Schwarzman: Real estate ‘shake-out’ coming

The Blackstone Group will not have a problem attracting LP capital for its next real estate funds, unlike other firms, according to the firm’s chief Steve Schwarzman.

The real estate private equity market is headed for a “shakeout” with many firms unable to raise any capital for new funds, Steve Schwarzman, chief executive officer of The Blackstone Group, said during an earnings call Thursday.

“There will be a huge shake-out in [real estate],” Schwarzman said, answering a question about whether limited partners are still allocating capital to real estate funds. “People have been devastated in that area, but it remains a big asset class.”

“We have what we think is the best record in the developed world … so we’re anticipating a very good response to our next fundraising, but that will be at the expense of some people who won’t even get to market again,” Schwarzman said.

Institutions like pensions are looking for the cash flow from real estate investments “to meet their actuarial assumptions”, Schwarzman said.

Blackstone has seen improving revenues in the hospitality side of real estate, according to Joan Solotar, senior managing director at the firm. 

In real estate, the fund’s net return in its carry funds was 16.9 percent for the third quarter, compared with a negative 2 percent in the same period last year. Net returns for the real estate debt hedge funds declined slightly to 3.3 percent in Q3, compared to 7.8 percent in the same period in 2009.

Overall revenues in real estate in the third quarter increased in the third quarter to $258 million, compared to $100 million in Q3 2009. Over nine months, revenues increased to $618 million, compared to negative $131 million in the same period last year.

The revenue increases were due to improvements in performance fees and allocations and losses in investment income, which improved this year through better operating performance, projected cash flows and exit multiples across the real estate segments’ investments, the firm said.

The firm invested $689 million in the third quarter, up from $35 million in the third quarter of 2009. The firm has about $1.6 billion in investments that haven’t closed yet, he said.