Blackstone Group LP, the private equity and alternative investment firm, is betting on a real estate recovery and a housing market paradigm shift in Spain.
CEO and co-founder Stephen A. Schwarzman has built Blackstone into the biggest rental real estate investor in the United States by purchasing foreclosed properties. Now he’s taking that approach to Spain, a country where housing prices have dropped almost 50 percent since 2007.
In July, Blackstone made its first major real estate investment in the Mediterranean country when it bought 18 apartment blocks in Madrid for around $170 million (125.5 million euros). The units were located in Carabanchel, Vallecas, Villaverde, and center city neighborhoods.
This month, Blackstone is bidding on another 1,458 rental apartment units in Madrid being sold off by the city government, according to a Bloomberg report. The firm is also bidding against Goldman Sachs Group Inc., which means that other investors share Blackstone’s appetite for Spanish real estate exposure.
Buying Low
With a 26 percent unemployment rate and a weak real estate market, Spain is a decidedly different market than the United States.
The Southern European nation has the highest home ownership rate in the European Union. But the current state of its economy and a weakened banking system no longer support widespread home purchases.
Last year, the Spanish government enacted reforms to encourage more renting by eliminating certain tax breaks for home purchases. It also passed regulations to speed up eviction of tenants and the ability for landlords to charge rents higher than prevailing inflation rates.
Tight credit environment and economic uncertainty could incentivize a population, which had been focused on ownership, to start renting. In addition, the recent landlord-friendly legislation is another shift that plays into Blackstone’s favor.
From a pricing perspective, there are mixed signals on whether the Spanish housing market has bottomed out. Data from the National Institute of Statistics states that housing prices in the second quarter of 2013 decreased 0.8 percent, the lowest drop since the fourth quarter of 2010.
Yet, a late October Bloomberg report said that bids for certain real estate-linked assets marketed by SAREB came in far below expectations. SAREB is a “bad bank” holding company created last year to house toxic real estate assets, including those from troubled lender Bankia Group. This development indicates that institutional investors believe more pain may lie ahead for the housing sector.
But that shouldn’t move the needle for Blackstone. The company with private equity roots isn’t in a particular hurry to flip.
A Different Strategy
Among its industry peers, Blackstone owns the biggest real estate portfolio and has quietly built the biggest single U.S. rental real estate portfolio over the last five years.
It has around 40,000 homes and more than $7 billion in capital invested in rental real estate.
“We started buying properties when the markets were down, individual markets [down] between 35 percent or 40 percent,” said Schwarzman in an interview with Co-Star, the commercial real estate information provider. “What we tried to do was not buy assets all over the country in some kind of scattershot way. What we tried to do was limit our purchases to certain markets where we thought that the recovery would be quite good.”
The firm’s U.S. residential real estate strategy has been methodical. It targets specific areas mostly in the Southern United States, buys foreclosed homes, refurbishes them, and markets them as rental units. Blackstone receives rental income and in time, as the market recovers, it will sell the properties at a gain.
Blackstone, through its subsidiary Invitation Homes, is also turning its rental real estate cash flows into a new asset class. Deutsche Bank AG assisted the asset manager to securitize the lease payments into debt securities, and began marketing such securities late October. These bonds are in some ways similar to residential mortgage-backed securities (RMBS) but are backed by lease instead of mortgage payments.
So far, its strategy in Spain is nowhere near as sophisticated. Blackstone is mainly focused on apartment units, which are already occupied with existing cash flows, and has targeted cities with higher relative employment statistics.
But as continental Europe recovers economically, Blackstone hopes to supplement its U.S. residential real estate portfolios with potentially larger returns.
The New York-based Blackstone has $69 billion in assets under management (AUM) as of Sept. 30 for its real estate segment, including commercial and hotel properties. Overall, it has $248 billion in AUM.
Frank Yu is a contributor to the Epoch Times.
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