EUROPE NEWS: Blackstone’s graduation day

The New York-based private equity giant has exited the student accommodation business after a classic build-and-sell play. PERE magazine June 2012 issue.

In 2006, London’s King’s Cross neighborhood was really just a shabby stretch of the British capital, known more for its cheap drugs and prostitutes than its outsized IRRs. Nevertheless, seven years on and The Blackstone Group is toasting the area, where it decided to build the first property in its Nido Student Living business.

After buying an office property a few minutes’ walk from King’s Cross Station and winning planning consent to turn it into student digs, the New York-based private equity and real estate giant went about adding properties. Last month, Blackstone achieved an exit by selling the company on behalf of a collection of commingled funds that invested in it. Experts say the deal, valued at £415 million (€511.3 million; $676.2 million), should extract £100 million of profit for investors in the firm’s global real estate opportunity fund series, Blackstone Real Estate Partners.

Back in 2006, when Blackstone was developing its first Nido property in that shabby but up-and-coming area, Blackstone director Stuart Grant told PERE: “We have identified an opportunity to re-invent the student accommodation experience. On the whole, student living standards in the UK are awful.”

Grant went on to explain how the former NatWest building in King’s Cross was within range of eight London universities, including University College London, which had buildings just a 10-minute walk away. The plan was to open a 16-story building housing 950 residents, as well as a cinema, a gym, free wireless Internet, a coffee shop and 24-hour security.

The demographics and supply-and-demand mismatch certainly seemed to be worthy of private equity real estate attention. In London, for example, there were an estimated 120,000 students looking for a place to live in the autumn of 2006 —and only 33,000 institutionally-owned student beds. That dynamic has never really gone away in the UK, which is why Nido Student Living found a willing buyer in Round Hill Capital, a real estate and energy investment management firm.

The equity investment by Round Hill was supported by £266 million in senior financing from M&G Investments, the fund management arm of insurer Prudential, and £80 million of mezzanine debt from Och-Ziff Capital Management. Incidentally, those two untraditional funding sources demonstrate the increasingly varied lending market for prime property in the UK.

Over the last seven years, the Nido business acquired three sites. Apart from King’s Cross, there is a site in Spitalfields and another in Notting Hill. In the end, it turned out to be a classic private equity-style investment, building a business and selling it after seven years, instead of selling assets individually. 

Despite the exit by Blackstone, one source familiar with the transaction and the firm said Blackstone still has an appetite for the student accommodation sector in Europe. That is evidenced by the firm’s decision to hold onto other development sites in London and in Barcelona. Furthermore, it is understood that Blackstone would consider engaging in future joint ventures in the sector.