Last month, Justin Brown announced that he was leaving his role as BlackRock’s head of real estate for Europe, the Middle East and Africa after 10 years at the investment giant. In a social media post he admitted to feeling “excited and a little nervous” at the prospect of travelling a new road. But he said the pandemic had “highlighted that I want to explore a change in direction while I have the energy”.
Brown could be forgiven for feeling a little drained. When he joined BlackRock in 2012, he had already been a portfolio manager for the UBS Triton Property Fund and, earlier, a director at LaSalle Investment Management. He joined BlackRock to run its UK Property Fund and, in 2017, stepped up to run the European real estate business. His time at the company has seen him face the UK’s Brexit vote, the Covid-19 pandemic and now the war in Ukraine.
But when he speaks with EG a few days after announcing his resignation and reflects on what he might do differently if he had his decade at BlackRock again, he only wishes he’d shouted a bit louder.
“Real estate in the context of a big asset management firm is always going to be a smaller player,” he says. His goal, he adds, would be “to be a bigger voice, punching above your weight from an internal recognition perspective, making sure that real estate is on the tip of the tongue not for real estate professionals, but for the other people who are talking to clients about a myriad of different investment classes”. In short, “make sure that they have got the message and that they are able to convey that message.”
Core and beyond
BlackRock’s assets under management stood at $9.57tn at the end of the first quarter of 2022, of which just over $60bn was in private and public real estate and infrastructure equity and debt in the US, Europe and Asia.
When Brown arrived from UBS, he says, the European business was far smaller: “When I joined the real estate team in Europe, it really only was the UK fund, which I was running.”
But a transformation followed shortly, with BlackRock acquiring private equity real estate fund MGPA in 2013. That brought three things to the business, according to Brown. First, an Asian capability that BlackRock didn’t have in real estate. Second, value-add expertise and European offices, including in Copenhagen, Frankfurt, Luxembourg and Paris – BlackRock had only operated out of London until then. Third, opportunities. In 2015, the company launched a pan-European value add fund and, a couple of years later, a successor fund, double the size of the first, as well as a core fund in 2018.
“We went from being just a UK-only business in real estate to a pan-European business,” Brown says. “We went from being a core-only business to being core and value add as well. It’s now a far more rounded and diversified business.”
Brown pointed to BlackRock’s German office strategy as a highlight of his time at the company. BlackRock bought in Munich, Frankfurt, Hamburg and Berlin. All of those investments have been bought, leased and sold, with its Berlin assets posting an IRR of 160%.
However, there are some things Brown wishes he could have done differently, especially in the student accommodation market, where BlackRock was very selective in its purchases.
“We took our time rather than just buying the market,” Brown says. “And I think the market caught up with us, which meant that towards the tail end of that strategy, we were in a much more competitive market environment. And I wish we’d been a bit more bold and just bought the market rather than wait for the very best deal, because it was a very strong play for us.”
He adds: “I think we’ve been very cautious and had a very risk-based approach which probably held us back from being more aggressive in that market. But on the flip side, that risk-based approach also is obviously very good at protecting capital. If the market’s been more difficult and if we’ve got it wrong, at least we have the best assets in that sector.”
Brown says he was always interested in the PBSA market, treating it as an alternative to the residential sector, but without taking the development risk.
“There were completed buildings that you could go along and buy. We thought that was a reasonably good proxy for resi and that was a sector we began investing in towards the back end of 2013. It had yields of late 6%, early 7% back then because it was a sector that not a lot of institutions were covering,” he says.
Difficult waters
Brown notes that the market has changed significantly over the past few years, and it’s now a “pretty confusing” time for real estate. Divergence of performance between sectors has accelerated, with retail and leisure at the bottom and industrial hitting the top.
“With the recovery from Covid, you would naturally think that real estate would be the beneficiary of that,” Brown says. “I think the difficult waters to navigate lie in the fact that yields have compressed so low over a number of years because of where interest rates have gone. Capital has flowed into real estate because it has been searching for yield that it just couldn’t find in alternative sectors, like fixed income in particular, government bonds, where you were getting a negative return on your equity. That meant that real estate was a real big beneficiary of that.
“With interest rates in Europe moving out, that suggests there needs to be some caution around capital flows… It’s an interesting juncture… There’ll be some difficult moments, especially if interest rates start moving rapidly and that ultimately spurs investors to reconsider whether they can get an income return from another sector and therefore take it out of real estate for that sector, whether that’s fixed income or another. That could be the catalyst for a little bit of disruption.”
Brown has also warned that investors need to be thinking about the capital base of funds. Defined benefit funds are reaching maturity, de-risking and selling out of real estate, he says, and “replacing that capital with new capital is an ongoing challenge”.
Brown adds: “We really need to, as an industry, be thinking about what makes real estate an attractive asset class. And for me that’s partly income, but it’s partly taking a very long-term view around investment.
“A big mistake would be to think that we can just simply replace defined benefit with any type of capital, because some types of capital are much more short term in their thinking, and they won’t work for the long haul.”
People person
Having run BlackRock’s EMEA real estate business for the past five years, Brown says it is now “the right time” for a change. He believes the Covid pandemic has had a distinct effect on business leaders, encouraging them to think on a far more intimate level about individuals in their team, what they need and how this can be delivered. Brown says it has become “quite emotionally and therefore physically draining”.
“I went away over Christmas in 2021 and said to myself, ‘I’m going to sit down and really think about what I want to do’,” he says. “And over that Christmas, I came to the realisation that five years was a good stint as head and maybe I wanted to do something else. It wasn’t just simply going and looking for another job, but it was taking some time to think about what’s next for me.”
That could see Brown follow his interest in politics. “Growing up, I actually thought I would be a politician,” he says, although he adds that the intrusion into politicians’ lives is something he’s not “terribly keen about”.
He also hopes to study, perhaps history, and will use non-executive directorships to keep a foot in the real estate market, along with a small investment company he runs with friends.
And there are takeaways that Brown is keen to take on his new adventure. But tellingly, they’re around people more than property.
“We don’t trade real estate on screens,” he says. You’ve got to be part-psychologist, have contacts in the market and get along with people. If you don’t get along with people, you might not be buying that building because the people on the other side of that trade don’t want to trade with people they feel aren’t going to live up to what they’ve committed to do.”
Brown adds: “Interpersonal relationships are what’s driven the real estate business forever. For me, that’s 25 years of those interpersonal relationships, understanding how to behave with counterparts and understanding what potentially motivates people… Real estate has been and probably always will be a very personal business.”
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