Real Estate

Blackstone’s firepower faces test in tougher property market


Ken Caplan forged his reputation at Blackstone almost a decade ago by salvaging the buyout firm’s $26bn acquisition of Hilton Hotels.

The rapid restructuring of the then record buyout deal, which Blackstone had sealed in 2007 even as the first signs of the financial crisis were stirring, helped the US private equity firm skirt disaster and eventually reap a $14bn profit.

“It ended up being the largest private equity profit instead of the largest private equity bust,” said Chris Nassetta, Hilton’s chief executive.

Since then a multiyear boom in global real estate has seen the assets managed by Blackstone’s property business balloon to $154bn, with a portfolio spanning office space in India to UK railway arches. The division is closing in on Blackstone’s traditional buyout business in size, but has also come under fire for an aggressive push into the home rentals market in the US.

Now Mr Caplan, who has run the real estate division with Kathleen McCarthy since last year, has another $20.5bn to play with after the firm this week set a new record for a real estate fundraising. Mr Caplan oversees the division’s investment strategy, while Ms McCarthy has responsibility for business operations and fundraising.

However, the fresh firepower arrives at a delicate juncture for a global real estate market long accustomed to a benign backdrop. US economic growth slowed to just 2 per cent last quarter, while a prolonged boom in real estate prices has triggered a rush of money into the sector, threatening returns.

It is something that Mr Caplan, who grew up in a family of homebuilders in New Jersey, acknowledges. “The underlying fundamentals still feel good, it’s just that we’re in a more challenging investment environment in terms of prices having gone up for several years now and yields compressing,” he said.

The pressure on the real estate division, which was built by Jon Gray before he became president of Blackstone last year in a move that makes him a leading contender to replace billionaire founder Steve Schwarzman, is sharpened by challenges at other pillars of Blackstone’s business.

The top leadership at GSO Capital, which has powered the firm’s credit division, is in the process of leaving. At the same time, Blackstone’s hedge fund business has had the lowest level of inflows among its four big divisions over the past 12 months.

Although Blackstone has financial muscle few can match, its approach to the global property market is not particularly distinctive. The company has focused its efforts on areas whose appeal is driven by forces that it bets will outlast the ups and downs in the global economy.

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They include warehouses, hotels and residential properties. In June, the firm paid $18.7bn for a swath of US industrial warehouses from Singapore-based GLP, as it seeks to amass a portfolio of properties designed to benefit from the growth of ecommerce.

“Blackstone’s portfolio has avoided the more challenged parts of the real estate market, like retail, and has invested in areas that benefit from structural tailwinds such as logistics warehouses benefiting from the growth of ecommerce,” said Michael Cyprys, an analyst at Morgan Stanley.

Alongside ecommerce, the firm’s thematic real estate bets carry a familiar ring. It is betting millennials will continue to spend money on experiences such as travel, buoying the value of hotels. Meanwhile, office space in cities where tech and pharmaceutical sectors are vying for talent from top universities will be coveted. The firm paid $8bn in 2016 for BioMed Realty, which owns properties in Boston and San Francisco.

“These larger, complex situations or new themes are really resulting from the disruption and innovation and change that we’re seeing in the economy, and the impact that’s having on real estate,” said Mr Caplan, who began his career in finance at Lazard and joined Blackstone in 1997.

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While Blackstone’s investment strategy is familiar, analysts and industry experts say the size of the deals it can pull off is far from common.

“There is strength in numbers, so for Blackstone to have that much money to invest gives them an advantage that others don’t have,” said Brian Schwagerl, a clinical assistant professor at New York University’s Schack Institute of Real Estate. “Opportunities are out there right now but it is harder for people to find and take advantage.”

The approach has reaped rewards. The division’s opportunistic real estate funds were up 12.7 per cent in the 12 months to the end of the second quarter, the highest of any of Blackstone’s main investment strategies. Its core plus fund, which targets less risky property investments with lower returns, has gained 9 per cent in the same period.

“Our investors trust us to be disciplined about where to pick our spots,” said Ms McCarthy, who joined Blackstone from Goldman Sachs in 2010.

But the scale of its property empire has brought criticism and challenges. One is in a legal fight with Urbano Cairo, an Italian media magnate and protégé of former prime minister Silvio Berlusconi, over the ownership of office properties Blackstone was planning to sell for about double the €120m it paid for them in 2013.

Another is a change to New York state’s rent regulation laws that could dent the profitability of Stuyvesant Town and Peter Cooper Village, the set of rental properties in Manhattan it paid $5.3bn for in 2015. In response, the group has halted some renovations as it examines the laws’ impact on the property’s affordable housing units.

The group has also come under fire over its purchase of residential properties across the US, with critics arguing it has made it harder for first-time buyers to get on the property ladder and helped to drive out less well-off tenants by lifting rents. Earlier this year a report on housing for the UN accused Blackstone of “pushing low-income, and increasingly middle-income people from their homes”.

Blackstone remains the largest shareholder in Invitation Homes, the rental property group it set up after the financial crisis and that went public in 2017. Shares in Invitation Homes have risen about 36 per cent since the initial public offering.

Mr Caplan rejects the accusations, calling it “a myth to demystify”.

Although Blackstone ultimately turned a profit on the Hilton Hotels, the firm struck the deal shortly before the US property market began unravelling. Mr Caplan said that while it was “a tougher market,” he was not expecting a downturn anytime soon.

Signs that the global economy is slowing has already unleashed a wave of interest rate cuts from central banks, something the European Central Bank added to on Thursday.

“It’s a lower growth environment, but we’re also in a lower interest rate environment with an expectation that it is going to stay lower for longer, which is certainly very positive for real estate values,” said Mr Caplan.



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