For asset management behemoth BlackRock, the dislocation of the capital markets represents a prime area of opportunistic investment for its real estate business, as the industry braces for a wave of commercial real estate debt maturities over the next two years.
“Real estate debt is a bit of a bipolar investment opportunity,” said Jack Chandler, head of global real estate at BlackRock, at a media roundtable held by the firm’s alternative investments group yesterday at The Pierre Hotel in New York. “In 2007, it was a terrible idea. In 2012, we think it’s a great idea because of your basis in that asset.”
In its latest move in this strategy, BlackRock is considering launching a senior real estate debt business in Europe, which would focus on half a dozen markets in the region and help to line up capital for non-trophy assets. “It’ll be a terrific opportunity for us for the next half decade,” said Chandler, who was head of LaSalle Investment Management's Asia real estate business before joining BlackRock last year. He declined to provide further details on the timing of the launch, but said that the firm recently made a couple of hires who could potentially work on the platform. European borrowers typically want to avoid dealing with banks and would view BlackRock as an alternative source of funds, Chandler said during a conversation with reporters following the roundtable. Senior debt deals would be “bilateral transactions,” he added, noting that there was no European version of the Resolution Trust Corporation, the government-owned entity that liquidated the real estate-related assets of hundreds of US savings and loan associations during the 1990s in the aftermath of the savings and loan crisis of the 1980s. Until now, BlackRock has primarily been focused on high-yield mezzanine lending, which Chandler calls “one of the most interesting ideas.” The firm, which currently has more than $13 billion of real estate assets under management, has provided about $2 billion of mezzanine debt in Europe in the last decade, with such investments typically earning 8 percent to 12 percent returns on loan-to-value ratios of 65 percent to 75 percent. More than $1 trillion of commercial real estate mortgages are scheduled to come due between 2012 and 2014, followed by a wall of CMBS maturities in 2015 to 2017, according to a presentation made by Chandler during the roundtable. Meanwhile, a funding gap remains as banks continue to be conservative on lending because of previous excesses and new regulatory restrictions, and CMBS issuance is projected to be $35 billion in 2012, just a fraction of its 2007 volume of $230 billion.
In the US, BlackRock has been actively investing in distressed condominium projects and bankrupt land, as well as developing apartments in major urban infill markets such as Los Angeles, San Francisco, Seattle and New York. “It’s a terrific time to inject capital and recapitalise assets,” Chandler said.
With the view that the housing market generally has bottomed out, the investment manager additionally has begun acquiring distressed single-family homes to be converted to rentals, with a five- to seven-year exit strategy. “We think it’s going to be a very slow recovery, but it will be a high-yielding opportunity that will give investors exposure to the national housing stock,” Chandler said.
As an alternative asset class, real estate historically has performed well in various macroeconomic conditions, Chandler noted in his presentation. “Real estate’s income component gives it a good head-start as far as other asset classes,” he said. “It’s really earned its place in the investment world, sort of halfway between stocks and bonds.”
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