fund’s assets annually, a steep drop from the previous 5%. This decision comes in response to the rapidly depleting liquid assets of the fund and a surge in redemption requests from investors.
Understanding REITs and Their Risks
Real Estate Investment Trusts (REITs) provide individuals the opportunity to invest in large, income-producing real estate assets such as office buildings, apartment complexes, hotels, and warehouses. REITs can be lucrative for portfolio diversification without the burden of directly buying, operating, and maintaining commercial real estate. However, they come with risks, including lack of liquidity and transparency in share value, and are susceptible to market changes.
SREIT and Blackstone’s BREIT are unique among REITs as they are privately held, nontraded real-estate investment trusts. Both were launched in 2017 and gained popularity during periods of low interest rates due to their 5% dividend payouts. However, the global pandemic and subsequent economic shifts significantly impacted these investments.
The Impact of Market Changes
The pandemic drastically altered the financial landscape, causing commercial occupancy rates to plummet as people stayed and worked from home. This led to vacancies in apartments and reduced revenues for hotels and restaurants. Consequently, REIT investors experienced lower returns, and when the Federal Reserve raised interest rates in 2022, the commercial real estate sector struggled to regain its pre-pandemic profitability.
Liquidity Crisis at SREIT
Starwood’s SREIT is facing a severe liquidity crisis, with liquid assets falling short of the number of investors seeking redemptions. According to the Wall Street Journal, the fund’s assets totaled $752 million at the end of April 2024, down from $1.1 billion the previous year and $2.2 billion at the end of 2022. The drastic reduction in the buyback percentage from 5% to 1% reflects Starwood’s struggle to manage the fund’s liquidity and fulfill redemption requests.
The Broader Implications for Investors
Starwood’s move to protect the fund comes at the expense of investors, focusing on the survival of the fund and the company rather than paying investors their due. This situation is not uncommon in the REIT market, which has seen its share of failures and crises over the years. The REIT structure, established by Congress in 1960, has experienced significant challenges, including the first REIT failure in the mid-1970s, the bankruptcy of Criimi Mae in 1998, and the role of REITs in the 2008 Financial Crisis.
Despite their potential benefits, REITs carry substantial risks, often to the detriment of investors. Market volatility can lead companies like Starwood and Blackstone to prioritize their interests over those of their investors, as seen with the SREIT buyback policy change.
Seeking Recourse for SREIT Investors
Investors in Starwood’s SREIT who have been unable to retrieve their funds may have grounds for a claim through FINRA arbitration, especially if they invested between 2017 and 2022 based on their financial advisor’s recommendations. At Bakhtiari & Harrison, our experienced securities employment attorneys are here to help. We offer free, no-obligation consultations to evaluate your case and work on a contingency basis, meaning we only get paid when you do.
For assistance with your claim, contact Bakhtiari & Harrison at 310-499-4732. Our dedicated team is committed to protecting your rights and helping you navigate the complexities of securities arbitration.