Blackstone’s Asian retail bet bucks the data

Blackstone has picked the retail sector to make what PERE understands is its largest investment to date from its newly-launched pan Asia core-plus real estate fund.

The New York-headquartered asset manager has agreed to acquire 50 percent of Taubman Asia’s stake in three shopping centers, in a deal valued at $480 million.  Taubman Asia is the Asian arm of the US retail property specialist Taubman Centers.

Two of the shopping centers are in China and one is in South Korea. Once the transaction is officially completed, Taubman would effectively retain a 17.15 percent ownership interest in Starfield Hanam, 25 percent in CityOn.Xi’an in the Chinese north-western city, and 24.5 percent in the CityOn.Zhengzhou shopping center in central China.

Blackstone made the investment through its first lower risk-return real estate vehicle in Asia. The firm launched the open-end commingled core-plus fund in 2018, targeting investments in substantially stabilized office, logistics, residential and retail assets in high quality Asian geographies and gateway cities.

PERE understands Blackstone has so far raised approximately $900 million in equity capital under management for the fund. Typical core-plus net returns in low double-digits will be targeted from these investments, according to a source familiar with the strategy.

While this is not Blackstone’s only retail investment in Asia in recent months, it does come at a time when the retail industry the world over is dealing with an onslaught of challenges caused by fundamental structural shifts in consumption. But while alarm bells might be ringing for the US or European shopping malls, some industry observers are advocating for a more optimistic view on Asian retail given favourable demographic trends. According to the Asia-Pacific Capital Trends 2018 report published by property transactions data provider Real Capital Analytics, investor demand for prime retail assets, for example, remained high last year, and they continued to expand their exposure in markets like Hong Kong, Shanghai, Sydney and Seoul.

“As it relates to Asia, investors generally take a fairly balanced view of the retail sector,” noted one person involved in the Blackstone-Taubman deal. “Everyone is aware of the challenges facing the sector because of e-commerce. But investors also appreciate the fact that there are other dynamics that could mitigate and offset these challenges. With the economic growth of the middle class, and consumption and urbanization trends, there is still space for a well-managed and well-executed retail strategy.”

Regardless, optimism is yet to reflect in transaction volumes for Asia as a whole. Total retail investment in Asia-Pacific, according to property services firm CBRE, was $19.7 billion in 2018, a significant drop from the $29.5 billion recorded in 2017. Meanwhile, the retail investment turnover for China specifically was $4.4 billion in 2018, a slight increase from $4.1 billion in 2017, but that was largely a result of some big-ticket transactions. In July, for example, China Vanke-led consortium agreed to acquire a portfolio of 20 shopping malls in China from CapitaLand for $1.2 billion, and a few months later Link REIT announced the purchase of Beijing Jingtong Roosevelt Plaza for around $369 million.

Tom Moffat, executive managing director and head of capital markets at CBRE, acknowledges investors’ cautious approach towards retail investments but adds that groups with sector expertise are still active in the market. “Investors are not dismissing retail as a sector in Asia but are being selective and careful in their underwriting of potential deals. They want to make sure the underlying asset is backed by sustainable income and that the tenant mix of has enough experiential retail.”