Private equity players and institutions target expanding asset class, reports David Hatcher
Logistics has rarely been seen as the most glamorous of sectors, but with its high yields, technological and infrastructure advancements and the growth in e-commerce, some of the world’s largest investors have been deploying huge sums into the sector in Europe.
Private equity investors are competing aggressively to build new platforms, looking to create value through economies of scale with the view to floating businesses later.
Blackstone has been building up its Logicor portfolio, P3 has been fuelled by new backers TPG and Ivanhoe Cambridge, while Gazeley has been active under the ownership of Brookfield.
Institutional players also continue to target these assets, in combination with sovereign wealth funds. Segro has linked up with giant Canadian pension fund PSP and Prologis has been given extra impetus through its tie-up with Norges.
This pool of buyers has pushed up values. Logistics investment volumes in Europe hit nearly €18bn for the first three quarters of the year, according to JLL, around 70% higher than the 10-year average.
The UK has been the main focus, accounting for 40% of deals, with Germany accounting for 16%, the Nordics 11%, France and Benelux 7% each and central and eastern Europe 6%. As a consequence, prime yields have compressed rapidly, by 25bps on average, to 100bps in markets such as Prague and Dublin, CBRE says.
“From my perspective the logistics market has clearly got really hot,” says Rui Tereso, head of portfolio and asset management at Tristan Capital Partners.
“On the back of so many new entrants there was a complete shift in the market last year through to this year. It is such a granular asset class and if you can accumulate a lot of assets, the market will pay a big premium for them. But it might take 10 or 15 deals to buy €200m or €300m of assets.”
Tristan has sold almost €1bn of logistics assets this year to take advantage of demand. It bought heavily in 2010 and 2011 and was buying up to last year to bulk up the portfolio. In February it sold €472m of assets in France, Germany and Poland to Segro and in August sold €523m of Czech logistics assets to P3.
“If you can put together a €250m portfolio, quite a few guys out there have the appetite to buy it, but not the resources,” says Tereso. “The difference for us is that we have 80 people to do the heavy lifting.”
Such is the weight of capital targeting logistics that Tristan sold its assets earlier than expected, generating a higher return.
“If we can complete a five-year business plan in a couple of years, we are getting a better equity multiple for our investors, we can take money off the table and distribute profits,” Tereso adds. “It’s about not being too greedy and taking advantage of windows of opportunity.”
More yield compression to come
On the other side of the table, those that have been buying from Tristan still see that there is value to be found. “You have to look at where you are on the pricing curve and we believe more yield compression is to come – we are not at top of the market yet,” says Ian Worboys, chief executive of P3.
“The sector is becoming more sophisticated and with e-commerce growth there is increased demand. Capital expenditure is also far lower with warehouses than other asset classes. Warehouse demand remains fairly constant whereas in retail, for example, more economic factors affect it.”
The geographic breadth of the market has also expanded, says Worboys, with prime, institutional investment product being created in Eastern Europe. In October, P3 bought a 467,000m2 portfolio of assets in Poland and Romania for €110m from CA Immo (see table) and in July it bought five assets in Italy totalling 200,000m2 for around €100m, mainly from AEW Europe.
“Poland, Czech Republic and Slovakia are pretty much seen as core with lots of manufacturing being moved to Romania too,” Worboys says. “These are acceptable places for big institutions to invest and a huge amount of money is trying to get in. If the opportunity is right we will also buy in Spain and Italy,” he adds.
Logicor, Blackstone’s European logistics arm, has built up a 62m sq ft portfolio worth around €3.5bn across 11 countries, having only owned 17m sq ft two years ago. Chief executive Mo Barzegar says the level of investor interest means an initial public offering of Logicor would produce a good return for Blackstone.
“Logistics produce strong, reasonably predictable cash yields with quite low capital expenditure requirements. Institutional investors are starting to realise that and as a result there is now a lot of capital out there,” he adds.
“Where public companies are trading at a premium to net asset value, there is a premium for a large, diversified pan-European portfolio and team, compared to the yield we get acquiring standard investments.”
Logicor is using other weapons to stay ahead of the market. “We continue to look for opportunities where there is an element of distress and an opportunity to create value,” Barzegar adds. “We have been buying vacancy, short income and assets tied up in complicated ownership structures.
“We have been buying portfolios including other asset classes, which a lot of our direct competitors can’t do as they are pure play logistics companies.”
The pace of acquisitions by the sector’s more traditional players has slowed and they have become more selective. “We will invest throughout the cycle but you want to be investing more when yields are higher and less when yields are lower,” says Phil Redding, chief investment officer at Segro.
SEGRO makes “safer bets”
“A lot of yields are now towards the bottom of their cycle ranges, particularly in the UK and Germany. But we feel that as we are playing at the prime or core area of the market, we are making safer bets.”
The company has changed tack to keep expanding its portfolio. “We are putting less money through the investment channel and are trying to allocate more via development and fortunately we have a balance sheet and landbank to support that.”
AEW Europe is following a similar strategy with its Logistis fund, which hopes to double its equity commitments to more than €1bn by the end of this year. “Logistics is obviously still a hot market” says AEW’s head of Europe, Rob Wilkinson, adding that his team has looked at “every single one” of the portfolios sold this year.
“There’s too much capital looking at those deals. But not everyone wants to do development and we’ll continue to build new investments with development partners, either pre-let or taking a bit of letting risk, ideally in parks.”
The logistics market may not have the obvious appeal of shiny retail or office trophies, but this year it has been every bit as talked about as other rival asset classes.
Margins fall as more lenders jump on logistics bandwagon
Banking partners have been right behind logistics investors this year. Margins have fallen at least 100 basis points over the year and investment banks, pfandbrief lenders and domestic lenders have all fought for their piece of the pie.
Stuart Hoare, director at Citi, says: “Our decisions have partly been due to being able to back good-quality sponsors and importantly the market has been very active, so there have been a lot of opportunities in terms of overall volume and size of individual transactions.”
Citi has been lending to private equity players in the sector, backing Blackstone’s Logicor for its €473m purchase of a German and French portfolio from Foncière des Régions and Oaktree and Anglesea Capital in their £200m purchase of the UK Fusion portfolio from Lone Star.
“There is slightly less competition in the logistics sector than other markets. Some private equity investors are more return driven so look for more leverage.”
The sophistication of logistics businesses makes it an attractive sector to lend on, says Charles Balch, Deutsche Pfandbriefbank’s head of real estate finance for international clients, UK and Central and Eastern Europe. The bank has backed Segro and PSP heavily this year as they have expanded.
“Margins on logistics have followed the trend downwards but they are probably not as extreme as for prime offices or retail,” Balch says. “There is good demand for the space as logistics operators continue to work on their supply-side efficiencies.”
As a result of demand for the best space from large third-party logistics providers, banks such as Deutsche Pfandbriefbank are willing to back development projects too.
“Most development tends to be build-to- suit now and that means as a bank you know that they will have picked a good location; you will have no, or low, vacancy rates and strong cashflow, which is what we are most interested in,” says Balch.
One eye-catching financing deal this year came when a club of three Czech banks — Československá Obchodní Banka (CSOB), owned by Belgian bank KBC; Komerční Banka (KB); and Česká Spořitelna, a subsidiary of Austria’s Erste Bank — financed P3’s purchase of a 627,000m2 portfolio from Tristan in its domestic market, with a €380m loan. The deal was priced at below 200 basis points and had a 72.7% loan-to-value ratio.
“I think there was a desire from the Czech banks to take a leading position in this deal, given the size, quality of assets and the excellent relationship we have with the banks here,” says P3 chief executive Ian Worboys.
“One big change in the past 12 months has been the number of banks lending again and that makes a difference to the margins we can get. They need to get money to work, having done very little for the past few years.”