Blackstone’s property ambitions | FT Alphaville

Blackstone’s property ambitions

Blackstone is on a roll. Having just reported strong Q2 results – featuring a 13 per cent annual increase in income and news that it raised $13.5bn in the quarter for its new buy-out fund, the biggest such fund since the financial crisis – it is now eyeing property investments in hitherto unchartered territory.

As Bloomberg reported on Thursday, following up on an initial report in Japan’s Nikkei newspaper, Blackstone is in talks with Morgan Stanley about buying its Japanese real estate assets assets — a deal that would mark its first property investment in the country.

Blackstone expects to complete a deal for the Japan property assets with a face value of Y100bn ($1.16bn) next week, according to Bloomberg, citing a person familiar with the deal. What’s more, the US buy-out group may offer less than 50 per cent of the face value of the portfolio, which consists of 11 non-recourse loans with about 30 office buildings mainly located in greater Tokyo, according to the report.

It sounds promising. But views about property investment in Asia as a whole, and Japan in particular, are at best, mixed, and at worst, downright pessimistic.

Morgan Stanley, for one – once one of the most aggressive investors in real estate in the 2005-07 boom – is considering a significant restructuring of its property investment strategy that would entail selling off substantial parts of its global property investment portfolio.

According to research firm Real Capital Analytics, cited in a Wall Street Journal report this week, Morgan Stanley bought at least $53bn of property and sold only $14bn worth from 2005 to 2007.

The US bank has such a presence in the property investment market that any major shift in its strategy would affect sentiment in the sector.

Now, however, with tougher US financial regulation of banks and their investments looming, real estate doesn’t look like such a fail-safe strategy for a bank.

Amid a property bear market, though, it’s perhaps not the ideal time to sell property assets. But as one Morgan Stanley executive told FT Alphaville, “the feeling is, it’s basically time to get out of this game before we’re forced to”.

At the heart of Morgan Stanley’s deliberations is a group of property funds known as Msref. According to the Journal, one option on Morgan Stanley’s table is reducing its own capital in the funds, while another could be to sell them. The Journal’s sources, however, emphasised that planning is in the early stages and no decisions have been made. As the Journal noted:

Msref has long been considered among the most sophisticated of Wall Street real-estate investors. Its funds, with about $46 billion in assets, hold investments including a luxury resort in southern China, the European Central Bank’s Frankfurt headquarters and a stake in one of Australia’s biggest office landlords.

Now, however, some of the bank’s deals are “coming back to haunt the firm as property values plunge, rent rolls erode and financing remains scarce”, added the Journal.

So why would Blackstone want to get involved?

Primarily because so far, it has done quite well. According to its earnings report on Thursday, the value of Blackstone’s real estate portfolio swung to a gain in value of 17 per cent in the second-quarter, against a loss in value of 20 per cent a year ago, while revenues totalled $208m, compared with $19m a year ago.

And just like rival buy-out firms including KKR, TPG, BlackRock and Brookfield Asset Management, it is perfectly positioned to scoop up the bargains from banks such as Morgan Stanley that want to exit the sector.

In Blackstone’s case, the argument is even more compelling as it has just acquired an ideal regional platform – following a recent deal earlier this month to take over the the management of a $2.7bn portfolio of Asian real estate investments from Bank of America Merrill Lynch.

Finally, as the Journal noted, owning property funds such as Msref could allow buy-out firms that haven’t had a real-estate-focused business to “further diversify away from their core expertise of leveraged buyouts to become broader-based asset managers”.

Interestingly, prices for Tokyo office buildings have plunged by as much as 50 per cent from their 2007 peak, according to an estimate by CB Richard Ellis Group’s Japan subsidiary, added Bloomberg. But, as one analyst told the news agency: Blackstone’s first purchase in the country, after opening a Tokyo operation three years ago, may suggest prices are set to climb.

Related links:
Worst is over for commercial property – FT
Sumitomo targets Y100bn for property fund – FT