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Blackstone invested more in European real estate than in any other region in 2023, as the world’s largest commercial property owner picked up bargains from market turmoil and distressed sellers.
Real estate deal-making collapsed this year as sharp rises in interest rates strained a sector heavily reliant on cheap debt. Deal volumes were down by half in the third quarter, according to MSCI data.
Blackstone cut back its total spending on new property investments from about $47bn in 2022 to about $9bn in the first three quarters of 2023. Unusually, however, it allocated more than 55 per cent of its global investments to European assets, including the UK. The group normally invests most in the US, and would typically allocate 20-30 per cent to European real estate.
The shift suggests that buying opportunities are appearing earlier in Europe as real estate investors navigate the downturn caused by higher rates.
Heavily indebted owners, including public companies and private investors, feel increasing pressure to sell assets to pay off debt and some are facing debt maturities.
“In Europe, our sector picks are intersecting with distress and dislocation, explaining why we have been more active in Europe this year relative to other regions,” said Kathleen McCarthy, global co-head of real estate at Blackstone.
McCarthy said the firm has $40bn of “dry powder” — funds raised but not yet invested — and is targeting its investment in parts of the real estate market with “the strongest cash flow growth and favourable supply demand fundamentals”, including logistics warehouses, data centres, and the “living” sector that includes apartments and student accommodation.
Many European real estate owners loaded up on very cheap debt in recent years when interest rates were low or even negative on parts of the continent. Of €640bn in European private real estate debt issued from 2019 to 2022, more than a quarter, €176bn, may be impossible to refinance when it comes due between 2024 and 2027 because of lower property values, tighter lending conditions and higher debt costs, according to real estate advisers CBRE.
This year, the rise in debt costs has already hit property valuations hard and left many companies scraping to pay down debts, creating opportunities for deep-pocketed investors.
Fergus Hicks, real estate strategist at UBS asset management, said prices in Europe and the UK were correcting faster. “We expect the UK market to bottom out first, followed by the rest of Europe, while the lagged response in US valuations means that we expect these to bottom out last,” he said.
The real estate crunch has created headaches in parts of Blackstone’s business. It has had to limit investor redemptions from its flagship Blackstone Real Estate Income Trust. Elsewhere, however, the group has acquired property from funds under liquidity pressure, part of a run of more than 100 deals in Europe so far this year.
Among roughly €5bn of European deals, Blackstone in April reached a £700mn agreement to take Industrials Reit private, acquiring the UK-listed real estate company’s 7mn sq ft portfolio of industrial and warehouse space. Many listed real estate firms have traded at heavy discounts to their net asset value this year, making it difficult for them to raise equity and more liable to takeovers.
Blackstone concluded a deal to buy another set of logistics properties from Swedish landlord Corem for €490mn. Like many Nordic real estate groups, Corem has been seeking to pay down its debt.
In November, UK housebuilder Vistry announced a £819mn deal with two Blackstone-backed residential landlords to sell 2,915 private and affordable rental and shared ownership properties. Vistry has been changing its strategy to focus less on private home sales as the UK housing market has stalled.