Blackstone Group closed this month on the largest real estate debt fund ever, giving the investment firm plenty of cash to lend to property investors looking to go shopping during the coronavirus pandemic.

One of the world’s largest owners of commercial property, Blackstone began raising money for the fund in the spring of 2019 and the $8bn it took in exceeded expectations, said Jonathan Pollack, global head of Blackstone Real Estate Debt Strategies. Fundraising got a boost after Covid-19, partly because interest rates fell, increasing the appeal of relatively high-yielding real estate debt.

“There’s an expectation that there will be a greater opportunity in real estate debt than there has been,” Pollack said in an interview.

The fund will make new loans and buy real estate debt securities along with other investments. Blackstone’s real estate debt business has grown to $26bn of property debt assets under management, up from $10bn five years ago. Overall, its global real estate portfolio is valued at $329bn.

Fundraising by private equity firms has declined overall this year as the pandemic created enormous uncertainty and barriers to travel and other business practices, especially in the early months. As of mid-September, private equity funds had raised $81.5bn compared with $142.9bn during the same period last year, according to data firm Preqin.

But it is beginning to pick up. Other recent closings include a $950m real estate debt fund raised by KKR that is focusing on the most junior tranches of commercial mortgage-backed securities.

During the first few months of the pandemic “everybody regardless of lender class was assessing their own portfolio,” said D. Michael Van Konynenburg, president of Eastdil Secured. “Once people got to July they felt they understood where their own portfolios are and started to ramp up and look for new deals.”

Much of the new capital raised is by firms planning to focus on distress properties. Billions of dollars of loans backed by malls and hotels are in default, according to data firm Trepp. At the same time, many of the traditional lenders, like originators of commercial mortgage-backed securities, have put on the brakes. That is increasing the rates borrowers are willing to pay to lenders still in the game.

“New capital invested expects to earn greater returns,” said Pollack.

Blackstone’s debt funds — which have historically returned about 10% annually to investors — tend to avoid riskier debt deals. Much of its business involves making first mortgages to some of the world’s largest real estate companies and investors.

For example, Blackstone might make a loan today to the buyer of a well-leased office building that was in contract to be sold before Covid-19 hit and the deal collapsed. “It’s going to get done today in much more uncertain capital markets,” Pollack said.

“Twelve months ago the guy buying the building would get 12 different term sheets from lenders of all stripes,” he said. Today fewer lenders will be able to give the buyers the certainty they need that they can close the deal “and they’ll pay more” for certainty, Pollack said.

Pollack said Blackstone’s debt portfolio hasn’t suffered many problems from loans it made before the pandemic. He said that is partly because Blackstone’s low risk loans are typically about 60% to 65% of the values of the properties.

“It also helps to be very selective about who you lend money to,” Pollack said. He pointed out that Blackstone’s borrowers have tended to be “well-capitalised institutional investors that you would expect to hold on to [properties] through a period of dislocation.”

Source: Wall Street Journal


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