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Blackstone bets on Britain’s railway arches

Pedestrians cross the road in view of the 22 Bishopsgate office tower construction project in the City of London, U.K., on Friday, Aug. 31, 2018. Axa SA's real estate unit and development partner Lipton Rogers Developments LLP are building the 278-meter (912 foot) Bishopsgate tower, which will become the tallest in the City of London financial district. Photographer: Simon Dawson/Bloomberg

LONDON • Blackstone Group LP is departing from its usual “buy it, x it, sell it” strategy to make a long-term bet on British commercial real estate.

The private-equity group that’s best known for refurbishing unloved properties and selling them on at a huge profit is pivoting toward a “buy-and-hold” approach with its politically sensitive purchase of many of the UK’s converted railway arches.

Blackstone, together with Telereal Trillium Ltd, agreed to buy the portfolio of around 5,200 properties from Network Rail Infrastructure Ltd for £1.46 billion (RM7.88 billion).

The deal, among Blackstone’s biggest UK real estate investments since its 2009 purchase of a stake in London’s Broadgate complex, reflects its growing appetite for investments that can be held for decades rather than years.

The money manager deployed a similar strategy in 2015 when it invested in Manhattan’s biggest apartment complex, Stuyvesant Town — another deal that aroused political scrutiny.

The UK’s railway arches have, over decades, been converted and leased to mainly small businesses, which use them for everything from bars and coffee houses to auto mechanic shops. About 75% of the rent generated by the Network Rail portfolio is in London, with the remainder concentrated in cities including Birmingham and Manchester.

The deal is therefore also a bet on the economic prospects of the UK, which have been jeopardised by uncertainty over Brexit, as well as a wager on the beleaguered retail sector.

The proceeds of the Network Rail transaction will help finance an upgrade of the UK’s railway system, which is suffering from unprecedented congestion after years of under-funding. Telereal, which will own an equal stake with Blackstone, will oversee the day-to-day running of the properties and will hope it can manage them more efficiently and grow rents.

Private-equity real estate firms are increasingly raising long-term pools of capital that reduce the pressure to constantly tap investors and to pursue deals that must produce outsize returns within just a few years. The fact that the Network Rail deal involves thousands of small properties may mean competition for the portfolio was less intense due to the hands-on management required. — Bloomberg