Blackstone and Telereal to buy £1.5bn Arches portfolio

Network Rail has selected a preferred party to buy its £1.46bn Arches portfolio in one of the most anticipated real estate deals of the year. Blackstone and Telereal Trillium have struck a deal to buy the controversial 5,200-asset portfolio on a 50:50 basis, having fought off competition from Li Ka-Shing’s CK Asset Holdings, Ellis Short’s Kildare Partners and Guy Hands’ Terra Firma Capital Partners. For Blackstone the deal is the latest in a series of platform business investments as it looks to deploy cash it has raised for a core-plus strategy. For Telereal the deal sees it bolster its reputation as a custodian of assets of public interest – it has a long history of managing assets for organisations such as the Department for Work and Pensions. The sale has come under scrutiny in part because Guardians of the Arches (the national collective of small business owners based in railway arches) raised objections on the grounds that the buyer will push up rents to a level unsustainable for many of the businesses that occupy the properties. Goldman Sachs and Wellcome Trust withdrew from the process earlier in proceedings in part as a result of public perception and reputational risk. Network Rail said that: “Both parties have adopted a ‘tenants first’ approach, cemented in a tenants’ charter, which offers a commitment to engage with all tenants and communities in an open and honest manner.” Blackstone and Telereal will now have to contend with any protests, as well as increasing the income of the portfolio in order to enhance value while managing public perception and deal with tenants that may be resistant to any rent hikes. The vast majority of the portfolio is located under railway arches. It has a vast range of occupiers, including restaurants, bars, offices, retail, leisure operators, breweries, car washes, gyms and healthcare centres. Spread across England and Wales, around 80% of the portfolio’s value is located in London, with much of the remainder in Manchester and Birmingham. Complex process Sir Peter Hendy, Network Rail chairman, said: “This has been a very thorough, detailed and complex process and we are pleased we are now in a position to announce Telereal Trillium and Blackstone Property Partners as the new owners of the commercial estate. “This deal is great news – for tenants, it will mean significant commitment and investment, and for passengers and taxpayers it will mean massive, essential improvements without an extra burden on the public purse.” David Biggs, managing director, Network Rail Property, said: “We are proud to have fostered so many small, independent, diverse businesses and communities across the country and we are confident that these will continue to thrive under the new owners. “Ultimately our role is to run, improve and grow the railway, and managing these properties isn’t essential to that. The new owners will invest in and grow the estate, and we can focus on our core business of running the railway.” Graham Edwards, co-founder and chairman of Telereal, said: “The Arches portfolio is a unique and vital part of the UK economy. We are tremendously excited by the prospect of working with its entrepreneurial tenant base – made up of car mechanics, bakeries, micro-breweries, restaurants, and just about every type of business you can think of. These tenants are a vibrant part of many local economies and communities. “As a long-standing real estate investor in the UK, we and our partner Blackstone believe that our ownership of the portfolio will provide the supportive environment in which these businesses can flourish on a long-term basis. For example, our business plan anticipates investing in several hundred currently disused arches so that they can provide space for more local businesses. “With our permanent capital structures, we will be investing in the portfolio for many years. We believe that the long-term success of this portfolio rests on strong relationships with our tenants, as well as with local communities and local government. We intend to remain particularly sensitive to the small businesses that have been long-term tenants of the Network Rail estate, and look forward to a long-term partnership with Network Rail.” James Seppala, head of European real estate at Blackstone, said: “We are honoured to have been chosen as the new owners of Network Rail’s commercial estate. The portfolio is unique in its character and function, and we are excited by the tremendous opportunity for us to contribute to the continued revitalisation of the railway arches in the UK, always recognising the role that they play in stimulating economic activity, growth and prosperity, in particular among SMEs and local communities. Rothschild is leading the sale of the Arches portfolio, with JLL providing due diligence advice. Cushman & Wakefield is advising Blackstone alongside Gowling WLG and Grant Mills Wood is advising Telereal Trillium. CBRE  is advising Terra Firma. BNP Paribas Real Estate is advising CK. To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette