Blackstone bets on low-risk realty assets

For its investments in the Indian real estate, Blackstone seems to follow adage “slow and steady wins the race” quite ardently.

Till 2011, the real estate segment recorded foreign direct investment (FDI) of about $14 billion (Rs 74,000 crore). During the boom years of 2005-2008, Blackstone, which manages $57 billion (Rs 3,02,100 crore) of real estate assets globally, invested only Rs 35 crore for a 35 per cent stake in Bangalore-based property management firm Synergy Property Development Services (April 2008). Two years later, Blackstone bought Bank of America Merrill Lynch’s $2-billion Asia real estate portfolio, which included $400 million of Indian properties.

While about 45 of 60 global funds such as Goldman Sachs, Marathon, Lehman Brothers and Wachovia exited Indian assets after the global slowdown in the last two years, Blackstone has steadily built its realty portfolio in India.

While Blackstone invested $471 million in the Indian real estate segment in the last two years, the top five investors together accounted for an investment of $478 million during 2009-2012, according to data collated by VCCEdge.

Along with the Merrill portfolio, Blackstone has assets of $871 million in Indian realty. It is increasing its focus on the segment as its investments in publicly-traded securities such as Gokaldas Exports have declined. Globally, real estate is one of the most profitable asset classes for the investor.

People tracking the company say at a time when the markets have bottomed and developers are looking for funds, cash-rich Blackstone is recording good deals in real estate. “They took a different view of the market during the boom, as well as after the global slowdown. When the services sector is growing and fuelling demand for offices, they think they are headed in the right direction,” said a person who had worked with Blackstone earlier.

“They have timed it well. Their ability to transact at attractive valuations is greater now, as the lives of funds such as HDFC and ICICI Venture are coming to an end,” said Amit Goenka, managing director, Essel Financial Services, a unit of Subhash Chandra’s Essel group.

After the life of HDFC’s foreign fund came to an end, Blackstone had helped the Embassy group to buy back HDFC’s stake it the company’s Manyata Business Park in Bangalore for Rs 540 crore. What makes Blackstone different?

Though Blackstone has aggressively invested in Indian properties, it has adopted a safe approach, as it has in global markets. Betting on the huge demand for homes in the US, it bought foreclosed homes worth $2.5 billion in that country. But in India, most of its investments are in fully-leased, income-generating and low-risk assets such as information technology (IT) parks and business parks, which are FDI-compliant.

In mid-2011, Blackstone invested $200 million (Rs 1,000 crore) for a 50 per cent stake in a special purpose vehicle that held three properties — Embassy Golf Link, Manyata Embassy Business Park and Embassy Tech Zone in Pune. In December 2011, the US PE giant acquired an IT special economic zone (SEZ) in Pune from the DLF-Hubtown joint venture for Rs 810 crore.

Blackstone, along with the Embassy group and a property fund promoted by HDFC, is buying an SEZ on the outskirts of Bangalore for Rs 1,950 crore, with each company contributing equal amounts.

“They are playing it safe because there are no development, construction and occupier risks in these assets, as they are fully leased out,” says Essel’s Goenka, adding, “There is always an upside. One can get yields of 10-11 per cent, even in the worst-case scenario. These are as close as you can get to AAA investments.”

But as the risks are lower, returns from IT parks and SEZs in five to 10 years are only 15-19 per cent, compared with 20-25 per cent returns from the residential segment.

Since these are fixed income generating and low-risk assets, investors such as Singapore-based Ascendas and Mapletree and IDFC are also investing in IT parks and FDI-compliant office properties.

Ascendas has assets under management of about Rs 7,800 crore across its IT parks, SEZs and other properties in Bangalore, Chennai and Kolkata. While Singapore’s Mapletree bought two million sq ft from Assetz Global Technology Park for Rs 800 crore, Baring PE Partners invested Rs 500 crore in RMZ Corp. Another global investor, Morgan Stanley, has invested $800 million in Indian real estate, mostly across residential properties.

An executive of that group said Morgan Stanley was comfortable with that segment.

“The basic difference between Blackstone and others is investors such as Mapletree have been involved in greenfield projects, while Blackstone has largely invested in brownfield projects,” said an investment director of a global property consultant.

With Blackstone planning to launch a $2-billion Asia property fund, experts expect more money to flow into India.