Blackstone doubles down online as e-commerce surges

The world’s largest private equity firm is again getting ahead of the e-commerce boom. Blackstone is a big believer in online shopping as a result of the pandemic.

Blackstone head of real estate Australia, Chris Tynan. With 50 per cent growth in online ordering during the first Covid lockdowns, Blackstone is bullish that higher levels will be locked in.

Private equity giant Blackstone is backing a further shift online – with Christmas just the start – after investing $2.1bn in a Dexus logistics property trust.

Blackstone, which is a big believer in both online shopping and a more permanent shift in supply chains as a result of the pandemic, will look to expand the portfolio in league with Dexus and also chase more properties in areas like storage that are benefiting from the shift online.

The private equity firm, which has $US100bn ($139bn) devoted worldwide to the core-plus real estate strategy that targeted the portfolio, could use its size to bulk up its holdings.

Blackstone’s Australian head of real estate, Chris Tynan, said: “Logistics is still one of our highest conviction themes; we still love the dynamic down here.”

When the company sold its Milestone logistics portfolio in April for $3.8bn, after a dual-track process which could have resulted in a float, Mr Tynan insisted Blackstone would be back.

“Now, I think you’re seeing that we really do have that conviction,” he said.

This portfolio, however, will be worked on by Dexus instead of relying on market prices to rise. Its moves are likely to replicated by other local landlords.

“We see rent growth as being the next part of this story. It’s always been pretty benign in Australia,” Mr Tynan said.

Traditionally, supply was almost in balance with demand, with assets spinning off returns linked to inflation or GDP growth. “Globally, we think that has changed, and the supply is struggling to keep up with the demand,” he said.

“We believe there’s tremendous opportunity for growth, supported by Australia’s strong e-commerce demand.”

But the firm is not all about property plays. It has insisted that its separate takeover for James Packer’s Crown Resorts is driven by a desire to turn around the casinos rather than to spin out the lucrative property holdings, although it is staying silent on its strategy ahead of the casino company’s strategy day on Monday.

The Blackstone team instead references its ability to execute on big trades, as when it this month replaced Chinese sovereign wealth fund CIC as the buyer of a half-stake in Sydney’s Grosvenor Place in a $925m move.

In the logistics field, Blackstone was best known as an early mover after it put together what became the Milestone portfolio that was sold off to Asian warehousing giant ESR.

The market has since leapt again, with pricing of industrial assets doubling over the last five years as the property yields on which they are measured ­tightened.

Blackstone is not worried about whether the market has peaked and is instead betting on a broader shift that will see Australian e-commerce catch up to the rest of the world as the gains made during the pandemic get locked in.

The purchase of the 49 per cent stake in the Dexus Australia Logistics Trust from Singaporean sovereign wealth fund GIC signals that Blackstone sees further growth in the area.

The deal was brokered by Tony Iuliano and Adrian Rowse of JLL.

The portfolio of 77 premium-grade logistics assets is concentrated in gateway cities, Sydney and Melbourne, with high exposure to densely populated areas and major transportation hubs.

The deal marks the sixth investment in Asia this year under Blackstone Real Estate’s Core+ strategy and the largest investment in Asia under this strategy.

“The transaction significantly increases our Asian Core+ real estate exposure to the logistics space and is consistent with our strategy of overweighting high conviction sectors and locations,” Blackstone global head of Core+ real estate Frank Cohen said.

Mr Tynan enthuses about the potential for Australia’s e-commerce penetration rate to rise. In Sydney and Melbourne vacancy is just over 1 per cent, which will support a jump in rents.

Tynan says that when markets get into that “frictional vacancy” range, rents start to move very materially.

Toronto rents have jumped 40 per cent and some US markets are not far behind.

“That’s what we think is coming here,” he said.

Once markets get through the 13 per cent e-commerce penetration rate, which Australia has broken through, logistics rents hit an inflection point in major cities.

With 50 per cent growth in online ordering during the first Covid lockdowns, Blackstone is bullish that higher levels will be locked in.

“We think that there’s no reason why Australia won’t be up in the 20s, like we’re seeing in the UK, or, at worst, in the late teens like in the US,” he said.

Mr Tynan argues that just-in-time inventory systems are being replaced by just-in-case management and that supply chain disruptions are being handled by holding more stock.

“Then you’ve got the reshoring of manufacturing, which we haven’t really even started to see take root yet, but it’s going to be a medium-term tailwind,” he said.  “We think that the disruptions might, in a year or two, come down. But the mentality, we think, is going to be here to stay.”

Blackstone has reset the market with the Dexus deal, and it expect more to come as it expands.

“This is by no means the end of the story,” Mr Tynan said.

“We should be able to continue to grow this over time.”

The DALT partnership was set up in November 2018 and seeded with 55 assets from the Dexus ­industrial portfolio, with GIC ­acquiring a 25 per cent interest, comprising core logistics properties and a development land bank.

Since then, DALT has grown through GIC’s acquisition of an additional 24 per cent interest in the portfolio, external acquisitions and the build-out of the development pipeline.

It has a 90 per cent exposure to the hot Sydney and Melbourne markets and is weighted to traditional logistics facilities, which are leveraged to the growth of e-commerce.

“This new relationship provides a stable long-term source of capital to invest alongside us. We welcome Blackstone onto our platform and look forward to continuing to drive the partnership’s strong performance,” Dexus chief executive Darren Steinberg said.

Blackstone’s part in the logistics boom could be just beginning.