When the owner of a company sells and then insists to onlookers that he's not calling the top of the market, you can't help but raise your eyebrows.
Blackstone Group LP (NYSE:BX) just announced the purchase of Max Property Group (LSE:MAX), a British real estate investment company. The sale is still pending majority shareholder approval, but investors representing 46% have already indicated that they'll vote in favor.
It makes you wonder what Blackstone is thinking. What self-respecting private equity behemoth buys into a bubble?
The news surrounding British real estate this year has been consistently, and increasingly, high-pitched. The Bank of England shared concerns about a housing price bubble in May, as housing price inflation hit a seven-year high of over 10%. Prices in London have risen spectacularly, as has mortgage lending activity -- and IPOs related to the real estate market.
All of this whispers "bubble." So if it is one, why is Blackstone buying now? This isn't just about real estate prices, it's about how effective regulators will be in reining in the enthusiasm -- and to the extent my take is correct, Blackstone is saying they won't be. Are they right?
Can regulators rein it in without raising rates?
British regulators have already declined to promise an increase in interest rates to curb the real estate market's enthusiasm.
Instead, the Bank of England indicated that it would impose new requirements for capital cushions, lending stress tests to ensure creditworthiness, and possible caps on mortgage to income ratios. Regulators also promised to impose stress tests on lenders that would simulate a severe drop in prices. These promises were softened somewhat in June.
Oddly enough, though, the sentiments very much echo recent announcements from the Fed about leveraged lending in the US.
Leveraged loans have taken off quite significantly in the past year, driven in part by low yields and high liquidity, and American regulators are concerned about it -- but they don't want to increase rates, lest the broader economy suffer. Instead, like their British counterparts, American regulators have proposed more rules, such as limits on debt levels.
Both situations have the same root: regulators want to control the market without doing the obvious, and probably most effective thing, which is to raise interest rates. Can this be an effective policy tool?
Blackstone doesn't think it will work
My reading of the Max Property Group acquisition is that Blackstone doesn't think the British will be successful in their attempts to cool the heat in the housing market.
I don't think the firm's managers are naive enough to just buy British real estate at its peak for no reason, so there must be something else going on.
British rates will rise eventually, but in the meantime regulators are trying to cool off a boom with strategies that I'm guessing Blackstone isn't all that impressed with.
Add to this the influx of foreign investment into the British property market by investors who probably won't be responsive to new regulations, and you have an even more dire outlook for these new policy tools.
I'm thinking mainly of Chinese insurance companies, which as of last year are allowed to buy foreign real estate, and can hold up to 20% of their portfolios in the asset class. China-based investments in European property have tripled in the last year.
A fine play?
All in, if Blackstone is right, regulators are relatively powerless to change the face of the British housing market unless they start raising rates. While it's been suggested that rates will go up toward the end of the year, so far nothing is happening. I think Blackstone is counting on the momentum in the market to keep its current pace no matter what regulators decide to do later on.
Either way, if I'm reading the situation correctly Blackstone is making an interesting, and very critical, comment about the effectiveness of economic policies that aren't tied to interest rates.
Considering that a similar bubble is growing in the US, Blackstone's vote on the matter is not just of interest to the future of its portfolio, but to all of us.