All things have small beginnings. Thirty years ago, BlackRock employed just six people. Now there are 14,000 and it manages more than $6tn of assets globally. But within that, real estate accounts for “just” $23bn (£16bn).
By comparison, one-time sibling Blackstone has $111.3bn of property in its $387bn of assets under management.
However, this is set to change and as the fund management world undergoes waves of consolidations, BlackRock has the capacity, willingness and firepower to grow both organically and through acquisitions.
The question is, if it is looking to buy in businesses – as many of its competitors have – how does it do that in a market that is late-cycle?
“’Should you expect to see growth in real estate from BlackRock?’ The answer is, in short, yes. We are absolutely committed to it,” says Marcus Sperber, managing director and global head of BlackRock’s real estate business.
“But there is this discipline dilemma at the moment. You have to be disciplined in this market – there are risks out there.
“It is about understanding the changes that are taking place. Provided you measure those risks and can manage them and innovate to face them, real estate still looks like a very good investment.”
And in terms of buying other managers? “As an organisation, we are always going to look at opportunities. That’s the nature of what we are. Are we committed to looking at something in particular? Absolutely not. If there were opportunities out there we would always look at them, but I have an excellent team here in the UK and across the globe.”
Exponential growth
Sperber joined BlackRock in 2002, when its real estate business was just $1bn.
The former shed head and regeneration specialist is more asset-focused than many in the fund management world.
After joining Inner City Enterprises in the early 1990s and working on various projects, he set up the Ashtenne Industrial Fund before moving to Merrill Lynch Investment Managers, which was subsumed by BlackRock.
Sitting in BlackRock’s London office, he’s joined by the company’s UK fund managers. Paul Tebbit is managing director and head of the £3.5bn BlackRock UK Property Fund and Geoffrey Shaw is director and portfolio manager for the £750m BlackRock UK Long Lease Property Fund.
With new capital coming into the long lease fund, they represent nearly £4.5bn of assets, and the plan is to grow both globally and in the UK alongside the rising demand from investors.
“What has become clear to the organisation is alternatives are becoming a much bigger part of investors’ portfolios, as they look more towards real estate and the alternative sector,” says Sperber.
In a recent survey of BlackRock investors, 42% said they were going to up their weight to real estate in 2018.
BlackRock has been positioning itself to become a global manager for that capital. Sperber points to the 2013 acquisition of rival manager MGPA, which had $12bn under management, and the launch of its European Value Fund in 2015, now with €700m under management.
“Right now we have core funds in certain markets, particularly the UK and US,” he says. “We will look to do something similar in Europe. You can expect to see us dominate in Europe in the coming years, equally in Asia.
“In the value-add space we have funds in Europe and in Asia, and you can expect us to do the same things in the UK and the US.”
Alternative and micro strategies
But the dilemma facing fund managers around the world is how to allocate that cash.
“At the moment, investors are starting to take more risk as they reach for a return. What is important for us is to make sure investors are very clear with us about the risk they want to take and what return they want,” says Sperber.
In the UK, Shaw and Tebbit are in charge of making sure capital is put in the right place, despite the position of the market cycle, and the wave of change effecting the UK’s occupiers.
“It is unlikely we will see these double-digit returns continuing, but you can tilt your portfolio towards the alternatives and industrials against the likes of offices and shopping centres,” says Tebbit. “That gives an angle where you still find value.”
BlackRock is already overweight against the student, medical and other alternative sectors, and Tebbit says this will continue. PRS is also going to be a part of that, but not high-risk city centre blocks: it is going for the Sigma-syle model of single-family rental housing.
“We really like the family focused, low-rise apartment or housing strategy,” Tebbit says. “We believe there is a lot of demand from families for that, and once in, they will be in for the long term. They will be much more sticky as tenants.”
He says they will be looking to buy sites with a development partner or through forward funding arrangements.
As an income fund manager, Shaw’s focus is slightly different, but perhaps indicative of where requirements for real estate funds are headed, looking less at overall returns and instead at steady income returns across markets.
“One of the benefits I have, because it’s an absolute return I am looking to deliver, we are completely unbenchmark constrained. So while Paul is making conscious bets about going overweight alternatives and industrial, for me it’s about creating that wall of income and what the best way is to it.”
On the other hand, in the increasingly crowded long income space, Shaw stresses the importance of concentrating on the tenant.
“Being able to look at it, not just as a property investor, but trying to understand the tenant credit piece and the sector they are operating in, it gives you something the property industry lacks: the ability to understand it from different angles,” he says.
“Even if it’s a strong tenant today, it could change in five years… A lot of it comes back to what is the dirt, what is the building and can you relet it.”
Easy does it
Tebbit says the team are property professionals at heart, with the credit analytics and financial mindset of BlackRock laid on top.
But expansion for the sake of expansion is not how BlackRock works: it manages a lot of money with a lot of different strategies, but it is not one of the high-risk players.
Sperber says BlackRock will continue to invest in the UK alongside Europe, the US and Asia, both in the core and value-add space, in equity and in public and private markets, but adds: “You are going to see us expanding in all of these places across the globe but you will see our focus continuing to be less on the emerging markets and more on developed markets.”
BlackRock believes liquidity, income and depth of market will be important going forwards, against higher-risk development plays.
“That’s why it is all about making sure. If you are an investor, you buy with an organisation that is not just deploying the capital but managing the capital and underwriting the political and economic risk for these assets.”
So it’s full steam ahead but also easy does it? “It’s not the be all and end all to say we want to be $100bn or $200bn. We are not necessarily looking to compete with anyone. We are looking to be better ourselves,” says Sperber.
“But we would like to be a top 10 manager in terms of AUM. Of course we would, because if you are it means you have great performance as well.”
BlackRock or Blackstone?
BlackRock started out under the umbrella of Blackstone, which provided 50% of the equity when the business was created by Larry Fink and five other partners in 1988.
Stephen Schwarzman started Blackstone three years earlier, in 1985. Its aim was to provide institutional clients with asset management services and it was originally known as Blackstone Financial Management.
By 1992, Blackstone had a 35% stake and the firm adopted the name BlackRock before it split out as BlackRock Financial Management in 1994. Fink remained with BlackRock, while Schwarzman stayed with Blackstone.
A selection of real estate funds
- BlackRock UK Property Fund: £3.5bn balanced fund with more than 200 assets, spread across all the main areas of UK real estate
- BlackRock UK Long Lease Property Fund: £750m in more than 50 assets (and £250m additional capital commitments), targeting secure and long-income assets
- BlackRock UK Strategic Alternative Income Fund: £500m hybrid fund investing in infrastructure debt, renewable energy, real estate debt, long-lease property and private credit. Net annual yield of 5%
- BlackRock US Core Property Fund: $1.8bn core fund with 31 assets in the office, industrial, retail and apartment sectors
- European Value Add fund IV: €700m European value-add fund with backing from 30 institutional investors from North and South America, Europe, Asia and Australia
- Asia Property Fund IV: $500m to invest across Asia in opportunistic assets. Previous Asia Property Fund III had raised $3.9bn
Picture: © Tom Campbell
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