ULI CONFERENCE Blackstone’s European chief sees repricing in Paris and London

Blackstone, the US alternative asset management giant, still has a strong appetite for European real estate, but some markets like London and Paris are becoming very pricey, the company’s senior European partner warned at the ULI Europe conference in Paris on Wednesday.

‘We will be both a buyer and a seller this year,’ Anthony Myers, senior partner at Blackstone with responsibility for Europe, told a panel discussion on European capital markets. ‘For stabilized assets, it’s a good time to be selling and we are selling in the US…But we’re still here to buy in Europe.’

Despite the sustained low-growth environment, Myers pointed out that Europe is doing better now than in 2013-14 thanks to the low currency and oil price. 'Rates are likely to stay low in 2016 and growth will be moderately accelerating. In the European context that is moderately attractive.'

Blackstone currently has $23.5 bn (€20.9 bn) in dry powder for real estate after raising a record $26.5 bn of capital for its real estate strategy in 2015, and investing $21.5 bn over the year.

In the past couple of years, Blackstone has been a voracious buyer of logistics assets and in Europe is now building a platform under the Logicor brand. 'Ecommerce and other macro trends are creating the strongest tailwinds for logistics,' Myers said. 'There's a flip side there for retail, particularly secondary, but for the next five to 10 years, ecommerce requirements will be going up.'

Keeping an eye on disruptors
Another segment that Blackstone has betted on is hotels and Myers conceded that disruptors like Airbnb could change the dynamics in the sector. 'It's not clear yet what that impact is going to be. Paris, which gets a lot of tourism, is seeing the impact of Airbnb on weekend visits...We're watching that, it could lead to disintermediation, like what Uber is doing for taxis. It's something to consider for hotels.'

In terms of countries, Myers said Blackstone was ‘pretty active’ across the globe. In the US the company has recently taken advantage of the repricing of public markets. In the final quarter of 2015, the company forked out a massive $7.8 bn to capitalize on public market dislocation and closed or committed to four public-to-private transactions over the year, including one in the UK.

The company changes its strategy according to the backdrop, Myers said. ‘In the US there has been a fairly dramatic repricing. In some respects the public markets have overreacted. There has been a pretty dramatic decline in expectations for future cashflows which is why we have taken a number of companies private.’

Myers said he saw ‘lingering distress’ in Southern Europe. ‘We’re still pretty active there. There’s a moderate growth environment and a value proposition.’

In terms of the big three - UK, France and Germany – he said Blackstone’s approach would be ‘very situational’. In many cases, prices are equal to or higher than they were in 2006, he pointed out. ‘Paris and London attract the highest capital, but it feels like things are very pricey, with 2% yields in Mayfair. I think we may see repricing in London shortly.’

Sentiment has changed in London
Asian investors in London in particular are rethinking their strategies due to financial troubles at home, Myers pointed out: ‘Sentiment has changed, in particular the appetite for residential…that will change the market and have an impact on the rest.’

Nevertheless, both London and Paris remain attractive markets for gloobal investors, Myers maintained. ‘In their push for diversification and a safe haven, international investors like the liquidity aspect of these markets…the fact that they can sleep at night is very important.’

In Germany, Myers is keen on Berlin and Hamburg, both of which featured in the top two spots respectively in ULI/PwC's Emerging Trends reports of the most attractive cities for real estate investment in Europe. 'It's about establishing an attractive basis for an asset and less about growth. In Germany Berlin and Hamburg are hot and they're not already overpriced.'

Outside Europe, Blackstone is very active in Asia, particularly India, Myers said. ‘In China, the rate of growth is slowing. But we have been very active buyers of office and retail in India. The growth story there is better.’

In terms of investment locations, Myers said Blackstone was increasingly focused on global trends and urbanized primary cities, rather than secondary or tertiary locations. ‘We look at cities that are successful in attracting well-educated labour pools and employers to employ those folks. That’s what is differentiating them.’

False attraction
The high yields offered by secondary or tertiary cities are potentially a ‘false attraction’, he added. ‘Secondary or tertiary cities offer less liquidity and if things turn down, the situation gets exacerbated. For us, we prefer a lower yield for higher growth. In the end, it’s about the metrics and what we’re paying per m2, but we would prefer a better location and a better asset. Typically we would buy an asset with some vacancy and improvement potential.’

Turning to geopolitical issues, Myers said the migrant issue in Europe and the slowdown of China’s economic growth would continue to have an impact on the industry, but added that the ‘unknowns’ were a cause for particular concern. He pointed to the unknown outcome of the Brexit referendum and the ongoing polarization of the popular vote to both the left and the right across large swathes of Europe including France, Spain and Poland.

The political situation is far more diffuse in Europe and political risks are potentially greater here than in the US, he intimated. ‘Even with a relatively dysfunctional Washington, the US economy will continue to power ahead…What happens in the geopolitical arena is more impactful in Europe.’

Blackstone saw fundraising in the last quarter of 2015 include $1.3 bn for initial closing of the group's third mezzanine debt fund and $2.4 bn for the core+ funds. In total, the group's core+ strategy reached $11 bn in assets under management two years after launching the business.

The company's real estate assets under management grew by 16% in 2015 year-over-year to $93.9 bn while Fee-Earning AUM surged by 28% year-over-year to $67.3 bn.