Blackstone’s Asian mall deal stands apart

Why Blackstone’s latest Asian retail investments are not to be considered among its high-conviction thematic bets.

Blackstone draws attention wherever it invests, and its latest Asian retail acquisitions are no exception.

Retail real estate’s grapples with fundamental structural shifts driven by the e-commerce boom have left no corner of the globe unscathed, a fact the New York sector powerhouse has been vocal about in the past.

And so, understandably, eyebrows were raised when, last week, the New York-based firm agreed to acquire 50 percent of US retail property specialist Taubman’s stake in a portfolio of three newly-built and fully occupied shopping centers in Asia – two in China and one in South Korea. The $480 million transaction is understood to be Blackstone’s largest to-date investment from its debut Asian open-end core-plus fund.

But the outlay defies the region’s headline retail real estate data. Total retail investment in the region dropped from $29.5 billion in 2017 to $19.7 billion last year, according to property services firm CBRE’s estimates.

And yet Blackstone, has been steadily buying up Asian retail in recent months. Beyond the Taubman deal, in December, the firm was part of an investor consortium to acquire a 12-shopping center portfolio from Hong Kong’s Link REIT for HK$12 billion ($1.5 billion; €1.3 billion). The same month, it bought an office complex and the adjoining VivoCity shopping mall in Shanghai, reportedly for $1.2 billion. Apart from mainland China and Hong Kong, the firm has also been bolstering its retail portfolio in India.

Is this string of deals a sign of Blackstone making one of its high-scale conviction bets on Asian retail? The firm is known for making massive thematic pushes in particular markets in the belief the supporting demographics will last way beyond the lifelines of its vehicles, such as office investments in India.

PERE understands the answer is no. As one executive involved in the Blackstone-Taubman explained, Blackstone does believe there is still a place for a well-managed and executed retail strategy in Asia – physical retail that offers either convenience or experience to customers – given the emerging middle class in developing economies and the high levels of growth in consumption and urbanization. In China, for instance, despite the ongoing trade dispute with the US, consumption is still expected to contribute 65 percent of economic growth this year, with an estimated 9 percent increase in total retail sales of consumer goods, according to the state-run news agency Xinhua.

However, all these retail investments in Asia are not believed to be part of an overarching investment theme. Rather, in Blackstone’s view, these investments should all be analyzed on a nuanced, case-by-case basis instead of a thematic lens.

That nuance sees them executed via a variety of structures. The Link REIT and VivoCity investments, for instance, were made from Blackstone’s opportunistic fund, and hence cater to a different investor base and risk-return mandate than the core-plus investment in Taubman’s assets. Also, Blackstone is in a joint venture arrangement with the Taubman assets, while the Shanghai acquisition, which also includes an office complex, is a single-asset purchase.

Nevertheless, as with any sector bell weather, Blackstone’s continued investments in Asian retail could compel industry observers to rethink their bearishness toward the sector – in Asia at the very least.

While disruptions caused by the growth of e-commerce are a reality across many global markets, can these challenges be offset by the demographic advantage seen in key Asian markets? The ongoing deleveraging process in China, and the resulting market dislocation, for instance, is creating value-add and opportunistic investment opportunities in many sectors, including retail. Some Chinese retail assets are understood to be currently trading at as much as a 15-25 percent discount to replacement costs.

The takeaway: Blackstone’s recent activity indicates there may be retail investments to pursue in Asia, but it is best to not think of the sector in the region as a large-scale opportunity.

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