Return to search

Why Blackstone’s latest logistics play is a rarity in China

The seller R&F group will use part of the $1.1bn in proceeds to pay its debt under the ‘three red lines’ policy introduced by the Chinese government.

Despite an increasingly crowded logistics space in the country, private equity real estate heavyweight Blackstone has managed to snap up a majority stake in the largest logistics park in China’s Greater Bay area from stressed developer R&F Group.

PERE understands the parties started negotiations in June, resulting in a deal where Blackstone paid $1.1 billion for a 70 percent stake in the 1.2 million square meter logistics park located in Guangzhou, China. The Chinese developer said in a statement that part of the sale proceeds will be used to lower gearing and repay debt. Also, the sale will allow R&F to refocus on its core business such as hotel, residential and office development.

Earlier this year, the developer started showing signs of stress after it breached all three covenants of the country’s ‘three red lines’ policy, according to media reports. The policy limits refinancing for developers that violate the following criteria: a ceiling of 70 percent liabilities to assets, a cap of 100 percent net debt to equity and a cash-to-short-term borrowing ratio of at least one.

Although the ‘three red lines’ policy has put more Chinese developers under pressure to sell their assets in order to reduce their debt level, the sale of a large logistics asset is very rare in the market, according to a senior executive at a real estate brokerage firm in China. “You might see more sales in other sectors but not the logistics space. This is because the core portfolio of these developers is usually in residential, retail and office. Not a lot of them have a huge logistics asset like R&F, it is a very rare case,” said the broker. She noted that most of the logistics assets in China are still owned and developed by pure logistics developers.

Moreover, a growing number of investors has been looking into the logistics sector in China, as covid-19 has accelerated online shopping activity and therefore increased the demand for warehouses, the broker added. She pointed out that the highly competitive landscape in the logistics space makes it very difficult to buy assets at a discount.

“High-quality logistics assets in China of this location and quality often result in a bidding war,” said Justin Wai, a Blackstone real estate managing director based in Hong Kong. He explained that the firm’s ability to provide certainty and efficiency was key to completing the transaction in such a competitive landscape.

Over three years ago, Blackstone saw the logistics space become more competitive and single assets start getting more expensive. “To better leverage our resources, we adjusted our strategy and began to focus on portfolio deals and acquiring larger assets and logistics parks such as this one,” Wai added. He also told PERE that finding an asset of this scale is relatively difficult in China. The firm is understood to typically look at real estate deal sizes above $100 million.

R&F’s 1.2 million square meter logistics park is understood to have sold at a cap rate of around 6 percent, according to market sources. The site has been developed and leased by R&F in phases over the past 10 years. Today, the development is 80 percent completed and 70 percent leased. Blackstone plans to develop the remaining 20 percent of the site into cold storage and traditional warehouses.