Western banks look set for minor role on Logicor

Europe’s largest private real estate deal will involve a €6.8bn loan, but Chinese banks are likely to be first in line for the €3bn that will be syndicated.

The biggest European private real estate deal on record will be half capitalised with debt, even though the buyer is an equity-laden sovereign wealth fund from Asia – with China Investment Corporation reportedly arranging a €6.8 billion loan to fund its €12.25 billion acquisition of warehouse giant Logicor.

Bank of China and China Construction Bank have jointly underwritten the loan, with the two lenders expected to provide €3.8 billion of the total financing, while the remainder will be syndicated to other banks, unnamed sources told Thomson Reuters publication Basis Point.

This would leave €3 billion entering the syndications market – equal to 6.2 percent of the €48.6 billion of total syndicated commercial real estate lending in the EMEA region in 2016 – according to Dealogic’s data.

The size is enormous for a single loan, certainly one of the largest in the region to date – in fact, it is the biggest real estate loan since February 2002, based on Dealogic’s records. However, executing it should be relatively simple – there are lenders out there more than capable of providing such an amount to finance the deal, according to industry experts Real Estate Capital spoke to this week.

While there are many financiers in the West that would fit the bill, the deal looks set for a more Eastern flavour. One non-Asian lender that issued debt to Logicor against some of its assets in the past said it was not approached to enter the syndicate. Moreover, it suggested that CIC’s relationships with fellow Chinese entities would be a significant driver for their involvement in the financing, as well as the terms on which their loans will be conducted.

It is easy to see why – conducting the loan syndication primarily with other Chinese lenders would avoid additional layers of bureaucracy, maintenance and reporting that could be created by US or European counterparts. Plus, large tickets from an A-list Asian sovereign wealth fund borrower do not occur every day, meaning Chinese banks are likely eager to enter the syndicate.

There is obvious appeal to backing the investment arm of the state, which posted returns on its foreign assets of 6.22 percent in 2016. CIC’s acquisition of Logicor comes at a time when investors continue to be drawn to prime logistic assets due to strong market fundamentals and an attractive initial return on investment, often of about 6 percent.

But, beyond yields, a major attraction of the Logicor purchase is the long-term thinking behind the investment. Logicor’s portfolio includes 147 million square feet of logistics assets across 17 European countries. Located along primary transport corridors and close to large populations, the portfolio is positioned to benefit from the structural shift in demand driven by the rapid growth in e-commerce.

As such, the acquisition is aligned with the One Belt, One Road economic and diplomatic programme outlined by Chinese President Xi Jinping to better connect Eurasian countries. The strategy seeks aggressive overseas investments in the industrial, logistics and infrastructure sectors – even at a time when capital controls are in place in the country. As the deal demonstrates, such restrictions are not imposed when it is all about the state’s own investment plans.

Private real estate investors in China often extol the virtues of swimming with the government’s regulatory tide – therefore it makes just as much sense for China’s lenders to pursue a deal with CIC as it does for the sovereign wealth fund to favour them as it capitalises Europe’s biggest deal.