Asian investors are increasingly active in building and operating logistics property assets - warehouses geared around last-mile delivery and located on the edge of major cities - despite the greater risks as the supply of pre-built assets dwindles and prices increase.
Rushabh Desai, head of Asia-Pacific at Allianz Real Estate, told AsianInvestor that the company had developed logistics properties around the world recently, including China.
He said that this approach entailed higher risks associated with development and leasing and higher leverage levels, but with the intention of holding the investment for at least five to seven years post development, the long-term return opportunities justified the risk.
“Developing assets provide us with a better opportunity to secure high-quality assets with strong ESG credentials at better relative pricing than buying current stock of stabilised assets. We are looking at such strategies selectively across the globe," Desai said.
He said he was comfortable with the greater risk of logistics development, adding that he placed these projects between core property investments – a group comprising traditional low risk assets such as prime offices in central city locations – and value-add – newer, higher risk sectors, that include retirement housing and multi-family and may include distressed investments.
With €7.1 billion ($8.3 billion) in AUM, Asia currently comprises 9.6% of the total €74 billion AUM of Allianz Real Estate, the captive investment and asset manager for the Allianz Group. In August Desai told AsianInvestor the target was to increase this to 15%, equating to a total of €11.1billion at current levels.
The growing appeal of logistics assets is seeing investors’ property arms invest alongside infrastructure and equity divisions.
Room for growth
Ashish Goyal of Omers Capital Markets in Singapore told AsianInvestor that the logistics sector was a particularly suitable area as Omers looks to grow the investments it makes across the capital structure in Asia.
Deals have so far brought together Omers Infrastructure, Omers Capital Markets and Oxford Properties (Omers' property arm).
Goyal said Omers was targeting Asia in particular, where total AUM of Omers Capital Markets has increased from $1.3 billion two years ago to $4.2 billion today.
ESR, the $36 billion logistics real estate platform, provides a recent example. Omers Capital Markets was a cornerstone investor in ESR’s IPO. Omers increased its stake in ESR in July 2020; Omers is currently the largest shareholder in ESR, with a 14.91% stake worth nearly C$1.5 billion, spread across Omers Capital Markets and Oxford Properties.
Goyal said Omers typically targeted ownership shares of between 10% and 30% in deals of this type.
In July, a new entity formed by ESR and Singapore’s GIC together bought Blackstone’s Milestone Australian logistics portfolio for $3bn, Australia’s largest logistics deal.
Roughly half of Omers Capital Markets’ equity portfolio is private.
“We want to do more with these assets,” Goyal said, noting that it tended to hold the assets for longer than typical private equity or hedge funds.
Australian super funds active
Mary Power, principal consultant and head of property at Jana Investment Advisors in Melbourne told AsianInvestor that larger superannuation funds or insurers in Australia – those with total AUM above A$40 billion – were particularly likely to develop logistics deals in this way.
“They will have deep relationships with managers and/or internal expertise that makes them comfortable underwriting these deals,” she said.
Australian super funds are now looking beyond Australia for logistics assets given the scarcity of domestic assets. This is despite the high hurdle for investing offshore, arising from the mismatch between the regulatory domestic benchmark and offshore investments, tax-related costs and the currency risk, she noted.
“If you’re in a sector that you can’t [buy] onshore, you have to go offshore."
Unlike the office sector, where investors will typically require pre-leasing of between 40% and 50% before developing a building, logistics investors are prepared to develop buildings without a tenant in place, according to Power.
She said the practice was most common in the US. One appeal of the US is that investors’ existing direct investments there mean they understood the tax treatment and had prior relationships with managers and advisers, she said.
Alek Misev, senior portfolio manager for property at Aware Super in Sydney told AsianInvestor that the super fund has been active in developing logistics assets in Australia in recent years to provide a better yield.
He said the fund targets yields of around 6.5% for developing assets compared with roughly 4% for well-located logistics assets that are already built.
He noted that the development route meant the fund was less likely to overpay for the end asset in a market where prices have been increasing. “There’s definitely a risk that prices can go too high in industrial,” he said.
Fund models of development
Fund managers employ different strategies for developing logistic assets within a fund, with varying implications for investors, Russell Proutt, chief financial officer of Charter Hall, the Australian property managers, told AsianInvestor.
He said that in the manager’s flagship Charter Hall Prime Industrial Fund (CPIF), the development activity was financed by the fund, with the manager charging the fund for its services.
He estimated that buildings developed by the manager and sold to the fund at completion provided fund investors with an internal rate of return of around 6%. Where the buildings were developed by the fund with the manager charging for its services, the IRR was between 7% and 7.5%.
“This structure eliminates the potential for conflict between the manager and the fund in terms of capturing development margin,” he said. With fund target returns typically between 8% and 9% in the sector, the contribution from development gains was a crucial component, he said.