How a US private-equity group just became Spain’s new real estate giant

The purchase was made from Spain’s Banco Santander, which in June bought the struggling Banco Popular for one euro in order to prevent its collapse. Like many other Spanish lenders, Popular had suffered from exposure to bad loans following the slump in the property market after a decade-long boom that ended in early 2008.

Thanks to the deal, overnight Blackstone became the biggest completely private real estate firm in Spain. Founded in the 1980s with seed capital of $400,000, the company has just added €5 billion of assets from Popular to the €7 billion it already had in Spain from its 2013 operation. The company’s total assets in the country now total just over €12 billion.

Blackstone has positioned this investment as a medium-term bet on the economy of a country that has seen four years of growth

Spain’s so-called “bad bank” – known as SAREB, and which was set up to absorb the toxic assets of a number of nationalized Spanish lenders – beats out Blackstone with assets of nearly €40 billion. But while its stakeholders are mostly private, it still counts on 45% of public capital via Spain’s bank rescue fund, known as FROB.

Blackstone has positioned this investment as a medium-term bet on the economy of a country that has seen four years of growth, but critics see the move as the definitive arrival in Spain of one of the biggest vulture funds in the world. “This important investment reflects our confidence in the robust recovery of the Spanish economy,” read a statement from Jonathan Gray, the head of the ever-more-important real estate department of Blackstone. “It’s a bold bet on one of Europe’s best turnaround stories,” wrote Tom Buerkle in an analysis article published on Breaking Views.

The net book value of the real estate business of Popular was €30 billion. But after a number of depreciations and amortizations executed first by Popular and later by Santander, the value of this portfolio of land, housing, commercial units and other assets fell to €10 billion. For the 51% of this stock Blackstone has paid just over €5 billion.

Even before this deal, the US fund was one of the biggest players in the sector in Spain

But even before this deal, the US fund was one of the biggest players in the sector in Spain, with nearly 100,000 real estate assets controlled via dozens of companies. The deal that was closed in the summer of 2013 saw Blackstone buy up 1,860 social housing units, parking garages and storerooms from Madrid City Hall, which was then controlled by Popular Party Mayor Ana Botella. The firm paid €127.5 million for the deal. The following year, the fund bought up the toxic mortgages on the books of Catalan lender Catalunya Banc. Valued at €6.4 billion, the package was snapped up by Blackstone for a little over half that amount, around €3.6 billion.

With some €370 billion of assets under management around the world, Blackstone is one of the giants of capital risk. Real estate is gaining more and more ground in its investment portfolio, now accounting for nearly a third of its assets. The total value of its real estate business is €104 billion, making it the biggest owner of bricks and mortar in the world.

Blackstone has sometimes been presented as an archetype of the excesses of capitalism, and its chairman and CEO, Stephen A. Schwarzman, as a representative of the villains of Wall Street. In an in-depth profile published in 2008, the magazine The New Yorker reported on the indignation sparked by news that Schwarzman had pocketed $677 million in cash for a public offering that also saw him retain shares valued at $7.8 billion, turning him into one of the richest men in the country.

Sources close to the company argue that the arrival of Blackstone in Spain should be seen as a boost for the sector

But in contrast to this view, sources close to the company argue that the arrival of Blackstone in Spain should be seen as a boost for a real estate sector that is in dire need of some good news. The same sources add that if the fund is able to move in and manage a pool of land and housing that was frozen up until now it’s because it can offer something that the banks don’t have: flexibility. “Blackstone offers three things: management, management and management,” conclude these sources.

Four years on, the sale of 1,860 protected social housing units by Madrid City Hall to Blackstone continues to cause controversy. The municipal housing company has been pursuing the invalidity of the deal in the courts, arguing that it caused a “serious weakening” of the council’s assets given that the €127.5 million paid by the fund was “well below market value.” But the courts have ruled on two occasions that the sale was legal.

English version by Simon Hunter.