BlackRock’s Distressing Real Estate Losses

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Part I

BlackRock’s Distressing Real Estate Losses:


It has been quarters and years that BlackRock’s Management is highlighting that the Alternative Investments have huge market and global investors’ interest. Despite of high potential in the segment, the investment is BlackRock’s Alternative Investor’s portfolio has not reached reasonable levels.


Investors seek added or let say some extra return from their investments in alternative investments portfolio. The idea behind alternative investments is to provide unique set of investment products offering diversified risk. BlackRock Alternatives Investors is an exclusive solution for institutions, primarily offering risk diversification and return enhancement. Different BlackRock alternative products are designed to meet different clients need. For instance, its hedge funds or fund of hedge funds offers return enhancement feature along with downside protection. Moreover, real estate equity and commodities alternative products offer inflation protection.


The management continues to add new products offering attractive features, but the efforts seem to be abortive.


Dawdling Assets under Management (AUM):

Despite being the most reputed and one of the largest Alternative Investment providers globally, BlackRock has not taken favored position in the vast market available for this segment. Investors have very straight agenda, and that is to invest in fresh avenues which can offer a better investment solution then from a usual hedge fund investing in equity and debt products. The dawdling AUM numbers clearly indicates that BlackRock is unable to grasp the right pie from the market. As per December 31, 2010 numbers, BlackRock Alternative Investments’ AUM were recorded at $110 billion levels. However, it reached $115 billion levels in mid June, 2011, which later eroded to reach the level of $113 billion in early September. The number shows indolent investment interest in the firm’s products.


As per the 2010 annual numbers, currency and commodity funds were the most popular products accounting 42% of the total AUM. However, hedge funds, funds of funds and real estate alternatives constituted 24%, 22% and 12%, respectively. BlackRock was able to generate positive income from all segments except real estate in 2008 and 2009. However, real estate showed some recovery in 2010 and first 9 months of 2011.


According to Russell Investment 2010 global survey on Alternative Investing, the expected allocation in real estate for 2012 alternative investing will be 6.6%.



Challenging situation for BlackRock commercial real estate alternatives

Besides real estate market tough dynamics, it seems that the BlackRock Alternative Investors has taken few weak investment decision in past, which led to investment losses that shattered investor confidence.


The default of Peter Cooper Village/Stuyvesant Town partnership in early 2009 dented investors’ confidence in the commercial real estate alternative products. In early 2010, BlackRock acquired Helix Financial Group to improve the situation but the numbers hardly grew.


The commercial real estate alternatives 2009 AUM were recorded at $18 billion-a decline of 30% from 2008 levels. The decline of $7.7 billion was mainly driven by $7.3 billion losses due to market decline. In 2010, the situation worsens when at the end of 2010, the AUM in commercial real estate ended at $12.9 billion, mainly on the back of massive outflow and slowing real estate market.


Real estate sector depleting numbers for the out going year:

In the outgoing year, the real estate sector grew below market expectation, disheartening optimistic analysts. In the year ended October 2011, The S&P/Case-Shiller index of property values in 20 cities dropped 3.4% year over year. The subdued home prices were due to the foreclosures.


The market analysts are hopeful that the market will be able to overcome 2011 issues and will pick some growth this year. In my opinion the market will take some more space to stabilize and it is unlikely that this sector will post any extra ordinary growth in 2012. The hedge funds have to select real estate products cautiously to post decent alpha.


Market keeps on hoping for real estate sector good days to return:

Reuters reports that several market experts and analysts believes that 2012 will be a better year for US real estate as housing market will strengthen going forward. Moreover, as per the annual survey of Association of Foreign Investors in Real Estate (AFIRE), its members has rated US as the top global commercial real estate market for 2012. The assumption to this increase is the overall increases in rents along with occupancy growth.


Alternative investment unbroached market:

The management is quite aware of the fact that the there is a huge potential in the market and the growth numbers are not matching the potential. Limited transparency is one of the major issues which is holding back the inflows in alternatives investors hedge fund. The regulators are approaching manager to provide all possible information to the investor for better transparency. Matthew B. Botein, Head of BlackRock Alternative Investors, after completing his UK visit passed positive comments on the market and said “The good news is that everyone is happy to get together and talk about alternative investment strategies right now and it is not an unreceptive audience.”


Management’s Vigorous Efforts:

Besides 2011 new offerings in renewable power, real estate and direct private equity, BlackRock continues to add well known market names in its employee’s directory to expand firm’s business in Alternative Investment.  Last September, Ingo Heinen has been hired as a Managing Director of BlackRock Alternative Investors. He will be reporting to Rick Arney, BlackRock’s Head of Hedge Funds. Ingo will be heading Alternative Investment Strategy Group (AISG). While sitting inUnited Kingdom, he aims to swell firm’s business.


BlackRock need to follow a better strategy in order to increase AUM and retain existing investors. BlackRock needs to move in the right direction as there are many investors waiting right on their desks, welcoming hedge fund manager to sell them any convincing story. Some market guru believes that the Alternative Investments will attract funds mainly shifting from the existing equity portfolios. However, some expects fresh investments in this segment.

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