Blueprint: Blackstone’s latest record fundraise, Brookfield’s REIT loses its leader, Lone Star’s distressed focus

Blackstone closes $30.4 billion opportunistic fund despite today's challenging market environment, Brookfield's Vaughan hands over reins of its private REIT to property boss Kingston, Lone Star targets retail and hotels for its latest fund as most distressed areas of the market; and more in today's briefing, exclusively for our valued subscribers.

They said it

“The debt funds that have stepped into that highly leveraged space have got to be in a worse position [than banks]”

Marc Bladon, head of real estate at Investec identifies potential cracks in the business model of alternative debt providers in commercial real estate, in the Financial Times (paywall) this week.

What’s new?

Record breaker: Blackstone’s global co-head of real estate Kathleen McCarthy adds another record breaking fundraise to her tenure as the New York-based firm closed its tenth global opportunistic fund at $30.4 billion. (Source: Blackstone)

Towering above
Blackstone has closed its latest and much anticipated tenth global opportunistic real estate fund, raising the largest closed-end private real estate vehicle ever. The New York-based mega-manager raised $30.4 billion for Blackstone Real Estate Partners X, eclipsing the record it previously held by almost $10 billion. As if that was not lofty enough, Blackstone achieved its latest heights in a market environment that is less than favorable for fundraising. Given the denominator effect, many institutional investors have been forced to reduce or suspend commitments to real estate strategies as inflation and rate rises impact other asset classes, making this capital haul an outstanding feat. That said, Kathleen McCarthy, Blackstone’s global co-head of real estate explained to PERE that the bulk of the capital raised, $24.4 billion, was collected by July 2022, before much of the inflation and rate rises happened. Read our full story here.

Losing trust
After a few sanguine months for non-traded real estate investment trusts, a new entrant is adding to the uncertainty. While not part of the December run that saw redemption requests cause gating in multiple vehicles, Toronto-based Brookfield Asset Management’s Real Estate Income Trust vehicle is facing a leadership change. Zach Vaughan, chief executive of Brookfield REIT, is leaving the firm for an “entrepreneurial opportunity,” a source close to the matter told PERE. Brian Kingston, current CEO of the Brookfield real estate group and chairman of the REIT will assume the role. The change comes at a challenging time for the vehicle, having posted negative monthly returns in three of the last four months, including a -1.94 percent return in November.

Lone Star sets its sights
As Lone Star Funds heads toward the first close of its targeted $6 billion Real Estate Fund VII, the market opportunity is becoming clearer for the distressed specialist. According to documents from the Arkansas Teacher Retirement System, which has committed $50 million to the fund, the Dallas-based manager expects to be overweight retail and hotels as areas in relative distress. Another focus is expected to be operationally intensive sectors, including senior housing, where Lone Star sees “long-term structural demand interrupted by short-term factors,” according to the Arkansas documents. Geographically, Lone Star could invest more in Europe in this fund, with target ranges for the UK and the continent between 35 and 55 percent whereas ranges for North America are 30 to 50 percent, per the documents. Asia is contained to Japan at 25 to 40 percent. This relatively smaller focus fits with its move to reduce its Asian capacity in 2021.

Trending topics

Et tu central banks
Last week saw central banks add their voices to an increasing consensus all is not well in the commercial real estate sector. The European Central Bank released a white paper warning how overly liquid real estate investment funds, which it says account for 40 percent of Europe’s commercial property asset base, present a systemic risk to “the wider financial system and the real economy”. To illustrate its concern, it pointed to the redemption issues at Blackstone’s largest real estate vehicle, BREIT – which PERE covered extensively – as a “recent stress event outside the euro area.” The REIT saw an uptick in its redemption requests in March too, rising to $4.5 billion from $3.9 billion in February.

Meanwhile, in Australia, the country’s Reserve Bank said falling valuations and weaker demand for offices coupled with rising borrowing costs are heaping pressure on its commercial property market and could potentially expose vulnerabilities in its banking sector. According to the RBA’s semi-annual Financial Stability Review, released last Thursday, Australian property is not highly geared, but that situation could easily change if “declining valuations lead to markdowns of the book value of their properties,” adding “some landlords are likely to become financially distressed.”

Coming to a city near you
The woes faced by owners of out-of-favor offices are well known, with several headline loan defaults contributing to a steadily rising delinquency rate. Indeed, data from analytics firm Trepp shows the US office rate saw a sharp uptick in March to 2.61 percent. Despite this, the level of distress has been relatively muted thus far, and has primarily occurred in US markets such as New York and Los Angeles. According to Bloomberg Intelligence, however, this could be about to change. Research published last week claimed that if office values in major European cities fall by at least 20 percent and interest rates stay high, there could be widespread distress to loans taken out in the past five years with short maturities. With office values in London, Paris and Berlin having fallen back near to levels circa 2017, such properties will be harder to refinance, said analysts, particularly in locations with vacancies of 10 percent plus such as London’s City. For insight from the appraisers on how the revaluation of office might play out, read our latest coverage.

Mixed views on lower rates
Although the Federal Reserve is anticipated to start cutting interest rates in H2 2023, lower rates are necessarily not the cure-all for the financing woes currently afflicting the commercial real estate industry, according to a Bank of America research report published last week. “Lower interest rates, holding all else constant, would be positive and could help alleviate some of the concerns we have about borrowers’ ability to refinance over the next year,” wrote US CMBS analyst Alan Todd in the report. However, financing costs are unlikely to decrease significantly. Credit risks will remain elevated since lower rates would likely be an indicator of a weaker economy, he said. Moreover, while lower interest rates would benefit borrowers with higher-quality properties, “we think borrowers with lower-quality properties or those backed by out-of-favor property types – office, for example – may still face significant headwinds.”

Data snapshot

Industrial stress
Industrial property’s strong position in the eyes of investors could shift in the coming months, according to data from global brokerage and advisory Savills’ latest report on warehouses. Industrial space available for sublease is higher than it was in the pandemic, swelling over 50 percent, the largest 12-month increase since 2008.


Rui Hua takes over Hong Kong for ESR
ESR has promoted Chinese real estate veteran Chang Rui Hua [her LinkedIn here] to lead the firm’s Hong Kong business. Her role as managing director for business management and investment at ESR Hong Kong also means she oversees the firm’s China real estate investment trust business. The promotion comes shortly after the firm obtained approval from the Hong Kong Stock Exchange to list a Chinese industrial portfolio on the Shanghai bourse. “A good step towards the right direction,” Rui Hua commented a month ago when ESR announced the news. Prior to her new role, Rui Hua was ESR’s group managing director, capital markets and investor relations. She joined ESR from CapitaLand where she was the head of capital markets and corporate finance, and corporate planning for CapitaLand China.

Investor watch

ADIA exiting an Aussie shed load
ADIA’s expected sale of shares in a A$3 billion ($2 billion; €1.83 billion) Australian logistics portfolio is expected to be the next big logistics property deal in the country. The investor is reportedly planning to offload half its shares in Peregrine – a portfolio with 10 prime industrial assets in Sydney and Melbourne. The portfolio is managed by LOGOS Australian Logistics Venture, set up in 2014 between industrial specialist LOGOS and ADIA to develop and acquire assets in Australia. Last March, ADIA topped up its commitment in the venture, adding A$1 billion of potential asset value, according to reports. The deal would be the second largest industrial deal in the country after Blackstone’s A$3.8 billion sale of its Milestone logistics to ESR in 2021.

This week’s investor meetings

Wednesday, April 12

Thursday, April 13

Friday, April 14

Today’s letter was prepared by Peter Benson with Evelyn Lee, Charlotte D’Souza and Christie Ou contributing