Blackstone likes to make an impact. One of the world’s biggest real estate investors has done it on home turf in the US, where it is now also the largest owner of single-family homes. It did it in Europe, dominating during the downturn, and has one of the most coveted portfolios in the region, including the second-biggest collection of logistics assets on the continent. And now, from the dizzying heights of the 1,352ft Two International Finance Center in Hong Kong − the tower that Batman famously leapt from in The Dark Knight − it is gearing up to do the same in Asia Pacific.
It is probably not quite the final frontier for Blackstone − there is still a lot of territory in South America where it is looking to make its mark − but right now Asia is arguably its biggest growth opportunity.
It closed its first Asia-specific fund at $5bn (£3.5bn) at the end of 2014, smashing its initial target of $3.5bn. It is pairing this equity with elements of the $15.8bn global fund it closed in October 2015, which is the world’s largest private real estate fund. With investors into its funds generally upping their allocations to Asia, the US private equity colossus is in prime position to catch the wave.
Leading the charge is senior managing director and head of real estate in Asia, Christopher Heady. He moved to the company’s regional headquarters in Hong Kong
in 2007 after working for Blackstone in New York and London since 2000, having joined from Morgan Stanley. Here he reveals how Blackstone is making its mark in one of the most diverse, complex and sprawling regions in the world.
Cultural differences
Just as it was in Europe, Heady says Blackstone was lucky and fortunate to have made minimal investments in Asia before the global financial crisis. As a result it started off with a large pool of cash to invest from its global fund at a time when the market was weak.
But unlike the US and Europe, where large businesses can be relatively closely controlled from New York and London, the huge variety of cultures and markets throughout Asia Pacific means the firm cannot simply operate out of Hong Kong. It has set up six offices made up of 70 people spread out across Hong Kong, Beijing, Shanghai, Tokyo, Sydney and Singapore.
“Any market in Asia where we’re going to be investing sizeably we want to have people on the ground that are local real estate experts, as well as people who are familiar with the Blackstone approach to investing,” says Heady. “If you take someone from India, and make them do business in Japan, it’s almost impossible practically. It does present some challenges at times.
“We do a tremendous amount of travel but we try to run a fairly synchronised operation in terms of the communication models. Our Monday morning meetings involve all six offices, a lot of video conferencing and a lot of co-ordination. We have a team with a fairly high number of people who have been with the company for a long time, and that helps a lot because it makes the process and consistency of approach similar between countries.”
Variety across the continent means that Blackstone is veering away from “buying the market” in any country. Instead of making broad macro calls, it is being more forensic. As in other regions, as well as buying single assets and undertaking its cult-like “buy it, fix it, sell it” mantra, it buys into debt portfolios, restructures companies, takes private listed entities and creates platform businesses.
Investor demand
Blackstone invests in Asia using all three of its central strategies – opportunistic, core-plus and debt. It has some investments in Hong Kong and Singapore but it is focusing predominantly on the region’s largest economies of Japan, India, China and Australia.
“If I were characterising the difference between regions I would say that Europe is obviously a very diverse place as well. But it’s emerging from a financial crisis at varying speeds and is all in a process of healing,” says Heady.
“In Asia you’ve got China which is slowing, India which is accelerating, Japan that’s in a period of stimulation and Australia that has part of its economy linked to the mining sector that is really suffering and other parts of its economy doing really well. So it’s probably a little more diversified in some senses and so we have to be very focused on specific areas.”
And this push into new territories has, in part, been driven by demand from investors that feel underweight in Asia Pacific. “Global institutional investors have just become more aware of the importance of large Asian economies in the global economy over the last 10 years,” says Heady. “And when they look inside their portfolios they are broadly underexposed to the amount of change and growth that’s happening in this part of the world.
“So while there will be volatility year over year, there is a clear trend that your traditional Western investors are probably under-allocated to Asia. And, in a sense, Asian investors are probably under-allocated and will want to diversify into the Western economies. I think that trend is just playing out.”
China strategy
Looking at the markets within the region more specifically, the story of 2015 and the start of this year has been the slowdown in the Chinese economy.
Blackstone is largely unruffled by the relative unrest, which may also mean a slight cooling in construction costs for its development projects.
“You can’t ignore the fact that the economy is slowing, but I think it just makes you even more selective,” shrugs Heady. “Even if China is slowing down it’s still the second largest economy in the world by quite some distance. And will continue to be. It’s still growing, and in absolute terms it’s a huge, huge economy.”
He adds: “It is a two-speed economy to some degree because you’ve got industrial, manufacturing and infrastructure slowing down and exports being hit pretty hard. But then you have consumption, the service and finance sectors growing.”
In terms of a strategy for moving into the Chinese market specifically, Blackstone has made two major plays. Most recently it formed a joint venture with China Vanke in mid-2015, known internally as VX, to buy logistics assets, starting with projects in Guiyang and Wuhan totalling around 2m sq ft.
“The logistics sector is one of the areas of the real estate market in China we find most attractive right now,” says Heady. “Because you get a situation where there’s a limited amount of land availability and a large amount of growth in tenant demand, mainly driven by e-commerce and retail sales as the country continues to shift more towards consumption-oriented growth.
“That benefits the tenants that occupy a lot of distribution warehouses and the percentage of the market that are modern warehouses is very small.”
This trend ties in with Blackstone’s other major Chinese investment. In 2013, it bought a 40% stake in shopping centre owner SCP for $400m. It is now targeting the emerging middle class through the development of mid-market malls.
“The [city] centres tend to have hypermarkets and cinemas and then fashion tenants,” says Heady. “We’re going to continue to grow that platform. We feel like it’s really well positioned to address this emerging middle class. And the shift in consumption patterns will hopefully increase in the service sector.”
IPO potential
Blackstone has also been active in Japan, particularly in the private rented residential sector.
In 2014 it spent $1.6bn acquiring more than 10,000 flats across 200 buildings in Tokyo, Osaka, Nagoya and Fukuko from GE Capital. It followed this up in November 2015 when it agreed a $450m deal to buy Japan Residential Investment Company, a Guernsey-based trust with 57 assets comprising nearly 2,700 flats.
“We’ve been attracted to that sector because of the stability of the cash flows and we tend to find that through increased focus on asset management, we can reduce some of the operating expenditures at the asset level,” says Heady. “And in private sales as opposed to large portfolio sales, there tends to be a wholesale to retail discount. We’re going to do more there. We really like it.”
In India, where the market is still relatively opaque, Blackstone made its first investment in 2012, forming a jv with local partner and office park developer Embassy. Its portfolio now totals 22m sq ft across the country, with a concentration in the IT hub of Bangalore.
“We’ve been primarily focused on the office sector and continue to have a very positive outlook on that space,” says Heady. “In the past 12 months or so we’ve signed 8m sq ft of new leases in India in our portfolio, so there has been tremendous demand.
“At the same time as you have had this tenant growth, you haven’t had the amount of new construction that you had previously and so what’s happening in the market is that the very large office landlords are taking greater market share because they have access to capital and have built higher quality real estate projects.”
It has been mooted that the company, with a $2bn portfolio, could work towards an IPO and form part of India’s embryonic REIT regime.
“We welcome the legislation and development of the REIT industry in India, but there are still limitations to the implementation of REITs, primarily around tax reform. The advent of REITs in India would be a bonus as an additional source of institutional capital but it’s not as if we have gone out to create REITs specifically,” Heady says.
Working Down Under
In Australia Blackstone has invested more than $1bn in equity since it entered the market in 2011, buying the distressed Valad Property Group for €149m (£113.1m). It has since divested the majority of the Australian portfolio and rebranded the operation Down Under as 151 Property. It sold the European fund management business to Cromwell in early 2015. (Read our interview with Cromwell boss Paul Weightman in EG, 23 January).
In August it bought three shopping centres for A$630m (£311.4m) across New South Wales and Queensland from Westfield spin-off Scentre Group and in December it bought a 75% stake in Brookfield’s 850,000 sq ft Southern Cross Towers in Melbourne for A$680m.
At the end of 2015 it recruited Chris Tynan, head of Morgan Stanley Real Estate Investing for Australia, to head its operations in the country. It was initially part of the feeding frenzy picking over Morgan Stanley’s listed property company and fund manager, Investa, but the main rump of the business, its A$2.5bn office portfolio, was ultimately bought by major Blackstone investor and partner, CIC.
“The non-mining sectors are actually holding up okay so cities such as Melbourne and Sydney, which really are less geared towards the resource sectors, actually are doing fairly well.”
Blackstone may not yet have the same dominance in Asia Pacific as it does in the US and Europe, but its presence is getting stronger by the day and as the world’s largest owner of real estate, it is certainly one being tracked closely by its peers.
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