Semiliquid direct real estate funds are finally getting back on solid ground.
The average semiliquid direct real estate fund gained 5.81% for the year ended June 30, 2026. It was the best 12-month stretch for the asset class in more than three years. Meanwhile, Blackstone Real Estate Income Trust, the $57 billion behemoth in the category, announced the second quarter of 2026 was its first quarter of net inflows in almost four years.
But while some funds are experiencing a renaissance, others remain mired in liquidity issues, reinforcing the risks investors face when owning semiliquid funds.
Performance Is Back
Real estate investment trusts, both listed on stock exchanges and unlisted, were among the asset classes hit the hardest by the Federal Reserve’s aggressive interest rate hikes in 2022 and 2023.
Real estate investors generally make money in two ways: collecting income from properties and benefiting as those properties increase in value. But the Fed’s rapid tightening created problems for both. The effective federal-funds rate rose more than 5 percentage points from the start of 2022 through September 2023.
Higher borrowing costs made it more expensive to finance real estate purchases, putting pressure on what buyers were willing to pay for properties. At the same time, the long-term leases common in commercial real estate meant landlords often couldn’t immediately reset rents to reflect changing market conditions. That combination depressed both property values and income growth.
The Morningstar US Real Estate Index, which tracks public REITs, offered a particularly clear signal of investors’ concerns, falling 33% from January 2022 through October 2023. Three years later, the picture looks considerably different. Real estate values have stabilized, and both public and unlisted real estate investments have begun to recover. Morningstar columnist Dan Lefkovitz highlighted the rebound in public market REITs in August. Both public and unlisted REITs are now making new highs for this market cycle.
The chart below illustrates the recovery by showing the growth of $10,000 invested in the average unlisted direct real estate fund alongside the Morningstar US Real Estate Index.
But there is another takeaway from the chart: While public and private real estate tend to move in the same general direction, they don’t move at the same speed. Public REITs are repriced every trading day, so they tend to absorb changes in interest rates and investor expectations quickly. Private real estate, valued periodically through appraisals, adjusts more gradually. The result is a smoother-looking path through both the crash and the recovery.
But that smoother ride isn’t necessarily an advantage. The faster pricing of public REITs cuts both ways: They suffered a much steeper decline in 2022, but they also recovered faster, ultimately pulling ahead of private real estate by the end of June 2026.
The Tax Advantages of Direct Real Estate Funds
Total returns, however, aren’t the only reason investors may find direct real estate funds appealing. For investors in taxable accounts, the tax treatment for those returns can be just as important.
A large part of the appeal of direct real estate funds is their tax treatment. Depreciation, which allows property owners to deduct the cost of a building over time, can offset rental income and reduce taxable income. That means some of the cash that investors receive can be classified as return of capital rather than taxable income. Distributions that are classified as return of capital aren’t taxed as ordinary income, as a distribution of income would be otherwise. This makes the yield much more attractive on an aftertax basis. The exhibit below shows the distribution rate and the tax-equivalent distribution rate for select direct real estate semiliquid funds and Vanguard Real Estate ETF VNQ, assuming the investor’s ordinary income is taxed at 37%. Publicly traded REITs also classify some distributions as return of capital, but because they tend to be longer-lived, the depreciation is smaller. About 25% of Vanguard Real Estate ETF’s distributions were a return of capital in 2025, for example, while each of the unlisted REITs in the exhibit had at least 70% of distributions classified as a return of capital.
The trade-off is that return-of-capital distributions reduce an investor’s cost basis in the fund, so the tax benefit is really a deferral rather than a permanent tax savings. When the shares are eventually sold, the lower cost basis can result in a larger taxable gain. But for investors who hold the investment for more than a year, that gain would generally be taxed as a long-term capital gain, likely at a lower rate than the ordinary income tax rates that would have applied had the distributions been taxed as income in the year they were received.
The table below shows a hypothetical $10,000 investment in an unlisted REIT with a consistent 5% annual distribution, all treated as return of capital due to depreciation, and no capital appreciation over four years. For simplicity, the full investment is withdrawn at the end of year four.
The net effect is that the distributions are effectively converted from ordinary income into capital gains, which are generally taxed at a lower rate. Assuming all of the gains qualify as long-term capital gains, this would reduce the total tax bill by approximately $340 over the four-year period.
Not Everyone Is Celebrating
Although performance has generally rebounded, some semiliquid direct real estate fund investors are dealing with a different issue: They can’t get their money back at par.
At the end of 2022, when direct real estate was hitting its cycle peak, Starwood Real Estate Income Trust was the second-largest unlisted REIT. It’s still the third-largest with $7.6 billion of net assets, trailing only Blackstone Real Estate Income Trust and Blue Owl Real Estate Net Lease Trust, but it would likely be smaller if investors were allowed to redeem their shares.
SREIT initially allowed investors to redeem up to 2% of net asset value each month and 5% each quarter, the same limits as BREIT. But in 2023, redemption requests were rising similarly to other unlisted REITs, like BREIT. But while BREIT was able to keep meeting investors’ redemption requests up to its 2% monthly and 5% quarterly caps, SREIT’s managers eventually had to reduce the caps. In May 2024, it cut the monthly limit to 0.33% of NAV, and in April 2026, it stopped repurchasing shares altogether. The only withdrawals allowed as of August 2026 were in the case of death or disability, or if the account had less than $5,000.
SREIT’s experience illustrates the fundamental liquidity mismatch in semiliquid real estate: Investors can ask to sell their shares, but the fund can limit how much it buys back. And when investors are willing to accept a steep discount for immediate liquidity, the consequences can be dramatic.
That was the lesson from Bluerock Private Real Estate BPRE, which took a very different route. In December 2025, fund shareholders voted to allow the fund to list as a closed-end fund to provide immediate liquidity. What they got was a more than 40% drop in share price that has persisted through August 2026.
Proceed With Caution
Direct real estate’s tax advantages and rebound in performance have money tiptoeing back into the asset class. But before following along, investors should take a close look at a fund’s liquidity terms and the manager’s record, both its performance and how it has handled investor withdrawals in the past. Starting with a small allocation may also make sense: With semiliquid funds, it’s always easier to invest than to get your money back.
With semiliquid real estate, you’re not renting. You’re buying.
