Alternative assets: PE and SWFs target logistics assets in Europe

By:
Duncan Kerr
Published on:

Blackstone and Norway’s SWF lead charge; boom in e-commerce driving interest.

Warehouses and distribution centres may not be the most exciting of buildings, but they are among the hottest real estate assets now being targeted by some of the world’s largest investors. 

Brendan Jarvis-160x186
  Real estate offers a real return, and if it’s in the hands of good asset managers, then the risk is well-defined

Brendan Jarvis,
Barclays

Blackstone Group’s European logistics arm, Logicor, and Norges Bank Investment Management, Norway’s sovereign wealth fund, made fresh and substantial investments in the European and US logistics sectors last month, forming part of a broader boom in global real estate investment. 

Private equity firms raised $29 billion of real estate investment funds in the first quarter of this year, one of the highest quarterly fundraising totals since 2009 and up from $26 billion in the fourth quarter of 2014, according to Preqin data. Blackstone raised more than half of that total alone in less than five months through its ninth real estate fund, which came in at a hefty $15.8 billion. It is the largest closed-end real estate fund on record. 

Logistics

A portion of the fund is expected to be deployed in the logistics sector, further boosting Blackstone’s investment in this asset class. Over the past 16 months, Blackstone has invested over €2 billion in warehouse assets across Europe, most recently investing about £400 million last month in 16 industrial warehouses in the UK. The US investment firm is now the second largest owner and operator of logistics assets in Europe.

Blackstone has pursued a similar strategy in the US, through its industrial real estate arm, Indcor, which it sold last December to GIC, Singapore’s sovereign wealth fund, for $8.1 billion. 

Steve Schwarzman, chairman and CEO of Blackstone, said on an investor call on April 16 following its first quarter results that the asset class is doing particularly well, largely because of the "huge burst of activity" in e-commerce and internet shopping, which requires "enormous logistic support and so being part of that chain is a very good thing". 

The 16 warehouses Blackstone bought from Oaktree Capital Management and Anglesea Capital are located close to Birmingham, Leeds and Oxford, and are leased to large retailers such as Arcadia, B&Q, The Co-Operative, Debenhams and Unipart.

Investor interest in industrial warehouses and distribution centres has rocketed in the past couple of years as large retailers have moved to transform their business models in support of the boom in online purchases by consumers and demand for next-day delivery. 

In April Prologis, one of the world’s largest industrial property landlords, together with NBIM, bought a $5.9 billion portfolio of industrial real estate assets from private equity firm KTR Capital, demonstrating the growing interest of sovereign wealth funds in these assets.

While the transformation among European retailers has come later than in the US, it is gathering pace and as a result yield-starved institutional investors are also increasingly being drawn into growing the asset class. 

Research from commercial real estate data firm Real Capital Analytics says the average capitalization rate, which measures income as a percentage of invested capital, of European industrial properties last year was 7.3% compared to 6.2% in retail.

In turn, this helped to drive some €25 billion of investment into the European industrial properties sector last year, up from about €19 billion in 2013, according to RCA. 

Blackstone isn’t alone in targeting European logistics assets. P3 Logistics Parks, owned by private equity firm TPG Capital and Ivanhoé Cambridge made some €1 billion of investments in the European logistics sector last year. The latter is a real estate subsidiary of the Caisse de dépôt et placement du Québec, one of Canada’s largest institutional fund managers.

Brendan Jarvis, head of real estate, EMEA, at Barclays, says investment in the logistics sector offers one of the best examples of private equity consolidating ownership in a sector, bringing cost savings through the synergies of running those businesses as one business platform. 

Chasing returns

"In the years before the 2008 crisis it was more about borrowing some money, buying something, gearing it up, collecting the rent and then selling it," he says. "Now they are looking to be an asset manager as well as an investor. And this is largely because they are chasing returns consistent with those promoted in raising investor money, and to achieve those levels, in this competitive market, you need to manage the asset actively."

Jarvis says that it certainly feels as though private equity interest in real estate is at its highest point since the 2008 crisis, fuelled by a number of factors. 

"Real estate offers a real return, and if it’s in the hands of good asset managers, then the risk is well-defined," he says. "There is also a positive yield gap between the cost of debt and the yield generated by real estate, and helpfully there is an abundance of debt in the market at the moment and interest rates remain low. In addition, there remain loans and property assets that are still distressed. So there are good deals to be struck if you know where to look."