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The Tell: ‘It’s a safe bet’ to expect pain in private real-estate funds, says TCW’s Brivanlou

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Private real-estate funds are due for a taste of the pain hitting public real-estate funds, said Iman Brivanlou, head of income equities at the TCW Group, in a telephone interview with MarketWatch.

“You saw the carnage the public guys took in 2022,” he said on Tuesday. “It’s a safe bet that more pain is coming for private guys. The question is how much more.”

The Dow Jones Equity REIT Index
DJDBK,
+0.29%
,
a measure of all publicly traded U.S. real-estate investment trusts, was down about 18.1% over the past 12 months through Tuesday, according to FactSet data, while up 7% to kick off 2023.

The S&P 500 index
SPX,
-0.20%

fell 14.4% over the past 12 months, while the Dow Jones Industrial Average
DJIA,
-1.14%

has declined 5.6%, according to FactSet.

Last year’s tumult in real estate resulted in the largest performance gap on record (see chart) when comparing returns on public and private real-estate vehicles, according to Goldman Sachs strategists. They pegged private commercial real-estate funds as up nearly 20% in 2022, but public REITs down by nearly 20%.

Historic gap emerges in 2022 in performance of public and private REITs.

NCREIF, Dow Jones, Goldman Sachs Global Investment Research

“History suggest this gap is usually closed in the following two years by a combined catch-up in public REITs and catch-down in non-traded REITs,” a Goldman Sachs credit strategy team wrote about the divergence, in a new weekly note.

“While this pattern is likely to prevail this time around, we think the risk of persistent and large outflows from private vehicles is quite low,” they said.

Many property owners who took on cheap debt in recent years could find it a lot harder to refinance if property values fall and today’s higher rates stick around. Federal Reserve officials have been vowing to keep rates high as the central bank works to bring inflation down to its 2% annual target.

See: The party is over in commercial real estate. Here’s what to expect in 2023.

Investors have been closely monitoring private real-estate funds for signs of stress since Blackstone
BX,
+0.99%

told investors it was placing withdrawal limits on its nearly $70 billion Breit fund. The massive fund in January received a $4 billion injection from the University of California, with the promise of an 11.25% annual return over a six-year investment.

Brivanlou, a lead portfolio manager of TCW’s global REIT products, now expects the performance of public and private funds to converge following last year’s rout, but potentially with less extreme downside for private funds.

“For those that are overleveraged, you are going to get blowups,” he said, adding that in real estate “the same mistakes keep getting repeated” despite the lessons of past economic downturns.

Brivanlou remains bearish on office and residential buildings in central business districts, and about shopping centers. But he also sees opportunities in some beaten-down sectors and in parts of real estate that flourished during the pandemic, including in industrial buildings, data centers and towers.

Office buildings have emerged as a key worry for many real-estate investors, even as company executives push for more employees to return to the office on a regular basis.

TCW, which manages about $206 billion in assets and is headquartered in downtown Los Angeles, is planning to move to a new building in 2024, while cutting its office space, Brivanlou said.

“We are certainly not alone,” he said.

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