BLUEPRINT: Storm after the calm

Every Monday morning at about 10:30 am, the senior members of The Blackstone Group convene for a few hours at its headquarters in New York for its real estate investment committee meeting. From mega-portfolio deals like the $39 billion privatisation of US office REIT Equity Office Properties or the $26 billion buyout of Hilton Hotels to smaller deals for individual properties not worthy of headlines, every transaction is discussed.

Co-founder Stephen Schwarzman, president Hamilton ‘Tony’ James and other top honchos are in attendance, either in person or patched in from Blackstone’s other offices around the world. They have attended the meeting ever since the firm started investing in the asset class back in 1992.

The meeting starts with resident economist Byron Wien sharing his interpretations of the global economy over the last seven days. Then Blackstone’s senior investment professionals have the opportunity to propose the best investment opportunities they are seeing. These investments are debated at length and, sure enough, the very top picks are pursued.

However, until the summer of 2010, Blackstone’s Asia division, led by Chris Heady, had proposed little at this weekly meeting. “We really wanted to do our jobs and contribute,” he explains, “but I think we were contributing by maintaining our discipline. Now, and for the past couple of years, investment opportunities are more compelling and we see greater value, so we are pushing them.”

Laying the groundwork

Blackstone’s activities in Asia began in earnest in 2006. The firm hired Tuhin Parikh from office developer and manager TCG Urban Infrastructure Holdings to open an office in Mumbai. Unfortunately, in India and across the rest of the region, investing activity initially was muted as Blackstone watched the global financial crisis break. Recalling the time, Heady says: “Less than 10 percent of the equity we have invested in Asia occurred during those years.” 

Then, in the summer of 2010, Blackstone’s caution switched to opportunism. The financial contagion had spread to Asia’s sophisticated markets, throwing up opportunities to buy real estate in distressed circumstances while simultaneously enveloping much of its competition. The capture of a ¥100 billion distressed loan book in Japan from Morgan Stanley at an equivalent of 32 cents on the dollar precipitated more capital outlays, and today Blackstone has invested $1.55 billion of equity in Asia, predominantly in Japan, Australia, India and China.

Accordingly, Blackstone’s Asia platform has grown to meet its greater appetite. Since Parikh’s arrival in Mumbai six years ago, Blackstone’s real estate headcount in Asia has reached 50 professionals working across offices in Hong Kong, Tokyo, Seoul, Sydney and Singapore. In that time, it also has played the role of white knight for the investors of Bank of America Merrill Lynch’s ill-fated $2.65 billion Asian Real Estate Opportunity Fund in 2010, assuming its management after they fell out with the investment bank. Arguably the firm’s standout milestone in the region to date, the takeover inherited it an instant and deep education of private equity real estate investing in some of Asia’s key markets.

In 2013, Blackstone is expected to add a further milestone with the launch of its first dedicated Asia real estate fund. At press time, no details had been publicly communicated, but a fundraising of more than $2 billion for the vehicle is rumored to be targeted. If it pulls off the launch – and considering its success in raising the world’s largest private equity real estate fund [the $13.3 billion Blackstone Real Estate Partners (BREP) VII] in 2012, there’s little reason to suppose it won’t – then, like in the US and Europe, Blackstone will become the largest opportunistic real estate investing platform in terms of live capital in Asia as well.

Heady and senior colleagues Stuart Grant, Asia head of asset management, and Alan Miyasaki, head of Japan, would not discuss capital-raising efforts. However, in a rare interview at Blackstone’s London office, the trio walks PERE through the firm’s progress in Asia to date and its strategy in the region going forward. It is clear from the couple of hours spent with these men that Blackstone believes it is in the enviable position of being capital-rich in a region that currently offers both distress and growth – and, crucially, where it has little competition.

Needless to say, the three men predict plenty more investments. “If you extrapolate what we’ve invested over the past couple of years, then I see that more than doubling,” Heady states. “Asia offers an environment with long-term growth but short-term volatility, and that is a fantastic pairing of ingredients for opportunity investors.”

Global reach, local prudence

Blackstone operates within a centralised decision-making investment process, personified by its Monday investment committee meeting, and Heady believes this model has stayed its hand from making ill-timed investments. Indeed, this has proven true when you compare Blackstone’s outlays in Asia with certain of its closest peers, particularly US investment banks that were the biggest opportunistic buyers of property in Asia before the crisis started. Furthermore, certain investment banks have since reverted to a similar centralized process, having previously awarded investment autonomy to the regions.

“Other funds still decentralize decision-making to Asia,” Grant says. “We have always thought that you take on too much risk if you do that, so we include New York and London in our process.”

Tapping into Blackstone’s global network, Heady argues that the Asia team can make well-informed decisions about whether to pursue an investment or not. He offers a hypothetic scenario: “Say we’re evaluating an office building and we know from our businesses elsewhere that the tenant is facing headwinds. We can leverage that knowledge to make the right decision.”

Conversely, a global reach can inform on opportunities Asia-only platforms might miss. For example, after tapping the firm’s European knowledge base, Blackstone bought an office in Asia from a German open-ended fund that needed to sell in order to meet redemptions. “So although Europe has its own specific micro-opportunities, these are proliferating all over the world,” Heady adds.

The benefits of Blackstone’s global reach were well demonstrated by its acquisition of distressed Sydney-based real estate investment management business Valad Property Group in 2011. With the crisis taking hold, Valad struggled to repay its debts as the value of its assets tumbled and its share price plummeted by 99 percent. Quickly, it became an attractive proposition for investors in both Europe, where it managed a portfolio once valued at A$10.2 billion, and in Australia, where it had about A$600 million of direct ownerships in mostly secondary properties.

The issue for Valad’s suitors in Europe, however, was reconciling the acquisition of a decent fee-earning business in the region with having to take ownership of the more remote Australian properties. Likewise, investors in Australia were concerned about inheriting a large investment management platform in Europe when the region was facing so much sovereign uncertainty. To complicate matters further – and give Blackstone a favorable position in the event of a sale – the firm already had an advantageous position via $185 million of convertible bonds secured against Valad from US retail REIT Kimco Realty.

As Tim Ryan, head of real estate at JPMorgan in Sydney and advisor to Blackstone on the deal, recollects: “The Australians understood Australia, but they couldn’t get their heads around Europe and the US. The same was the case for the Europeans. Blackstone could find an answer for everything.” As a result, Blackstone eventually purchased Valad in a deal valued at A$740 million, and its long-awaited market arrival had come.

Blackstone’s centralized decision-making ethos is apparent to Ryan as he advises the firm: “Jon Gray (global head of real estate) and Stephen Schwarzman know about every deal to the minute detail because everything flows back to New York. I also get the sense that Chris and Alan know their bosses extremely well. Sometimes when I’m with them, they’ll get a call from Jon and be on the phone with him for over an hour.”

Grant underlines the importance of having people with “the Blackstone DNA” leading the firm in Asia. “The region’s three senior partners – myself, Heady and Miyasaki – were at the firm a long time before we were inserted into Asia. Underneath us, we have senior guys who we have worked with in London and are now in Asia. In addition, we have integrated good local hires as well as a few folk from Bank of America Merrill Lynch.”

There are some outside of the firm who suggest Blackstone should locally source more senior executives in order for it to achieve more in Asia. Mark Burton, formerly an investor in the BREP opportunity funds while chief investment officer for Abu Dhabi sovereign wealth funds Abu Dhabi Investment Authority and Abu Dhabi Investment Council, says: “In my view, they need to have some local players pretty high up on their agenda, such as more Chinese or Japanese people in senior positions. That would help them get closer to the various bureaucracies and government institutions in the region.” However, Burton admits: “It’s hard to criticize a model that has worked very well elsewhere. I mean, they don’t have any French or German guys high up in Europe either.”

Blackstone already may be addressing this concern as, in December, the firm promoted Parikh, its first locally sourced professional in India to senior managing director. He becomes only the fourth senior managing director in Blackstone’s Asia real estate team.

White knight

Burton’s perspective of Blackstone’s efforts in Asia has been colored by his experience on the limited partners advisory committee of the ill-fated Asian Real Estate Opportunities Fund, a pan-Asia opportunity fund for which Bank of America Merrill Lynch (BoAML) raised $2.65 billion in 2008. After actions taken by the bank during the early part of the fund’s life were considered “non-fiduciary” by its 25 or so investors, BoAML found itself facing legal action. Rather than head to court and burn investors, including ADIC, the General Electric Pension Trust and AXA, the bank instead opted to offer a settlement valued at approximately $650 million and to transfer the fund to Blackstone. 

It was the ideal cocktail of conditions for Blackstone: the firm would inherit a portfolio of 70-plus properties spread across key markets including Japan, India and Korea, a pick of 27 professionals in the region (17 of whom have been retained), no threat of litigation from now-appeased investors – some of which were new to the firm – and, crucially, a challenge to minimize losses as opposed to achieving stellar returns.

Burton recalls the investors’ expectation at the time: “In 2010, it was pretty difficult to know how much could be recovered. There were indications then that people would have been happy if [investors] received above 60 cents on the dollar.” So far, he says Blackstone has made a “good fist of things.”

Blackstone would not offer a prognosis for the health of the fund, but Heady says: “We’re going to be maximizing value for it for a long time. There are a handful of investments that still need to be worked out, and ultimately those will be a big determinant of how the fund performs.” As of September last year, the fund still held 42 properties valued at approximately $862 million.

Still, Grant notes there are numerous positive anecdotes that can be extracted already. For one, something on the order of $1.1 billion of debt has been restructured.  “We think we’ve done a nice job to refinance the capital structure of many of these investments,” he says. He offers more examples of progress, including a building in Seoul: “It was 38 percent occupied in November 2010, when Seoul had a soft leasing market. It is now fully occupied.”
It is perhaps of little surprise that certain of the fund’s investors new to Blackstone have since committed capital to the firm’s latest opportunity fund, BREP VII. “We’ve made a few new friends,” Grant confirms.

Bullish on China and India

Miyasaki notes that the BoAML takeover has played an important part in educating Blackstone as it threads together its own investing strategies in Asia. “It helped us scale up and gave us a deeper knowledge,” he says. “At that time, they had done 70 deals in the region and we hadn’t. That’s a lot of information and insight.”

Miyasaki is responsible for Blackstone’s investments in Japan. With almost 60 percent of the BoAML fund’s investments originally in that country, his sources of market information are ample and have helped him form an alternative view of the market. For one, he does not subscribe to the well-peddled premise that Tokyo’s office markets are rebounding.

“You’re starting to see some recovery in rents for the S-Class buildings (super-premium quality),” Miyasaki says. “But for the broader market, we haven’t seen it. We see a lot of leasing through the Merrill stuff, and I can tell you conditions are still tough.”

Blackstone currently is more bullish on China and India. The firm is poised to complete the acquisition of Huamin Imperial Tower, a 530,000-square-foot office in Shanghai, from Huamin Group, for approximately RMB2.7 billion (€332 million; $433 million). A big equity check no doubt will be required for that deal, but the investing doesn’t stop there. Early this year, Blackstone will crystalise two large-scale joint ventures with developers – one for affordable housing and the other for logistics.

Grant says market timing is currently good for Blackstone in China, but the critical ingredient in its decision to ramp up its investment in the country is its choice of partners. “We’re obsessed in making sure we have solid joint venture partners,” he adds. “We’ll play in China, but we have to be very careful about that.”

That point also is well demonstrated in Blackstone’s joint venture in India with Embassy Property Developments, a Bangalore-based property developer that the firm courted for years before making its first investment last year. Despite being the first Asian country to have a Blackstone office, the firm has parked just $480 million in India, much of which has been invested into office parks developed through the venture.

Central to Blackstone’s India thesis is demonstrable income. The firm has joint ownership of more than 30 million square feet of development land, but about 19 million square feet of that already is developed and leased to blue-chip tenants, including IBM, Capgemini, Mercedes Benz and Accenture.

Anuj Puri, chairman of Jones Lang LaSalle in India, says Blackstone’s venture with Embassy has delivered a strong message to the Indian private equity real estate market: “They are happy to take income-yielding property but no development.” Indeed, Blackstone’s timing couldn’t be better for this type of property. “The funds of 2006 and 2007 are now completing these assets and they are coming up for sale,” Puri adds.

However, Puri warns that Blackstone may have to widen its brief when other investors follow its lead and saturate what is essentially a small marketplace. “At some stage, that market will become crowded, so they will need to innovate and go after other stuff. That might mean development.”

The most attractive

When Blackstone’s real estate team in Asia unearths an attractive investment, it is brought first to a review committee comprising the real estate partners in the region, which meets each Thursday. “At those committees, we determine whether it has the merit to move forward,” Miyasaki says. If it does, it will be brought to the aforementioned main Monday meeting.

As chance would have it, PERE’s interview is taking place on a Monday morning. Acknowledging as much, Miyasaki points at an adjascent door and says: “It’ll be in that boardroom over there.”

The three men don’t reveal if they are planning to propose any deals at today’s meeting, but Miyasaki says, if they did, there would be pressure for their deal to outshine deals coming out of Europe and the US. “When you present your deal to our global investment committee, it has to be the most attractive deal in the world. We can’t say this is the best deal in ‘sub-region A’ or ‘sub-region C’. When we say we want to invest money in China, India, Japan or Australia, we have to explain why we think it’s a good risk-adjusted return compared to the US or Europe.”

When PERE suggests that an Asia fund might afford this team a little more autonomy, the suggestion is quickly refuted. The trio repeats a reluctance to discuss fundraising, but Heady nonetheless points to Blackstone’s European funds, which invest alongside the global BREP funds – not independent from them. The inference is that the same would happen in Asia.

Blackstone’s BREP funds have a 33.3 percent cap on equity invested outside of the US. Given Heady’s prediction that the firm would double the $1.55 billion already invested in the region over the next couple of years, news of an Asia fund is hardly surprising. But make no mistake, at the world’s biggest opportunistic real estate business, the team that executes its investments in Asia will not operate without authorization from a committee meeting that watches the world. And everything Blackstone does is ratified by all those attending the meeting, from an investment partner plying his trade in Europe to the very founder of the firm.

Blackstone in Asia

Started: 2006
Offices: Hong Kong, Tokyo, Mumbai, Seoul, Sydney and Singapore
Professionals: Approximately 50
Leading principals: Chris Heady, senior managing
director and head of real estate Asia; Stuart Grant, senior managing director and head of asset
management Asia; Alan Miyasaki, senior managing director and head of Japan; Tuhin Parikh, senior
managing director and head of India
Assets under management: $2.6 billion
Capital invested: $1.55 billion