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ASIA NEWS: Blackstone's sweetened Shanghai deal

Turbulent property markets have benefitted the New York-based firm as it gets more for less cash in China. PERE Magazine December 2008/January 2009 issue

The world may be repricing around us, but for private equity real estate firms in the midst of closing a deal that actually may be a good thing. It certainly was for The Blackstone Group.

In June, the New York-based firm agreed to buy a 90 percent stake of the Shanghai centre, Changshou Commercial Plaza, for RMB625.5 million (roughly $90 million; €70 million). That of course was in the summer.

Changshou Plaza

Come November, and the global property markets – including China's – looked somewhat different. Even in emerging markets, with their strong long-term growth stories, real estate valuations were being hit by the credit crunch.

For Blackstone, it offered the opportunity to renegotiate the Changshou deal. Instead of paying Hong Kong-based financial services firm, VXL Capital, RMB625.5 million cash for a 90 percent stake in the company that ran the centre, Blackstone was able to close the deal for RMB536.7 million ($78 million; €60.2 million) cash for a 95 percent stake.

The six storey centre houses a 25,312-square-metre shopping mall and commercial complex and is located in Shanghai's Putup district.

Blackstone declined to comment on the deal but according to people familiar with the matter the renegotiation was also triggered by changes to the minimum lettable area of the centre and the number of car parking spaces, as well as to changing market conditions.

The short-term volatility being seen in China at the moment, PERE was told, was combining to make China a “very good” investment destination, particularly in the retail sector where the growing middleclass and supply and demand imbalances would provide opportunistic investments. Blackstone is expected to hold the Changshou Commercial Plaza for around five years.

Blackstone – which recently saw the Chinese sovereign wealth fund China Investment Corporation increase its stake in the firm to 12.5 percent from 9.9 percent – has already stressed the importance of China to its real estate strategy, after opening an office in Beijing from which to drive investments in the mainland.

Senior managing director Garrett Moran told the China Business Weekly last month that although the lack of credit had resulted in a reduction in deal flow, declining values were ensuring “attractive returns” on potential transactions. He said some of the “best investments” were made in declining markets predicting in a few years time, the market would present Blackstone “with the best opportunities to return high benefits”.