Blackstone Sees Payoff From London Projects Banks Shunned

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Chiswick Park office development in West London. Photographer: Mike Booth/Alamy

Blackstone Group LP, manager of the world’s biggest property fund, is collecting on 1.25 billion pounds ($2 billion) of bets it made mostly on London developments in the last five years as banks shunned similar investments.

“London is the number one city for attracting overseas investors and is where we’ve been fairly active,” Ken Caplan, senior managing director in charge of European real estate, said in an interview. “A big focus of ours has been to target high-quality properties that have some type of fixable problem, that once fixed are perfect for institutional investors.”

Blackstone can afford to be selective in London as banks avoid lending for developments unless a tenant is committed to lease space or a buyer is lined up for the completed property. The firm picked projects in growing markets like student housing as well as partially built properties that needed funding for completion.

The world’s biggest buyout firm is seeking as much as 800 million pounds for Chiswick Park, a west London office development it bought in April 2011 for 480 million pounds. In June, the company sold three central London student dormitories to a fund managed by Round Hill Capital LLC for about 415 million pounds. The firm more than doubled its money on the deal, according to a person with knowledge of the matter who asked not to be identified because the information is private. Caplan declined to comment on the sales.

Blackstone, based in New York, is the largest U.S. owner of hotel properties, the No. 2 office landlord and the third-biggest owner of shopping centers, according to trade newsletter National Real Estate Investor. The firm combines investor capital with high levels of debt to buy troubled or undervalued assets, make improvements and sell them to achieve at least 20 percent annual returns.

Bank Reluctance

The investment firm placed bets on U.K. developments after project finance dried up in the wake of the global credit crisis. For the first time in at least 11 years, U.K. banks are unwilling to finance development projects without a tenant committed to lease space or a buyer for the completed property, according to a biannual study by De Montfort University released in May.

“The banks aren’t taking on development, so private-equity firms have the keys to unlock development returns, provided that they can price risk correctly,” said Matthew Cutts, head of the advisory team for lenders and investors at Arcadis NV’s construction consultant EC Harris.

Because developments take years to get from the drawing board to the opening, the shorter-term investment strategies of buyout firms will increase sales and purchases of projects as they advance towards completion, Cutts predicted.

Chiswick Park

Blackstone this month hired CBRE Group Inc. to handle the planned sale of 33-acre (13-hectare) Chiswick Park. Since buying the property in a deal 75 percent funded with debt 18 months ago, the firm cut vacancies to 1 percent from 9 percent and constructed a 215,000 square-foot (20,000 square-meter) building on the site.

“Total occupancy costs are half of what they are in the West End” district of central London, said Caplan, 39. The shortage of modern office space in the capital has helped drive up rents at Chiswick Park, he said.

Rents averaged 30.60 pounds a square foot when Blackstone acquired the property, according to Deutsche Bank AG asset-backed bond analysts. One of the most recent leasing deals there was for 47.75 pounds, Blackstone said.

Its funds invested in student housing as a shortage of university accommodation in London lifts rents faster than inflation and keeps vacancies low. The industry will register record sales this year because it generates income returns that beat the average for family housing or commercial real estate, broker Jones Lang LaSalle Inc. predicted.

Dormitory Brand

Blackstone built the 2,500-room Nido student-dormitory brand in central London. It started by acquiring a former bank office building at Kings Cross and turning it into high-end residence hall, repeating it in two other locations.

Blackstone has broken ground at a site near Woburn, 45 miles northwest of London, in a 250 million-pound plan to open a fifth location for its Centre Parcs vacation-resort business. The project includes 625 lodges and a 75-room hotel.

Office developments under way include a 700,000 square-foot building that UBS AG agreed to lease for about 18 years at Broadgate in the City of London. Blackstone and British Land Co. each own 50 percent of the project.

Construction work at Woburn, Chiswick Park and Broadgate will employ 2,900 workers and provide space for 10,200 employees, Caplan estimates.

City Offices

Blackstone gained control of the Devonshire Square office campus in July for about 330 million pounds. Insurance broker Aon Corp., the largest tenant on the site near London’s Liverpool Street train station, plans to move into nearby skyscraper that British Land is scheduled to complete in 2014.

“It’s a repositioning opportunity,” that may attract technology, media and telecommunications companies, Caplan said in an interview at his office in London’s Mayfair neighborhood.

The U.K. is Europe’s largest real estate investment market, Real Capital Analytics Inc. data show. London property is attracting international investors as they try to protect wealth from economic and political turmoil in the euro region and the Middle East.

The U.K. represents a large proportion of the 2 billion euros ($2.6 billion) excluding debt that Blackstone invested in European real estate during the past two years. That may soon change.

Blackstone in July agreed to acquire Gecina SA’s French logistics properties for about 203 million euros to add to the portfolio of industrial and logistics centers it’s assembling globally. In June, the firm acquired three malls in Turkey from Redevco BV of the Netherlands.

“The U.K has been our most active market to date, however we are seeing an increasing number of opportunities across Europe,” Caplan said.

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