Blackstone Vies With Goldman in Spain Rental Housing Bet


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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

By Sharon Smyth and John Gittelsohn, Bloomberg,

Blackstone Group LP (BX), builder of the biggest single-family rental home business in the U.S., is using its experience to replicate the model in Spain, where property prices have dropped 40 percent.

The world’s largest private-equity firm, which has spent $7.5 billion buying 40,000 homes in the U.S., agreed in July to purchase 18 apartment blocks from the city of Madrid for 125.5 million euros ($173 million). The firm is bidding against investors including Goldman Sachs Group Inc. for another 1,458 housing units being sold by Madrid’s regional government, according to three people with knowledge of the auction, who asked not to be identified because the information is private.

“Building a business from scratch without a single employee and buying something like $150 million in homes per week requires a learning process,” Anthony Myers, senior managing director of real estate at Blackstone, said at a conference in Barcelona last week. “When we looked at the situation in Spain, we thought we could see something similar, where we could replicate a lot of the systems and technology that we created in the U.S.”

The New York-based firm is seeking to transplant an investment that’s transformed housing in parts of Atlanta, Phoenix and California into one more suited to Spain. Blackstone is competing with foreign and domestic distressed investors that are seeking bulk purchases of low-cost housing units, mainly apartments that are already occupied, in cities where local governments need to sell assets to trim deficits.

Urban Areas

“Funds are being very selective in what they are buying,” Fernando Encinar, co-founder of, Spain’s largest property website, said during a telephone interview. “They’re focusing on homes complete with tenants and assured rental income in large urban areas like Madrid where there’s high demand and most people’s salaries can meet the rent.”

The investors’ strategies in Spain differ from the U.S., where they have targeted mainly foreclosed single-family properties, renovated them and sought tenants. In both countries, they’re aiming to buy cheaply after a crash, and bet on increased rental demand as more people struggle to qualify for mortgages.

While Spain traditionally has a lower percentage of renters than the U.S., the government last year introduced measures to increase demand in the rental market by abolishing tax breaks for individual home buyers, passing legislation to protect landlords by speeding up evictions of tenants who don’t pay, allowing owners to raise rents above the annual inflation rate and reducing the duration of leases.

Mortgage Drought

Three years of austerity, unemployment at 26 percent and a drought in mortgage lending are forcing more Spaniards to weigh renting and attracting foreign funds to invest in the country’s unsold homes, which may total 1.5 million units according to some estimates.

Home prices have fallen an average of 40 percent since the peak in 2007, according to and the IESE business school. Rents in Madrid have fallen 19 percent from their June 2008 peak. In Barcelona, Spain’s second-largest city, they’ve dropped 24 percent, according to Idealista data.

“Rental prices have fallen but it won’t be that way forever because renting is the only alternative many people have,” said Mikel Echavarren, chief executive officer of Irea, a Madrid-based restructuring firm that has advised on 22 billion euros of refinancing. He anticipates the arrival of large funds will help professionalize the market and bring price stability.

Right Structure

The strategy in both countries also shares a common view in the long-term prospects for real-estate.

“We’re pretty positive that Spain will recover in the medium- to long-term,” Myers said. “As long as ultimately we have the right capital structure over assets in the medium- to long-term we are going to do fine.”

Spain is showing signs of pulling itself out of recession as foreign investors return to its bond, stock and property markets. Gross domestic product expanded 0.1 percent in the third quarter, growing for the first time in more than two years, the Madrid-based Bank of Spain estimated in its monthly bulletin on Oct. 23. The Ibex-35 index (IBEX) of leading companies fell 0.9 percent at 5:38 p.m. in Madrid trading, paring its gain this year to 20 percent.

Private-equity firm HIG Capital LLC agreed in August to buy a majority stake in a portfolio of around 1,000 homes from Spain’s bad bank, known as Sareb. The transaction, known as Project Bull, valued them at about 100 million euros.

Sareb Pledge

The government has pledged that Sareb, set up last year to acquire soured real estate assets at a discount from rescued lenders, will sell 1.5 billion euros of assets this year. Juan Barba, head of real estate for the entity, said during the conference it will prepare a portfolio of rented accommodation to sell next year in response to investor demand.

More rental-home portfolios will be sold as prices start to match expectations, said Alfredo Laffitte, head of sales to investors at Banco Sabadell SA. “This type of sale will be flavor of the month in coming years.”

Goldman Sachs and Azora Capital SL, a Madrid-based private equity firm with 2.3 billion euros of assets under management, agreed in August to pay almost 20 percent above the asking price for 32 social-housing developments sold by the capital’s regional government. That beat Blackstone’s bid to secure 3,000 housing units with a monthly rental income of between 370 euros and 520 euros a month per unit.

Goldman Competition

Blackstone and Goldman Sachs are again competing to purchase a second portfolio from the regional government of Madrid, according to a person with knowledge of the bidding. The asset comprises 22 developments with 1,458 housing units and 1,588 garages situated in and around the capital, according to a presentation to investors obtained by Bloomberg. TPG Special Situations Partners had also considered the properties and is no longer bidding, said a person with knowledge of the process.

The minimum asking price for the homes, which are 94 percent occupied with a delinquency rate of 21 percent, is 67.2 million euros and is set to close in November, according to the presentation.

Spokesmen for Blackstone, Goldman Sachs and TPG declined to comment on the sales.

In the U.S., the birth of single-family homes as a new institutional asset class came in February 2012 with the auction of government-backed distressed homes.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, put 2,500 bank-owned rental homes up for sale. Colony Capital LLC, an investment fund founded by Tom Barrack won bidding for 970 of the homes in Arizona, California and Nevada. It’s now the third-largest single-family home landlord in the U.S.

Blackstone Buying

Blackstone started buying two months later through its Invitation Homes division, which now operates in 14 metro areas, including Atlanta, Chicago, Las Vegas, Miami, Orlando and Phoenix. The company is renting about 95 percent of them within 60 days, according to Laurence Tosi, Blackstone’s chief financial officer.

The firm is leading investors that have raised more than $20 billion to purchase as many as 200,000 homes to rent. Blackstone is now attempting to sell debt backed by the rental payments, the first securitization of its type, with Deutsche Bank AG (DBK) holding a meeting today in New York to market $479.1 million of the securities backed by mortgages on 3,207 properties. Blackstone’s long-term wager is that the homes’ values will rise, positioning the firm to exit at a profit.

“These existing houses have to go up more over time because there’s a shortage,” Blackstone Chairman Steve Schwarzman said during an Oct. 17 earnings conference call.

Even as Blackstone and its competitors continue to build large-scale national home rental businesses in the U.S., they will face different challenges in Spain.

Evicting Tenants

One is the comparative difficulty of getting rid of tenants who fail to pay their rent, said Claudio Sbrighi, general director for Solo Alquileres, a Valencia-based real-estate rental company with more than 40 franchises.

“You have to have a court order to make an eviction and your request goes to the bottom of a huge pile of papers stacked on a judge’s desk,” he said.

Sbrighi estimates it takes between six to eight months to remove a bad tenant from a property, down from just over a year before the government introduced fast track eviction laws. “It’s better but still, losing eight months of rental income can dent your yield.”

Critical Mass

Buying large lots at the bottom of the market is key for investors looking to shield themselves from bad tenants, according to Irea’sEchavarren

“Blackstone has critical mass and that’s its protection because when you buy 5,000 homes in bulk you will have factored into the purchase price that there may be a percentage of tenants that won’t pay,” he said, “It’s not like you’re an individual private investor who is ruined as soon as your tenant stops paying.”

The culture of home ownership is also even stronger in Spain than in the U.S., where the rate has dropped to 65 percent from a peak of 69.2 percent in 2004 before the housing crash. The U.S. level is expected to stabilize at around 63 percent, adding more than 2 million additional households to the rental market, according to Morgan Stanley housing analyst Haendel St. Juste.

Spain has the highest rate of homeownership in the euro zone after Slovakia and Estonia, at about 83 percent of dwellings.

The weakness of the Spanish economy is changing Spaniards’ mentality, saidEchavarren, who estimates that the rental market in Spain will double in coming years.

“Job insecurity, salaries that are frozen or falling and bad experiences with mortgages and foreclosures are all going to translate into a barbaric rise in the demand for rental accommodation,” he said.

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