A Big Fund Faces a Real Estate Crunch

Blackstone's portfolio is a hit with small investors, but it's headed into tougher markets

- Dawn Lim and John Gittelsohn

In just over five years, a Blackstone Inc. real estate fund open to small investors has turned into a $70 billion force. It has swallowed up apartments, suburban homes, dorms, data centers, hotels and shopping centers. It owns Las Vegas's lavish Bellagio hotel and casino, a 76-story New York skyscraper designed by Frank Gehry, and a sprawling Florida complex for interns working at the Walt Disney World Resort.

Unlike with many real estate investment trusts, its shares don't trade on exchanges. But fueled by billions of dollars from affluent individuals, Blackstone Real Estate Income Trust has become one of the firm's top profit drivers, expanding property investing in private markets to the masses. Now the money machine is facing its biggest test.

Rising interest rates threaten to drag down property values and make cheap debt harder to come by. Even though the BREIT strategy is outperforming stocks-total net returns for its most popular share class were 9.3% in the nine months ended in September-inflows are slowing and redemptions are up.

Wealth advisers at some banks are growing cautious about client exposure to more illiquid investments. At UBS Group AG, some advisers have been shaving their exposure to BREIT after the fund's massive growth made it too big a piece of clients' savings, according to people close to the bank.

Staffers at Bank of America Corp.'s Merrill Lynch have been reviewing client portfolios more closely in this market to assess customers' exposure to REITS that don't trade on exchanges, other people say.

After years of attracting investors chasing yield at a time of rock-bottom interest rates, BREIT is coming under new pressure. It has thresholds on how much money investors can take out, meaning if too many people head for the exits, it may have to restrict withdrawals or raise its limits.