Blackstone reveals its European real estate strategy

Having been at the forefront of the largest real European real estate deal in history, James Seppala has now taken the helm at Blackstone this side of the pond. With the €12.25bn (£10.8bn) sale of Logicor now in the rear-view mirror, at the age of 39 the new head of real estate in Europe oversees more than €50bn of assets. A protégé of the company’s revered chief operating officer and former head of real estate Jon Gray, Seppala was elevated at the start of the year from his accelerator role as head of European real estate acquisitions – a job he took on at the start of 2015. Since then he has been the brains behind many of Blackstone’s biggest buys of the past three years. These include the €3.4bn purchase of German office business OfficeFirst, a 51% stake in Banco Popular’s €30bn loan book and the €2.2bnbn acquisition of Nordic assets from Obligo.     There is very little that Seppala and Blackstone don’t touch, be it London offices, co-working, affordable housing, shopping centres, last-mile distribution or the debt market through its BREDS business that has already issued $2bn of loans in Europe so far this year. Last year, Blackstone raised Europe’s largest ever real estate fund at €7.8bn off the back of its record-breaking $15.8bn (£11.7bn) 2015 global fund. It has now raised €2.3bn for its debut core-plus European fund that sees it expand over and above its traditional domain of opportunistic investing. Seppala tells EG how Blackstone is planning to team up with blue-chip partners to help deploy the new core-plus fund and why it expects to be involved with more listed M&A. He also lifts the lid on the culture the firm promotes to give it the Midas touch. A wealth of opportunities “Becoming head of Europe was not something I was particularly focused on. It was something that, when I was told last year, I was a little unsure how much I was actually going to enjoy it,” Seppala says. “My career until then had been on the acquisitions side of the business, but changing responsibilities energises you and I’d underestimated that fact. It’s still early days, so we’ll see, but things are going well currently.” Seppala, who is measured but open in his approach, says the company’s habit of pushing talent through the business rapidly is part of the culture that makes it successful. “Part of what makes this place special is that it is a hyper-meritocracy. Our team is incredibly talented and, as the business grows, so do the opportunities for them around different business lines as well as around the world,” he says. “We move our people from London, to the US and to Asia, sometimes for 18 months and sometimes permanently. That allows them and their careers to evolve, to become more broadly experienced across different geographies or different groups.” With that talent Blackstone is always trying to push the boundaries and come up with the next thematic idea that is going to see it outperform its rivals. Driving strategy The company’s biggest recent strategic evolution has been its move into core-plus on top of its traditional high return opportunistic funds. It manages more than $30bn of core-plus money globally, largely in the US through segregated mandates that it has built up over the past four years, but it has now launched its first European fund. Blackstone Property Partners Europe, which is open-ended, is now urgently looking to deploy the equity it has raised and wants to team up with partners so it can do so faster. [caption id="attachment_895775" align="aligncenter" width="847"] BPPE bought a Logicor stake last year[/caption] BPPE bought back a 12% stake of Logicor from CIC at the end of last year for the fund and in May acquired a €425m portfolio of 2,500 Berlin residential properties, but Seppala thinks that the market has not caught on to its core-plus strategy just yet as its opportunistic “buy it, fix it, sell it” approach is so entrenched in the psyche. “We are raising capital on a continuous basis. It’s a permanent capital vehicle and also one which allows us to partner with owners, operators, and so forth. “We are buying on our own of course, but we have also been buying less than 100% or even minority stakes in assets or portfolios – whatever makes sense to counter parties given their particular circumstances as we have a significant degree of flexibility in that strategy,” he says. Blackstone reshapes its property top team “Our view is that if we like the underlying asset and theme, and we may hold it forever, then we could partner with some of the UK public companies on, for instance, an office building or district in London. They can come to us as the vehicle is permanent capital, it is lower return, we can be flexible on the financing structure and work together to drive or guide strategy.” Some outsiders have suggested that Blackstone’s move into core-plus is linked to a concern over global property being set for a dip and subsequently taking a more defensive position, but Seppala refutes this. “Our timing was driven by some of our largest investors within our opportunistic funds coming to us and asking us to similarly help them deploy their capital in the Core+ space. After a couple of years investing mainly through separately managed accounts we had the confidence that we could execute across this strategy. It’s not a call on the market,” he says. “We are later in the cycle globally but, nevertheless, we are constantly focused on where we think there are areas of relatively higher growth. If we can find those then of course the cycle may help, but the underlying theme or thesis is more important.” The Brexit impact What does concern Seppala are broader geopolitical factors: “We are reasonably sanguine about growth prospects, stability and underlying GDP growth globally in the next 12-plus months, but I am concerned about events outside our control that could create disruption, such as geopolitical risks, for example,” he says. As a result of broader mispricing brought about by political events such as Brexit Seppala thinks Blackstone will be involved in an increasing amount of listed sector M&A activity. It is currently trying to take private Spanish hotel REIT Hispania having made a €2.3bn bid. “Around the world I think you could see us do more in the public markets in the next 24 months because expectations around interest rate rises impact investor appetite for REITs, for example. There is also some dislocation in that sector in the UK that is, in part, Brexit-related,” he says. Like his mentor Jon Gray, Seppala has been tipped for a role at the top table of Blackstone from an early age. With an unrivalled amount of dry powder to invest in Europe he now has the position and firepower to further cement his reputation and oversee the strategies that should see him move even further up the ladder. I want to get in with Blackstone. How do I do it? For many potential partners or advisers, having a steady and fruitful relationship with the world’s largest property investor is something of a Holy Grail. So what advice does its head of European real estate have for those looking to cultivate one? “Don’t assume we know or are aware of everything, because we don’t. There are regularly people who bring good ideas to our attention that we are then able to work on together. “We may be relatively demanding but ultimately we are very long term with our partner and adviser relationships. Some of our operating partners or portfolio company chief executives have been involved with us for over 20 years. “If it’s going to click and we’re going to work well together that requires mutual investment into each other over six months or so and the build-up of trust, but then that relationship can be extremely fruitful. It’s not a short-term thing because we are not short-term real estate investors.” Seppala’s European agenda Last mile-logistics One of Blackstone’s most important strategic European plays is the development of its last-mile distribution portfolio alongside partner M7 Real Estate, which has already hit €3bn after entering the market at the start of 2017. Like Logicor, it is likely to evolve into a fully mature separate platform business. “When we looked through performance across our warehouse portfolio we saw there were tangential opportunities on smaller, more in-fill, urban assets that had been overlooked. It’s a more difficult asset class to scale and underwrite across Europe efficiently as ownership can be quite disparate. “It is possible that that will become a platform we ultimately manage, brand and potentially in time exit as one.” [caption id="attachment_922797" align="aligncenter" width="847"] St Katherine’s Dock, E1[/caption] London offices When Blackstone deployed billions into the London office market between 2012 and 2015 it probably did not fully anticipate the disruption Brexit has brought about. However, while some sales such as the £435m St Katherine’s Dock, E1, have struggled or taken longer than anticipated, it has ridden high on the buoyancy of the leasing and investment market, the extent of which has surprised many, including Seppala. “I hope we will be investing more in London offices over the next several years because we see the leasing success if you own good real estate and are prepared to invest into the asset, as well as the liquidity of those assets, once stabilised,” he says. Serviced offices Last year, Blackstone bought The Office Group for £500m to gain exposure to the disruption in the office sector and it is now looking to build the UK business internationally. “We continue to grow the business through leaseholds and freeholds in their core London market but I could also see us making commitments internationally, such as in Germany for example. “TOG puts [us] more on the front foot in the way they see occupier demand trending – we can learn from that and apply it around the world.” [caption id="attachment_847434" align="aligncenter" width="1000"] Blackstone bought flexible offices provider the Office Group in 2017[/caption] Retail Through its Multi platform Blackstone owns 120 retail assets across 14 European countries valued at €5bn including St Enoch in Glasgow and Blanchardstown in Dublin. Seppala says it has been selling out of centres at decent pricing in the maligned sector, but does expect to be buying up distressed assets before too long: “We are finding the European investment market supportive for higher quality assets that are stabilised, with demand coming from European institutions. “Secondary assets are perhaps less liquid than they were 24 months ago but overall cap rates on sales are what we had hoped they would be. “I could see us being active in retail over the next few years globally if there is an element of repricing that affects the whole asset class, where public market investors perhaps apply too much of a broad brush.” Affordable housing With its traditionally skinny yields the affordable housing sector might not be one typically associated with opportunistic investing. However, according to Seppala, the potential for major capital uplift for secure income assets is so great that it squares and that is why Blackstone has backed UK housing association Sage following similar successful ventures into the sector in the US, Germany, Spain and Sweden. “It’s historically been a capital-starved sector, both in terms of the supply of stock and capital investment into existing stock. “It is a lower yielding asset class but capital invested into the assets – particularly in the case of assets where previous owners may have invested little or nothing for 20+ years – leads to win-win outcomes, including for tenants. “We are bringing more capital into this sector across Europe and globally, which should be a positive in addressing the biggest issue – the under supply of housing stock, including here in the UK.” [caption id="attachment_922801" align="aligncenter" width="847"] Blackstone is targeting Spanish coastal resorts[/caption] Spain Blackstone has bet big on Spain in the last five years, mopping up billions of euros of Spanish residential totalling 100,000 flats through buying from the state, buying into listed companies and from banks, most notably in a deal to buy a 51% stake of Banco Popular’s €30bn loan book last year. Now it is in the process of a €2.3bn take-private play for hotel REIT Hispania. Seppala says: “There is a natural limit on supply in coastal resort markets in Spain. Many were historically owned by private owners and some have been capital constrained. It is as a result possible to invest into the assets and improve performance sometimes quite meaningfully.” The Nordics The Nordics have been Seppala’s baby, having instigated the 2015 deal to buy $2.2bn of assets managed by Obligo; built a 61% stake in Swedish residential landlord D. Carnegie & Co, which has a portfolio worth £1.9bn; and last year took private Finnish real estate company Sponda, which owned €3.8bn of assets. “It’s a wealthy, hyper-transparent, high growth region that is extremely liquid, but one where the number of investors that can operate in real scale is more limited. We have a lot of conviction in the Nordics and hope to do more there. “Between 2011 and 2014 we were buying into distress and the Nordics didn’t really have any meaningful distress so we didn’t focus on the region as much. In retrospect, we should have done so anyway because the growth trajectory was so good that, had we invested then, we would have done very well, as others did.” German offices Blackstone bought the former office portfolio of German fund manager IVG, OfficeFirst, last year for €3.3bn after the business’s failed IPO. OfficeFirst is now being used by Blackstone as a platform to manage all of its office assets in the country, including those in its core-plus fund, and while the assets from the buy are starting to be refinanced or sold, the management business is expected to be a permanent fixture. “That’s a platform that we may use to manage office assets across multiple different strategies, potentially forever.” The James Seppala story Seppala was born of a German mother and English father in France and went to school there until he was 11. Having gone to boarding school in England until he was 18 he studied at Harvard and “stumbled” into Goldman Sachs’ real estate private equity group when scouting around for a job. He spent a decade at the investment bank, nine of which were in London and one in New York, before joining Blackstone in 2011. As a result he says he does not identify with one nationality and his unusual accent has elements of all his geographical journey and heritage. Married to an American, he speaks Spanish on top of English, French, German and Italian, which he says is “handy” for doing deals on the continent. “It’s not impressive really, it’s just fortuitous.”     Quick-fire questions: Favourite deal: Obligo [the $2.3bn 2015 purchase of assets from 10 funds of the Nordic manager]. It was an amazing underlying asset base with a lot of upside potential, multi-jurisdictional, complicated to underwrite, and completed over a three week period of time. We involved multiple platforms and partners to underwrite the asset base and transaction, which is so far tracking well. The deal that got away: Coeur Défenese [the giant Parisian office complex bought by Lone Star in 2014 for €1.3bn in a highly complex CMBS restructure and sold last year for €1.8bn]. Lone Star did a great job and were smart in the way they got to control over the asset. We had looked at that transaction many times over the years. What keeps you up at night? Macroeconomic events we can’t control, but that could disrupt our business If there’s one thing you would change about the real estate industry: The more limited accessibility of real estate for private investors. Our funds are principally for large institutions that today may have 10-12% allocated to real estate. Retail investors have maybe 1% which is a reflection of their inability to access the sector today Best piece of advice you’ve been given: From Jon Gray, and that’s that the macro themes are always more important, and end up outweighing the micro. Seppala images: Will Bremridge To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette A version of this article appeared in the 26 May edition of EG with the headline “No stone left unturned”