Having just raised the largest global property fund ever, Blackstone is now working towards a first close of its new European investment vehicle. James Seppala, head of Europe real estate, and Nadeem Meghji, head of real estate Americas, discuss the firm's strategy with PropertyEU.
Even for the biggest and most seasoned of asset managers, raising a $30.4 bn (€28 bn) fund is in itself a colossal feat and a huge vote of confidence from its investors.
The achievement by Blackstone in April marks not only a milestone for the US asset management giant itself, but indeed a world record. It also means the time has come for the firm to roll up its sleeves and start investing the massive funds accumulated by Blackstone Real Estate Partners X (BREP X), its latest global vehicle.
In Europe, Blackstone is also in fundraising mode: here, the firm expects to secure another $10 bn of equity for its latest European fund, Blackstone Real Estate Partners Europe VII (BREP Europe VII), with a first close understood to be in the works for the second half of the year.
This immense war chest has become available at one of the most exciting times for capital deployment ever, says James Seppala, head of European real estate at Blackstone.
‘Europe at the moment is providing compelling investment opportunities and we anticipate that will remain the case for some time,’ Seppala tells PropertyEU in an interview. ‘In fact, Europe is the most active area for capital deployment on a global basis at the moment,’ he adds.
The fundraising efforts coincide with the publication of PropertyEU’s annual Top100 Dealmakers ranking which puts Blackstone in the top spot with €21.2 bn of transactions in Europe over 2022. AXA IM Alts, the number two in the ranking, chalked up €9.3 bn of deals, with Brookfield Asset Management following in third place at nearly €8 bn.
Seppala oversees the European investments made by Blackstone Real Estate Partners X (BREP X), Blackstone’s latest global property fund and the largest real estate investment vehicle ever launched. The vehicle, which secured $30.4 bn of equity commitments in just a few months and reached final closing in April, is run by Nadeem Meghji, head of real estate Americas at Blackstone, based in New York.
Both Seppala and Meghji have been with the firm for over a decade and speak very highly of it. ‘I applied to Blackstone back in 2007 because I had the impression - reading about the firm’s investments - that it was always two steps ahead,’ Meghji says.
The big divide
The business has evolved radically over the past 15 years, according to Meghji. ‘Today, we are seeing incredible dispersion across asset classes, but at the time I joined, most asset classes within real estate were highly correlated,’ he points out.
Real estate sectors move in cycles and investors could produce attractive returns in most sectors if the timing was right. ‘What we have seen happen in the sector the past few years is a greater bifurcation of performance across asset classes and therefore sector selection has never been more critical. I see this as one of the biggest changes in the investment environment and the real estate business during my time at Blackstone,’ Meghji explains.
The US industrial market – the biggest sector for Blackstone Real Estate – is showing double-digit rental growth and vacancy rates are as low as 3% while occupancy levels in the US office sector keep falling. ‘Fundamentals in logistics are incredibly strong. Logistics supply, which is already insufficient to keep up with growing demand, is starting to decline due to the volatility in the capital markets. These fundamentals are in contrast to US traditional office, which faces unprecedented challenges, with record high vacancy north of 20% and rent pressure,’ says Meghji.
Blackstone Real Estate’s view is that technology and e-commerce are causing this big divide as the single largest driver of rental growth in today’s times. Anticipating changing macrotrends, Blackstone has thus been shifting its portfolio away from assets facing headwinds such as traditional office and malls and is now approximately 80% concentrated in logistics, rental housing, hospitality, lab office and data centres. ‘We are high conviction investors,’ Seppala comments. ‘We spend a lot of time identifying and gaining conviction in investment themes which we think will do well over the next five to 10 years and then we try to align our portfolio with those themes.’
Identifying new trends early and understanding how they will play out in the real estate sector is crucial, adds Meghji. ‘We saw in 2015 that global R&D in the biotech industry was accelerating, and we asked ourselves how we could express this view in real estate; so we privatised BioMed Realty Trust (today one of the largest private providers of real estate solutions to the life sciences industry).
‘When we had a view on e-commerce penetration rising, we bought and we are still buying warehouse assets in last mile locations. When we spotted a trend about content creation, we acquired some of the highest quality studio assets in Hollywood or when we spotted a trend about growth in the cloud and AI, we asked ourselves how we could express this trend in real estate and we bought QTS Realty Trust, one of the fastest growing data centre companies in the world.’
BREP X raised over $30 bn in just a few months, setting a new record for a property fund and taking a big leap from its predecessor, BREP IX, which secured $21 bn in September 2019. ‘This achievement with our global fund truly speaks to the amazing business and team we have globally, as well as the performance we have realised for our investors over the past 30 years,’ comments Seppala.
The European fund is, however, expected to take longer to close as a result of current market volatility. The flip side of the coin is that in a difficult environment, opportunities abound and buyers are scarce. ‘The financing environment is challenging in Europe but capital constraints benefit us as an investor in the fortunate position of having scale capital committed to us. We have navigated these periods before and we can move quickly and close transactions entirely with equity and arrange financing later,’ Seppala comments.
Also, the fundamentals of what Blackstone calls ‘its highest conviction sectors’ have maintained their allure. In contrast to previous periods of dislocation including the global financial crisis, supply pipelines have remained limited and should help to support the market. Says Seppala: ‘We have come to a period of dislocation which is different from previous downturns. Generally during these periods, real estate fundamentals were weakened further because in the run-up to the correction there would be an abundance of new developments, a lot of cranes, and these assets would be delivered into the market during a period of relative economic weakness.
'In today’s situation, supply levels have remained limited, largely because of the pandemic, and now with what has happened to labour costs and financing costs, supply levels are reducing by 50% or more. So, the fundamentals in the sectors where we have our highest conviction are actually quite supportive. We believe that these times of market dislocation and volatility could lead to the best vintages and generate very attractive opportunities for our investors.’
Any investments made in Europe will be shared by the global fund, which largely focuses on North America but also takes a minority stake in any investments Blackstone is making in European real estate, or in Asia. ‘In this way the strategy keeps an allocation to our entire international business,’ adds Seppala. Although BREP X does not have a set allocation to Europe, the group anticipates that around 20% of the global fund may be invested in this region. ‘Our investment volumes generally track GDP, so we tend to focus on the most liquid markets in Europe,’ he notes.
This means Western Europe will be a major target and particularly countries such as the UK, France and Germany which tend to attract 60% of Blackstone’s capital, or up to 90% if the Nordics, the Netherlands and Southern Europe are included.
High conviction sectors
Blackstone has bet big on European urban logistics over the past few years, starting in 2016 with Mileway’s first investment, and building it into a 14.2 million m2 pan-European last-mile logistics landlord. More recently, the US giant also announced a €578 mln takeover of UK real estate investment trust Industrials REIT.
Buying into operating companies is a preferred investment route for the group, comments Seppala. ‘We have a broad mandate from our investors, we can buy real estate, loans, securities, listed securities, and so we have a lot of flexibility for our funds to invest where we see the best opportunities. There is more to buying into operating companies than just extraordinary assets, you can align yourself with a fantastic management and use the platform to grow the business, this is when really good things happen.’
In the living sector, the group is mostly active through the Sage Homes and St Modwen platforms, which were acquired in 2018 and 2021 respectively. Remarks Seppala: ‘We have focused on rental housing and affordable housing for many years and we will continue to fund and grow these businesses going forward.’
Sage Homes in particular recently announced it is increasing its delivery target to 30,000 affordable homes by 2030. ‘I expect rental housing will continue to see income growth because of a huge mismatch between supply and demand,’ comments Seppala.
In the US, too, the market cannot keep up with demand with a reported deficit of four million housing units, adds Meghji. ‘In the past several months we have seen housing permits decline by over 20%. This applies not only to rental housing but also to student accommodation.’
Last summer, the US giant acquired American Campus Communities, Inc, the largest developer, owner and manager of student housing in the US, for a total of $12.8 bn. Says Meghji: ‘We are now growing our student housing platform in some of the largest college towns in the US. This is supported by fundamentals; new supply in top universities has declined by approximately 50% and at the same time we are seeing increasing demand for student rooms.
‘We also noticed 18 months ago that rental demand in traditional apartment assets was higher than what we were seeing in student housing. We thought that disconnect didn’t entirely make sense and that student housing was lagging as we emerged from the pandemic. This is why student accommodation represents one of the most recent themes we entered with conviction.’
Although Blackstone Real Estate invested as much as €48 bn globally last year, it may accelerate investment activity further this year, as Meghji says. ‘I expect we are going to remain in an environment with slightly higher volatility for some time. In a moment like this there might be misperception about real estate and the attractiveness of the sector. It is in moments like this that we do our best work and some of our best investing. Our objective is to take a long term view based on our data and invest with conviction.’
The full ranking of PropertyEU's Top100 Dealmakers in Europe over 2022 appears in the July/August magazine