Such is the weight of capital targeting logistics real estate in the UK, consultant CBRE recorded a 16-basis-point compression in prime industrial yields during the second quarter, bringing them to 4.4 percent.
Driven by a combination of strong occupational demand from ecommerce operators and constrained supply of stock – as well as uncertainty in the office and retail sectors – property investors are competing hard to buy logistics properties in the UK, and across Europe more generally.
Amid this scramble for prime stock, some real estate investors, including BentallGreenOak, are opting to build it themselves. The US manager, alongside industrial development specialist Equation Properties, plans 2.4 million square feet of new logistics space across eight UK sites, including in Milton Keynes and Basildon in the south-east of England, the Wembley area of London, the port town of Felixstowe in Suffolk, and Bristol in the south-west of England. BGO is targeting a ‘A’ Energy Performance Certificates and BREEAM ‘Excellent’ ratings for each of the properties.
Financing the development drive is Allianz Real Estate. The property arm of Munich-headquartered insurance company Allianz announced this week that it has provided a £240 million (€280 million) loan to BGO through PAREC, its Luxembourg-based real estate debt fund. The five-year, floating rate facility is structured as a development loan. The first tranche will refinance land that BGO has purchased using equity, once planning permission has been achieved.
Shripal Shah, head of real estate finance for the UK at Allianz Real Estate, told Real Estate Capital that the decision to write the loan was, in part, taken due to the borrower being BGO – which Allianz had financed in the US market, but not in Europe. “This loan was provided to a high-quality, experienced sponsor – one with a strong track record,” he explained.
But it was also an opportunity to access the highly competitive UK logistics sector, and make an attractive risk-adjusted return by taking development risk.
“Logistics is a very sought-after asset class, and rightly so because of how covid has accelerated the demand for ecommerce,” Shah explained. “For prime logistics, yields have compressed, and assets are now trading at sub-4 percent. So, if you want a pick-up in return, you need to develop the asset yourself. The same applies to debt.”
Lenders are piling into European logistics, seeking prime properties to lend against, for the same reasons equity investors are trying to buy them. According to Shah, it has led to a tightening of loan pricing: “We would not get a sufficient return on financing existing core logistics properties occupied by the likes of Amazon because lending margins for these have come in very strongly this year.”
He added: “There is more development happening in an asset class like logistics, where there is strong demand. The supply side lags demand in the UK, and in many locations across continental Europe.”
Shah believes financing development projects can also help lenders increase their exposure to sustainable real estate, because new build projects are more likely to be designed to sustainable standards than standing stock. In this case, Allianz classified the facility as a green loan. “ESG is very high on Allianz’s agenda, and this was a deal which met the criteria we need for a loan to be structured as green,” said Shah. “It is much easier to mark an asset as eligible for green finance when it is a development.
“We invest on behalf of liability-driven investors, including the Allianz group. At the same time, we have committed to reducing our carbon footprint to net-zero by 2050. So, deals such as this allow us to meet our ESG targets and those of our clients.”
The Luxembourg-based PAREC fund, through which the loan was provided, enables third-party investors to commit capital alongside the insurer’s group companies. By the end of June, capital deployed by PAREC had reached more than €4 billion, contributing to a European debt portfolio of €10.6 billion under management.