The PE firm as global landlord.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET .

Private equity firm Blackstone, the undisputed king of property funds, continues to bet big on global real estate. In the last week it raised $9.4 billion for Asian real estate. It was also given the green light to acquire Spain’s biggest real estate investment fund (REIT), Hispania, for €1.9 billion. The move, after its prior acquisitions, will cement its position as Spain’s biggest hotel owner and fully private landlord.

Hispania’s 46 hotels, added to Blackstone’s other hotels, will turn the PE firm into Spain’s largest hotelier with almost 17,000 rooms, far ahead of Meliá (almost 11,000), H10 (more than 10,000) and Hoteles Globales (just over 9,000).

It took Blackstone just three moves to become market leader. First, it acquired the hotel group HI Partners from struggling Spanish lender Banco Sabadell for €630 million in October 2017. Then, a month ago, it bought 29.5% of the hotel chain NH Hoteles, which is currently in the hands of the Chinese conglomerate HNA. Now, by raising its stake in Hispania from 16.75% to 100%, it will take up a dominant position in one of the world’s biggest tourist markets.

With this deal, it will also expand its residential property empire in Spain. Blackstone has over 100,000 real estate assets controlled via dozens of companies. Those assets include a huge portfolio of impaired real estate assets, including defaulted mortgages and real estate-owned assets (REOs).

Blackstone also owns 1,800 social housing units, which it acquired from Madrid City Hall in a controversial deal brokered by the son of former Spanish prime minister José Marí0a Aznar and former Madrid mayor Ana Botella. Blackstone paid €202 million for the apartments in 2013; they are now estimated to be worth €660 million — a 227% return in just five year! Since its purchase of the properties, Blackstone has hiked rents on the flats by 49%. Those who can’t pay have been evicted.

Blackstone also played a starring role in one of the world’s biggest real estate operations of 2017, in which it payed €5.1 billion for the defaulted loans Banco Santander inherited from its shotgun-acquisition of Banco Popular.

By the end of 2017, the total value of its property assets under management had surged almost 29% to €184 billion.

The transformation of private equity groups like Blackstone into global landlords occurred for a number of reasons. First, after the financial crisis they were one of the few large market participants with enough cash on hand to invest in foreclosed homes, of which there was a massive glut all over the world. Central banks and financial regulators gave a big helping hand by driving the cost of borrowing, especially for well-connected Wall Street funds, to heretofore unimaginable depths, as well as by passing regulations that made it easier for the funds to issue rent-backed securities.

Before the financial crisis, real estate investment trusts (REITs) — funds that own, operate or finance income-producing real estate — didn’t even exist in Spain. The government had to alter national laws and regulations to make them legally possible, which it duly did in 2012. Since then, in the absence of domestic retail appetite for property — most young Spaniards have neither the funds nor job security to buy property — REITs (or Socimis as they’re known in Spanish) have become a prime source of demand.

And with average rents in Spain soaring by 25% since 2014, and by over 50% in Barcelona and the Balearic Islands, these investments have offered lucrative returns. Which in turn has helped entice more big players into the market. In 2017 alone global private equity funds purchased some €60 billion of real estate assets from Spanish banks — almost three times the total outlay in 2016.

But those soaring rents appear to be reaching their upper limits. Prices in the most upmarket barrios of Barcelona and Madrid have already begun dropping. According to the Spanish Savings Banks Foundation (FUNCAS), the same funds that piled into the market last year are beginning to worry that Spain’s rental real estate boom may be running out of steam, given that many Spanish families, scratching a living on poorly paid, zero-security jobs, are incapable of paying today’s high prices.

Increasingly, young people are choosing to stay at home, one recent study shows. Many tenants that can’t pay their rent have already been evicted from their fund-owned apartments. The latest report from the General Council of the Judiciary (CGPJ) shows that during 2017, over 35,000 families and individuals were evicted due to non-payment of rent.

Nevertheless, the Financial Times pointed out that the sheer scale of private equity firms’ recent fundraising, coupled with rising property values, is fueling concerns that unsustainable pricing bubbles have formed in some real estate markets. There are certainly plenty of candidates. If some of those bubbles go “pop” in synchronized fashion, even (or especially) the global king of property could have big problems on its hands. By Don Quijones.

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