Blackstone saw real estate win that London missed

TWO mergers in one of the few hot areas of real estate — warehouses — tell you all you need to know about the advantages private equity enjoys over the lifeless UK and European stock markets.

A Blackstone Inc property fund is bringing together a host of recent acquisitions to create a large, UK-focused logistics landlord. A bigger company with a greater variety of sheds and sites will be more relevant to the likes of Inc and Deutsche Post AG’s DHL as they cater to consumers wanting a pack of AA batteries delivered in ever fewer hours.

Dubbed Indurent, it’s an odd name for a good idea. The business will also be more relevant to stock market investors when the time comes for Blackstone to exit. True, a deal with a pension or sovereign wealth fund would be the mostly likely outcome: Blackstone sold Logicor, an earlier roll-up of European warehouses, to China Investment Corp in 2017 for €12 billion (RM61.5 billion). But the US alternative asset manager would still need the credible option of an IPO to get the best price.

Think of Blackstone as taking subscale assets off the public markets, adding some other piecemeal acquisitions and creating something with critical mass that investors might enthusiastically buy back. The two biggest assets in the stable are company called St Modwen, taken private in 2021 when its shares were still off their pre-pandemic high, and Industrials REIT, which was down more than 40% amid worries about rising interest rates last year before Blackstone’s intentions emerged.

The listed European real estate sector is a fragmented patchwork of mostly illiquid stocks lacking scale players in the areas that excite global investors. In the US, data-centre specialist Equinix Inc is worth nearly US$80 billion (RM382.73 billion). Europe would just be glad to have a data-centre IPO.

At least in logistics, there’s a big local player in the form of Segro plc, but even that’s worth only around of Prologis Inc, the US leader with a market value of around US$120 billion. If Indurent can grow a bit more in the coming years, it’s not hard to see potential investors lapping up the scarcity value.

Welcome consolidation is finally underway, led by the stronger publicly traded minnows. The latest deal came on Feb 12, with London-listed warehouse operator Tritax Big Box REIT plc agreeing key terms to buy peer UK Commercial Property REIT Ltd (known as UKCM). Just as with Blackstone’s internal warehouse merger, the enlarged

Tritax would become a more appealing partner to its customers. UKCM brings more urban sites that help with those Amazon Prime deliveries.

The shares will become easier to trade, potentially entering the FTSE 100 index. The terms divide the combined company between each side’s shareholders in proportion to the firms’ most recent net asset values. The target’s NAV is already down about 30% since June 2022: A lot of pain has been priced in.

It sounds sensible enough, yet the deal is proving a slog. The buyer’s shares are down, partly due to technical trading by merger arbitrageurs. Investors are also worried that the portfolio being acquired includes some leisure assets that would need selling. And UKCM is a bit of an unknown quantity. Blame MiFID II, the European securities regulation, for the fact that barely any brokers write research on it. With the transaction yet to be firmly agreed, full details on the financial logic aren’t available. On top, UKCM’s chair isn’t supportive.

The intuitive benefits of consolidation surely offset the negatives here, but that’s not the signal from the stock market.

Who would a property boss rather work for? A private capital fund like Blackstone’s or UK shareholders? Even leaving aside the higher pay in the private sphere, you can see the temptations of pursuing a warehouse roll-up away from the public markets. And where would investors seeking to play the logistics boom rather allocate their funds? You can also see why the alternative investment managers say there’s a world of opportunity out there. — Bloomberg

  • This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

  • This article first appeared in The Malaysian Reserve weekly print edition