The concept of paying a ‘portfolio premium’ for collections of private real estate materialized in the latter years of the last market cycle. From high-profile transactions, such as sovereign wealth fund China Investment Corporation’s €12.25 billion acquisition of European logistics business Logicor from Blackstone in 2017, down to hundreds of sub-$100 million deals not making big headlines, transactions involving managers collecting properties and being paid extra for doing so by their bigger peers became commonplace.
For those managers able to do the aggregation work, premiums of as much as 20 percent over individual valuations of a portfolio’s assets would be paid by organizations keen to achieve immediate scale in the sector.
But since the onset of the pandemic, such aggregation premiums have become rarer as investment programs were paused amid significant disruption for many property types. Today, they are most common in logistics, a sector already favored by institutional buyers before the pandemic. Now, having proven resilient to its impact, it has become even more popular. Indeed, even as global commercial real estate investment was down 28 percent in the first 11 months of 2020 compared to the same period in 2019, according to broker Savills research, logistics’ share of overall volume bucked the trend by accounting for 21 percent of total volume, up from 17 percent a year before.
With demand for logistics expected to continue to intensify, managers are now taking to actively marketing their aggregation strategies to cater for this appetite.
Feeder funds for strategic investors
One such manager is London-based Clearbell, which in January exited a four-strong industrial portfolio in the UK to Blackstone for £45 million ($62 million; €50.8 million). The deal was the latest in a series of transactions between the two firms dating back to 2016 and has become worth approximately £300 million to date. For senior partner Manish Chande, hunting for smaller assets enables the firm to evade bigger institutional managers as competitors and see them instead as buyers of its work. “We have the ability to fish in the undergrowth. In so doing, that has created the aggregator model and effectively made us a feeder fund for strategic investors such Blackstone, [REIT] Segro or Logicor.”
Chande says this ability was worth a 5 percent premium to Blackstone for this latest deal. Additionally, follow-on asset management assignments are possible for firms like Clearbell, Chande says, particularly when the buyers are lower-risk-and-return investors.
David Boyle, co-founder of NW1 Partners, a UK and US-focused boutique manager, is another executive vocal about chasing premiums for amassing logistics assets. The firm tagged its approach as a ‘portfolio roll-up strategy.’ “Our raison d’etre is to do exactly this,” he says. “We buy from less sophisticated groups to sell to more sophisticated groups. The portfolio premium comes in doing the hard yards.”
In January, NW1 and partner Marchmont Investment Management announced the £51 million sale of eight urban industrial properties to a core-plus logistics fund of a bigger manager, InfraRed Capital Partners.
On the other side of the equation, Dean Harrison of InfraRed’s real estate investment team accepts that the firm needs to pay a premium for another manager “doing the hard work we don’t want to do.” He says: “Our preference is to focus on larger lot sizes above £50 million. We expect to build on this and turn it into something worth £250 million. I then expect a large manager or investor to pay a 25-basis point yield premium for the work we do.”
Harrison confirmed the Europe- and Asia-focused firm paid a 5 percent net equivalent yield for the portfolio from NW1 and Marchmont and believes its own aggregation exercise could see a sale at a yield of 4.75 percent – or higher if coupled with active asset management. Indeed, he says portfolio premiums for logistics real estate could still rise to as high as 15 percent post-covid, in line with pre-covid price hikes.
Furthermore, when it comes to logistics, Harrison does not think this premium range differs much by transaction size: “Aggregation works for logistics. Smaller managers do the legwork for those bigger than themselves. We don’t have the resources for finding £8 million to £10 million assets. That’s too time-consuming. But then we’ll do this type of work for a Blackstone; and they’ll do this type of work for a CIC.”
Indeed, in the case of Clearbell’s sale to Blackstone, the assets have been added to the New York-based giant’s own last-mile aggregation strategy in the form of Mileway. Launched in September 2019 as a combination of 1,000 assets from the Blackstone Real Estate Partners Europe opportunity fund series, Mileway has since grown to 1,400 properties thanks to further deals just like these. At inception, Mileway’s executive team was charged with establishing and growing a business ripe for an institutional exit in a short timeframe, just as with Logicor and, before that, Indcor, Blackstone’s US industrial business, which sold to Singapore state fund GIC for $8.1 billion in 2014. Logicor essentially comprised an aggregation of more than 50 smaller deals made over five years.
In the European stomping grounds of Clearbell and NW1 Partners, Blackstone is poised to lose an official tie-up with M7 Real Estate, a manager that has acquired numerous logistics assets on its behalf but was purchased this month by Canadian investor Oxford Properties. Neither Clearbell nor NW1 have an appetite to forge formal arrangements, both firms opting for more flexibility in who they work with. Harrison says: “You want to create competitive tension, so we’d want to retain the flexibility to choose.” Boyle concurs: “You want to keep your options open. If you’re not attracting a deep level of interest in what you’re doing, then you’re not maximizing your interests.”
Whether there are such prospects for portfolio premiums in other asset classes is debatable. Boyle says logistics is a natural fit for such a strategy, but his firm is also exploring residential aggregations, including in the US and Spain. InfraRed’s Harrison thinks buy-to-let residential properties in Europe could command premiums as well as possibly healthcare-oriented assets – sectors “where there are trends and demographics to support a robust growth story,” he says. Like Boyle, Harrison believes the most obvious sector to see aggregation strategies remains logistics given the current and intense race for market share among the sector’s biggest investors. “People will always pay for scale, particularly when the market has such strong underlying dynamics,” Harrison says.
According to data by UK-focused broker DTRE, which advised on more than £1.9 billion of portfolio transactions in 2020, industrial portfolio deals reached a 7-year record high in 2020, accounting for more than £4 billion of the £7 billion of overall industrial turnover in the UK. DTRE Partner David Emburey says aggregation premiums for larger portfolios of more than £100 million currently range between 2.5 percent and 10 percent, depending on the quality of the assets. By his reckoning, the sheer volume of investor appetite continues to drive pricing – since last June, he has seen yields in the sector compress by at least 50 basis points – and that can give an impression of a premium. “I think a lot of it is just down to continued investor enthusiasm for the sector, the ever-increasing online or last-mile demand, a lack of new development and strong rental growth dynamics.”
He concludes: “It would be wrong to assume all industrial and logistics portfolios will command premiums for quantum as it will be opportunity-led, but for now, this certainly seems to be a continuing trend.”