Private equity buying on fear

Welcome to IFR Buyouts Europe new fortnightly real estate column. In the present climate real estate funds will provide buyout firms with great opportunities to acquire distressed assets at a time when their pure private equity funds are coming under increasing pressure to be deployed. Just last week Blackstone raised a US$10.9bn global real estate fund, with a separate US$1bn West European one on the way.

Justin Pugsley is a real estate expert and senior writer on Acquisitions Monthly and Thomson Merger News. Prior to that he was a freelancer. For example, he’s written for The Wall Street Journal, Herald Tribune, IFR, Project Finance, Global Pensions & Global Investor. If you have any interesting news or views please contact him on: 0207 369 7477 or

Private equity buying on fear

Real estate has been one of the worse performing sectors of the UK stock market, with many property companies having halved in value. Even in the real world, UK commercial property values are sliding, down 15%–20% depending on which survey you read.

Over on the Continent things are a little better. It seems that Europeans, except perhaps the Spanish and Irish, didn’t get quite so carried away buying buildings.

Nonetheless, plenty of surveyors are warning of worse to come. There are reports of more distressed sales hitting the market. Many speculators over-extended themselves and are now being forced to sell. The City of London, for example, which is being buffeted by the credit crunch, hardly looks a great place to own real estate with investment banks beginning to slash staff numbers.

Yet it is against this background that Blackstone has raised a US$10.9bn global real estate fund, with a separate US$1bn West European one on the way. It now has some US$25.7bn targeted at real estate. But as many market sages such as Warren Buffett have advised, it is better to invest when there’s fear and exit on general euphoria.

Stephen Schwarzman, co-founder and CEO of Blackstone, seems to take a similar view. Indeed, Blackstone’s record in investing in this asset class is impressive, its having delivered 31% annual returns after fees.

Last year, Blackstone made the largest ever buyout in the real estate and hotel sectors with the acquisition of US-based Equity Office Properties Trust for US$39bn including debt. For the time being, real estate looks set to be Blackstone’s main focus.

Meanwhile, Apollo’s real estate arm earlier raised US$1.4bn for a European fund with 30%–40% earmarked for the UK. The fund bought 15 upmarket care homes in northern England for £95m and owns the Telford Shopping Centre.

On a much smaller scale, recently founded Infinity Asset Management has set up a £100m real estate arm. Les Lang, who heads it up, thinks the current reality check sweeping the market makes now a great time to buy.

Among the listed companies, veteran wheeler-dealer Mike Slade, who runs Helical Bar, is on the look out for deals.

Also, German-based institutional funds are actively buying in the UK. Although they were also buying in the UK on the eve of early 1990s property crash, it is hoped that they’ve had more foresight this time around.

All this is in stark contrast to retail funds run by asset managers such as New Star and Norwich Union, which were forced to place time limits on investors exiting their funds. It was a good thing they did, because to meet investor redemptions would have involved flooding the market with distressed real estate.

Nonetheless, the UK situation doesn’t look as bad as in the early 1990s. There’s been less speculative development, ie, throwing up buildings without pre-letting them. Should the UK avoid recession, and a number of experts think that will be the case, then investing in UK real estate now might turn out to be well timed, albeit that further price falls are also expected.

Indeed, when listed property companies report their results from May onwards, expect more asset write-downs and possibly more doom and gloom about the sector from commentators.

But property, unlike the stock market, is a slow-moving business. Buying buildings takes months, so identifying the very bottom of a market is difficult. It is also a long-term business, which implies being prepared to sit through bad patches.

If a building has solid blue-chip tenants and is properly financed, then weathering the downswings shouldn’t be too hard. In the meantime, the owner can enjoy reliable cashflow. When conditions improve, asset prices and rents rise, it is then possible to refinance and withdraw equity and reap the rewards of good timing.

Talk suggests that more specialist private equity funds are on the way. They could help set the scene for a sustained recovery in values later on. An improved economic and financial climate would do a power of good as well.