Christopher Heady, Blackstone's senior managing director and head of real estate for Asia, talks to FinanceAsia about the firm's "fantastic relationship worldwide" with GE and how it plans to invest its $5b property fund across the Asia Pacific region.
Q You’ve raised the money, so now how will you deploy it?
A We continue to invest in the region’s largest economies: China, India, Japan and Australia, and a little in Hong Kong and Singapore. Greater China represents about half of our portfolio.
Q What about type of investment?
A Our investments by real-estate asset class varies by country and by opportunity. Blackstone doesn’t tie itself to a particular asset class. We can invest where we see the best risk-adjusted opportunities, but we prefer situations that are larger in scale, and possibly more complicated – situations in which we can use our scale to gain a competitive advantage. Then we augment that return by adding value to the property.
Globally we focus on investing in existing real estate or in companies that own real estate at the biggest discount to replacement cost we can. We’re not a developer.
Q How is China’s economic slowdown impacting your investment strategy?
A Our portfolio in China is oriented toward commercial real estate, particularly malls. We’ve already taken a large position in the shopping centre space [a 50% stake in Shenzhen-based developer SZITIC Commercial Property alongside ICBC, which builds shopping malls in various tier-1 and tier-2 cities]. These are malls catering to the mass market. Their customers are among the emerging middle class and a lot of the tenants are non-discretionary retail. Even though the overall economy is slowing, many people are enjoying a rising standard of living and continue to shop.
Q What about the impact of Xi Jinping’s anti-corruption drive? That’s hitting luxury goods sales specifically, but is it having an impact on the broader market when it comes to property?
A The entire retail space is affected by the slowdown in the luxury sector. But our same-store sales growth rates are in line with overall retail sales growth in the low double digits.
Q Do debt-related problems at property developers such as Kaisa impact your portfolio?
A Without addressing that issue specifically, some developers have faced challenges in China around policy and access to credit. In the short term, those problems reflect a slowing market. But long term, those challenges mean there is less construction going on, which is a good thing for us. A decline in new supply is an important variable. And if developers struggle to access markets, that can be positive for private equity in general, because we have capital.
Q You have invested in warehouses in China [Blackstone owns warehouses in Shanghai and Guangzhou]. But how attractive is the logistics sector if China is meant to be transitioning away from an overreliance upon exports?
A Returns in logistics are stable. The amount of maintenance capital one invests compared to office buildings, for example, is limited. Logistics and warehousing have benefited from the rise of ecommerce and online sales. That leads to higher occupancy rates and rising rents. Also, there is a limited amount of land for the development of this asset class. We’d like to find more opportunities in this space.
Q You also acquired 75% of Hong Kong-listed Tysan Holdings last year for HK$1.9 billion. Is this potentially a winner in the shake out of developers?
A Each investment is a standalone transaction, made on its own merits. That said, I expect there will be consolidation among developers if they continue to lack access to financing. In China we’re seeing a divergence between those larger, higher quality companies that can get access to credit, and smaller ones that can’t. We could participate by facilitating deals among them, or buying assets from them.
Q Have you done so yet?
A Not so much in China, but so long as the divergence of cost of capital among different groups persists; there will be opportunities for us.
Q In both Japan and Australia, you have acquired sizeable portfolios from the arms of GE Capital. Do you rely on global partnerships for deals, and were these a related transaction?
A Blackstone and GE have a fantastic relationship worldwide. We’ve borrowed capital from them and purchased assets from them, in the US, Europe and Asia. We recent purchased a large portfolio of residential properties from GE in Japan, and another portfolio in Australia of commercial properties. But these were independent deals.
[After Heady's interview with FinanceAsia, Blackstone and Wells Fargo said they will purchase GE Capital’s property portfolio for $23 billion.]
Q What’s the impact on your business from the Indian resurgence since the election of
A Our first office in Asia was in India in 2006 but we only did a limited amount of investing. We remained patient while others deployed a lot of capital into development projects that have since been delayed or seen other problems. In the aftermath of that, we have been investing heavily in the office sector, where there are distressed owners with fantastic underlying properties, such as software parks – properties whose tenants have seen an upsurge in sales to the West in the wake of the 2008 financial crisis. Investor sentiment towards India has shifted dramatically but it’s still not attracting the levels of institutional real-estate interest India saw in 2006 and 2007. So it remains an attractive investment environment.
Q With low interest rates and Europe and Japan engaged in quantitative easing, are you seeing new competition in Asia from tycoons or other sources of private wealth?
A In this global environment, real estate is an attractive asset class. Given the alternatives of owning equities or fixed income, many institutional investors also see it that way. But in Asia, we don’t see a lot of competition in the large, complex situations we prefer. Sure, it would be hard to compete if we just wanted to buy a small office building in Tokyo. But when we use our scale and global relationships to buy several office buildings in a single transaction, that creates attractive pricing and also allows the seller to complete the deal in one go, with just a single counterparty.
Also globally various financial institutions continue to exit the real estate market due to regulatory considerations.
Q When the US raises interest rates, how will that impact Hong Kong’s property market, and other markets sensitive to US monetary policy?
A If a rise in interest rates is a result of accelerating economic growth and robust employment that should outweigh the negatives of an interest-rate rise on real estate. Historically in such situations, real estate values continue to rise. But if the rate hike occurs amid a struggling or slowing economy, that makes for a tougher environment for real estate. Hong Kong has a deep and liquid property market, and many buyers come here to preserve wealth, not to seek appreciating rental values. There’s also a limited amount of new supply here. So if US or Hong Kong interest rates were to rise sharply, in the short run it would be negative for real estate, but in the medium term, we would continue to have high confidence in the market here because of the dynamism of the Hong Kong economy.
Q Do you expect to partner with some of the large Chinese property companies looking to acquire assets or companies overseas?
A We have had such discussions and it is likely in the coming years we will jointly purchase a large asset together either here in Asia or elsewhere around the world.
This transcript has been edited