After announcing the launches of its newest real estate funds last fall, The Blackstone Group already has held or will soon hold first closes for those vehicles. The New York-based private equity and real estate giant has raised $2 billion in the first close last week for Blackstone Real Estate Debt Strategies (BREDS) II and is expected to hit the $3 billion hard cap for the fund. In addition, Blackstone is anticipating an initial closing of more than $1 billion for its first Asia-focused fund, Blackstone Real Estate Partners (BREP) Asia, this quarter.
“We’ve had a very enthusiastic response to both strategies,” said Blackstone president Hamilton ‘Tony’ James in a media call with reporters today. The pace of fundraising “has been quicker than we thought, for sure.”
Blackstone’s real estate debt strategies business has generated consistently strong returns of approximately 12 percent, net of fees and carry, and has benefited from the perception of debt investments as lower risk as a result of being secured by hard assets, James explained. “They typically go in with lots of value cushion when they make a loan on a piece of real estate,” he said of the business. “So I think people are saying, ‘Low risk, good return, long track record, tapping into the huge pool of knowledge that Blackstone has as the largest owner of real estate in the world, what’s not to like?’”
In a subsequent call with analysts, Steve Schwarzman, Blackstone’s chairman and chief executive, noted that the firm intends to hold a final close for the new debt fund at its $3 billion cap, which “is way below the demand for this product. We capped the fund at this amount in order to match its size with the current market opportunity.” With the first close of BREDS II, the firm’s real estate debt strategies platform now represents $9 billion in total assets, up from zero in 2008, he pointed out.
Meanwhile, “we have by far the biggest footprint in real estate in Asia, we have great returns and there's, to my knowledge, no other way that an investor who wants to participate in Asian growth through real estate can invest in a fund that’s pan-Asian,” claimed James. While there are country-specific real estate funds targeting the region, “if you want to play the Pacific Rim with one credible manager that’s experienced with a track record, but play the whole region and therefore be able to move money where the values are and be dynamic in that way, we’re about the only way to do that.”
Schwarzman also noted that the firm continues to attract strong in-flows of co-investment capital for its large real estate deals, having raised nearly $2 billion for co-investments in the last two quarters alone. Additionally, he said that Blackstone’s latest global real estate fund, BREP VII, which began investing in the third quarter of 2011, already has achieved a 32 percent internal rate of return, net of fees. In managing the largest real estate fund in the world, “we’re not supposed to have a good performance [with BREP VII] according to a lot of theoretical models, but that has not turned out to be the case for us,” he said. “It’s really an amazing performance.”
Blackstone’s opportunistic real estate portfolio appreciated 6.3 percent in value during the first quarter and 17 percent over the last 12 months, reflecting rising occupancies, rents and operating income as a result of limited new construction. New real estate investments accounted for $1.2 billion of capital during the quarter, contributing to a total of $10.5 billion of equity invested in the sector over the past year. An additional $1.9 billion was committed to deals that had not yet closed at the end of March. Real estate realizations were $930 million for the first quarter and exceeded $4 billion over the last 12 months.
Economic net income (ENI) in real estate was $352.9 million during the first quarter, a 32 percent increase from $267.2 during the first quarter of 2012, while real estate assets under management (AUM) reached nearly $59.5 billion at the end of March, up 32 percent from the same period one year ago. Overall firm ENI rose 28 percent to $628.3 million during the first quarter, from $491 million in last year’s first quarter, while total AUM grew to a record $218.2 billion, up 15 percent year-over-year.