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Blackstone to make greater overseas push

The New York-based private equity and real estate giant is shifting away from a heavy US focus and pursuing more real estate opportunities in Europe, Asia and Latin America. The firm also held a final close for its latest real estate debt fund.

The Blackstone Group shows no signs of slowing down in real estate, but it is focusing more of its attention outside of the world’s largest property market.

“Investment activity continues at a tremendous pace, as we’ve seen over the last 18 months,” said Blackstone president Tony James during a call with reporters today. During the second quarter, the firm invested or committed some $4.2 billion in real estate, bringing the total level of deployment to $5.6 billion during the first half of this year alone.

In real estate, Blackstone has been “very, very heavily US-focused” over the past couple of years, because of the size of the property market in the country. However, in terms of new investments, James said more of the activity was shifting to Europe, given the continued distress in the region, as well as Asia and emerging markets due to rising liquidity issues. 

“For a while, we thought Europe would be really interesting, but frankly there just wasn’t that much coming on the market,” said James, who noted the region “broke open” a year or two later than anticipated. “A lot of the new flow is coming out of Europe. You won’t see that in our closings or announced investments for a while, I’m talking about what’s coming in the top of the funnel.” 

Meanwhile, Asia – and emerging markets overall – “was quite quiet for a while,” James said. However, in the face of tightening credit in China, political instability in India and currency devaluations elsewhere, liquidity has become much more challenging. “All of the sudden, owners and developers of real estate in emerging markets don’t have the access to capital that they did a couple of years ago.”

James also said he sees more opportunities emerging in Latin America. “We think that’s actually a very interesting region and a significant growth area for our real estate business.” In addition to buying a majority stake in Brazilian homebuilder Gafisa’s Alphaville unit in June, the asset manager has executed a Brazilian mall transaction on behalf of its Tactical Opportunities Fund and also acquired real estate assets from a large Brazilian bank. 

All that said, James stressed that the majority of Blackstone’s real estate investments will continue to come out of the US because of the scale of that market. But with prices rising, property values coming closer to replacement costs and greater liquidity in the market, the US “won’t be quite as high a percentage of activity,” he added.

Meanwhile, on the fundraising front, Blackstone held a final close on $3.5 billion in equity this week for its latest commercial real estate debt fund, Blackstone Real Estate Debt Strategies (BREDS) II. The closing comes just three months after raising $2 billion in the first close for that vehicle, which was launched last fall. Earlier this quarter, the firm also held a first close of $1.5 billion on its first Asia property fund, Blackstone Real Estate Partners (BREP) Asia, and now is targeting up to $4 billion in commitments for that vehicle, which originally had an equity goal of $3.5 billion.

Additionally, James said that Blackstone plans to exit its third-largest real estate investment, the $9.4 billion acquisition of Centro Properties Group US. The firm filed today for an initial public offering for Brixmor Property Group, as the company is now known. Blackstone purchased the US assets of the Australian property company on behalf of its sixth global real estate fund, BREP VI, in 2011. 

Blackstone’s real estate equity portfolio appreciated 5.7 percent during the second quarter, and a total of 19 percent during the past 12 months, as a result of increases in occupancies and rental rates in its properties. “As long as new construction stays at these historically low levels, we expect these trends of growing occupancies and rents to continue,” James said. Realizations in real estate have maintained an accelerated pace, with a total of $2.1 billion for the quarter and an average multiple on original capital of greater than 2x. 

Economic net income (ENI) in real estate rose 88 percent to $371 million during the second quarter fueled by strong fund performance, while assets under management (AUM) in the segment grew to $63.9 billion, up 27 percent from $50.2 billion during the same period one year ago. Overall firm ENI more than tripled to $703 million during the quarter, up from $212 million in the second quarter of 2012, while total AUM hit a new record of $230 billion, up 21 percent year-over-year.