On its third-quarter earnings call on Wednesday, Blackstone’s chairman and chief executive Stephen Schwarzman called the firm’s $14.6 billion recapitalization of BioMed Realty Trust one of the most successful investments in its history.
The massive transaction, announced in mid-October, sees the life science office company change hands within Blackstone. The firm will, in effect, be exiting from its opportunistic fund, Blackstone Real Estate Partners VIII, to anchor its new perpetual capital vehicle.
Blackstone’s president Jon Gray said the investment was a prime example of how the firm was prioritizing sector selection: “Resilient income-producing assets, such as life science office properties, garden apartments and logistics, are re-rating higher in value in the current interest rate environment.”
The economic fallout from covid-19 has triggered tectonic shifts across industries. In real estate, it is creating a new world order with respect to the desirability of its different sectors. That this year’s most high-profile transaction occurred in life sciences speaks volumes about the growing investment potential of niche and alternative strategies, buoyed by favorable demographic and technological trends.
In contrast, offices, hotels and retail – for a long time a meaningful part of an institutional investor’s portfolio – are facing the biggest structural headwinds. In the first half of this year, global transaction volumes in the three sectors declined by 33 percent, 35 percent, and 55 percent respectively, according to figures from real estate transactions data house Real Capital Analytics.
The definition of what constitutes mainstream property has blurred in today’s environment. Some formerly ‘alternative’ asset classes are today believed to offer more resilient investments, given their defensive cashflows.
In PERE’s investor sentiment partnership with financial services group Lazard’s real estate capital advisory platform, the firm’s global head of real estate James Jacobs pinpointed life sciences as of particular interest to the investors it works with. Other sectors, including cold storage, self-storage, medical offices and data centers, also saw the largest increase in interest out of 12 niche sectors in property services firm JLL’s Global Real Estate Transparency Index 2020 report.
The appeal of data centers, for example, is increasing exponentially across gateway property markets. In its first data center report, published this month, property services firm Knight Frank reportedly noted how the pandemic has been “one of the busiest periods” ever in terms of M&A activity in European data centers, with more than $25 billion of investment expected to complete in 2020. The momentum in Asia is equally strong. In one high-profile deal, Chinese manager CITIC Capital is planning the sale of a giant Beijing data center called BJ14 to a Chinese data center developer GDS Holdings for approximately $560 million. Real Capital Analytics estimates that more than $1.7 billion of technology, telecom and data center deals are in the pipeline across China, Singapore, Japan and India.
The performance of such sectors is far outpacing mainstream property types. According to the investment performance data released by the National Association of Real Estate Investment Trusts, total returns generated by office and retail REITs between January and September were -30.2 percent and -39 percent respectively. Data center REITs recorded 25.8 percent returns while self-storage REITs generated 5.8 percent returns during the same period.
With the mountain of dry powder and pent-up liquidity in real estate, these sectors could soon become go-to options for any investor reassessing its portfolio construction with a view to mitigating market risks. With enough deployment in these directions, what was once considered supplementary to a mainstream portfolio of assets could soon be taking center stage.
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