Blueprint: Oak Street, GIC’s $14bn US net lease investment, MARK’s mega-exit to Prologis in Europe, LaSalle, ULI’s climate risk report

Oak Street and GIC demonstrate how institutional appetite for net lease real estate is growing with $14 billion blockbuster take-private, MARK vindicates strategic shift from retail with giant logistics exit to Prologis, LaSalle and ULI's climate risk report underlines the problem with today's wide range of assessment tools, and more in today's briefing, exclusively for our valued subscribers.

They said it

“We have to be ready that our return from previous investments will not be as good as previous years and that we need to be more selective again”

Hideto Yamada, head of real estate at Japan’s $1.3 trillion Government Pension Investment Fund, warns PERE’s Japan Investor Forum they should expect lower performance in the current market environment, owing to spiking inflation and rising interest rates.

What’s new?

Earlier this year, two $3 billion-plus transactions prompted a PERE cover story on institutional appetite in the previously niche net lease sector. Judging by last week’s purchase of real estate investment trust STORE Capital by private net lease specialist manager Oak Street and Singapore sovereign wealth fund GIC, it is clear momentum behind strategies of buying single-tenant assets where the tenant covers additional costs is only building. Oak Street and GIC have coughed up to obtain this market share. At $14 billion, the deal was the largest take-private of a net lease REIT ever. At $32.25 per share, the transaction represented a 20.4 percent premium on STORE’s share price at close on September 14, a value significantly higher than the underlying portfolio of mostly retail properties’ current value of $11.3 billion. Advisory and research firm Green Street, said STORE’s “platform value,” essentially future growth activity, was a driver behind the premium. The deal was in the offing before its announcement, with the Scottsdale, Arizona-based Oak Street reporting a $13.2 billion acquisition pipeline at the end of Q2, according to its latest investor presentation.

Making its MARK
Just two short years ago, London-based real estate investment manager MARK, then known as Meyer Bergman, was in the midst of shifting away from the retail strategy for which it was best known. A key part of this shift was the launch of a pan-European urban logistics platform called Crossbay, with a seed portfolio of €500 million of assets under management and a goal to grow the platform to €2 billion in two to three years. The strategic move has been vindicated. Last week, Crossbay sold a portfolio spanning 128 warehouse buildings and six development sites in Italy, Netherlands, Spain, France, Germany, Belgium and Poland to Prologis for €1.585 billion. The sale is understood to be the biggest warehouse portfolio transaction to close in Europe this year and has delivered more than 30 percent returns for Crossbay’s early investors, including Nuveen, Credit Suisse, Townsend Group and Qatari investment bank Qinvest.

Diversification still the order
Delegates at PERE’s Japan Korea Week will continue to invest in sectors with long-term fundamentals in real estate as they are ready to embrace for a potential recession. Despite the hikes in inflation and interest rates, both investors and managers are taking a long-term view on real estate investments as they see the continual need for portfolio diversification. Hideto Yamada, head of real estate at Japan’s $1.3 trillion Government Pension Investment Fund, said on a keynote panel that the investor will continue to build its overseas real estate portfolio with a focus on generating consistent return in an environment where lower return is expected. The investor dialed up its commitment to real estate from ¥1.13 trillion ($7.9 billion; €7.9 billion) as of March in 2021 to ¥1.2 trillion in 2022, according to its last annual report. For more from Yamada, click here.

Trending topics

Music faltering for beds and sheds
Since the global financial crisis, industrial and residential real estate have been the darling sectors for institutional investors. Rapid rent growth, historic undersupply and shifting demographics have been the most cited reasons for this appetite. But an unprecedented pandemic and the ensuing fallout could cut the party short, according to research from Oxford Economics. The global forecasting firm predicts the not-so-transient inflation in some of the world’s developed economies could erode property values of all types significantly, including ‘beds and sheds’. The biggest hit is 25 percent in US industrial with residential properties in Canada and France, and industrial in the UK, facing north of 15 percent value erosion by 2025. In the high inflation scenarios, Oxford Economics predicts global property returns will fall by an average of 8.4 percent.

Wanted: uniform climate risk assessment  
As PERE illustrated in last week’s Friday Letter commentary, the institutional real estate sector continues to struggle without a consensus on how to measure the impact of climate risk on asset values. That was an overarching takeaway from a jointly authored white paper by manager LaSalle Investment Management and sector body Urban Land Institute called How to choose, use, and better understand climate-risk analyticsIn the absence of a uniform method of applying climate science to real estate industry practices, the report tries to arm its readers with the right questions to ask via the myriad applications currently available aimed at assessing climate risk on physical real estate. “Improved understanding and increased disclosure of physical risk in pricing and value-at-risk models will urge the industry closer to uniform practice and standards,” the report said.

Data snapshot

Performance contagion extends to funds
Lowering returns from direct investments are translating into poorer performance from private funds, according to INREV’s Pan-European Quarterly Asset Level Index.

People moves

Rumblings at BlackRock
BlackRock Real Estate is no stranger to senior executive turnover. The years 2016-19 were a particularly tumultuous period, marked by a wave of senior departures that included EMEA real estate head Tom Lee, who exited in January 2017; chairman Jack Chandler, who retired in June 2017; global chief investment officer Simon Treacy, who left in November 2017, and then global head of real estate Marcus Sperber, who departed in June 2019. Since Sperber’s exit, however, the world’s largest asset manager had seen little senior turnover with its property platform – until now. This year alone, two senior real estate executives have resigned, first Justin Brown [his LinkedIn profile here], its former head of EMEA real estate, and now head of US real estate investment management John Lamb [his LinkedIn here]. Check out this week’s news on that here and watch this space for additional coverage.

Investor watch

Prop-up property
Following on from real estate successes in California Public Employees’ Retirement System’s, California State Teachers’ Retirement System’s and Norges Bank Investment Management’s portfolios earlier this year relative to negative overall performance, Teacher Retirement System of Texas is the latest globally investing institution to see its performance propped up by its real estate portfolio. The Austin-based investor posted a total annual return of -2.3 percent across its $184.4 billion holdings, as of the end of Q2. Real estate in the same period returned 30 percent, the highest annual return of any asset class, according to its CIO presentation at the investor’s September board meeting. That was also 2.7 percent above the TRS Texas’ benchmark. Quarterly results, while still positive on an absolute basis, did underperform the benchmark by 1.6 percent, hinting that the tide could be ready to turn for the private markets as they have elsewhere.

This week’s investor meetings
Wednesday, September 21

Thursday, September 22

Today’s letter was prepared by Jonathan Brasse with Peter BensonEvelyn Lee and and Christie Ou contributing