This article is sponsored by ESR.
With its acquisition of ARA Asset Management, ESR becomes the largest real asset manager in Asia-Pacific and the third-largest listed real estate investment manager globally, with over $140 billion in real estate assets under management. The transaction also brings ESR together with fellow logistics specialist LOGOS, which was majority owned by ARA, creating a combined new economy (logistics and data center) portfolio of $59 billion and the largest development pipeline across over 10 countries in Asia-Pacific.
Jeffrey Perlman, chairman of ESR and head of Asia-Pacific Real Estate and Southeast Asia at Warburg Pincus, explains why expanding scale and offerings is important for logistics players given the transformational need for global capital partners to rebalance their portfolios over the next decade in favor of new economy real estate.
What does the acquisition of ARA Asset Management bring to ESR and its investors?
We are bringing together the best-in-class platforms of ESR, ARA and LOGOS to form Asia-Pacific’s largest real asset manager powered by the new economy and the third-largest listed real estate investment manager globally with a gross AUM of $140 billion.
On the logistics and new economy front, the coming together of ESR and LOGOS creates the largest new economy real estate platform in Asia-Pacific with $59 billion of logistics and data center assets under management across 10 markets, representing 95 percent of the region’s GDP and a development work-in-progress of more than $10 billion. We have a leading position – either top one or two – in every key market in Asia-Pacific, with the ability to offer a comprehensive pan-Asia solution to our customers.
We have also, by combining the businesses of ESR and ARA, created something truly special and unique. We think we have created the only fully integrated closed-loop solutions ecosystem for real estate globally. The largest global real estate investors, including sovereign wealth funds, pension funds and insurance companies, are all looking for a way to rebalance their portfolio allocations in light of the transformational impact of technology on their existing real estate portfolios.
Put simply, they need to leverage a platform like ESR to increase their allocation to new-economy-driven sectors such as logistics and data centers – where they are still significantly underweight – by selling some of their grade A commercial assets and redeploying that capital back into new economy real estate via ESR and LOGOS.
Bringing in ARA also significantly expands ESR’s network by adding 59 new capital partners, which allows the group to expand our product offerings, including adding discretionary pan-Asia vehicles for the first time. The enlarged ESR Group now has active relationships with nine of the world’s top 20 capital partners, representing more than 40 percent of global real estate allocations.
How important is the development pipeline for a business like ESR?
Modern logistics in this region is still in the ‘land grab’ phase or the early innings of the sector. Something we firmly believe in is, when you’re building logistics today, you are creating the critical infrastructure of the new economy. Going back 150 years ago, whoever built the railroads controlled commerce. It’s why they were the wealthiest or the most successful companies of their day. In our view, whoever controls that ecosystem of modern warehouses sits in the central nervous system of e-commerce.
The most important competitive advantage for e-commerce is speed of delivery; the location of warehousing is crucial and so is securing the best positions in cities around the region. One of the biggest challenges for logistics in the key gateway cities is access and availability to land. That is a huge area of competitive advantage for us, because nobody has more boots on the ground across all of these major markets in Asia-Pacific than the enlarged ESR. Leveraging both the ESR and LOGOS businesses under one umbrella gives us the people and acquisition power to secure those prime locations all over the region.
Given the secular trends at play, combined with the long-lasting effects that will come from the pandemic, there is huge potential for Asia-Pacific logistics. A recent CBRE report highlighted that 80 percent of occupiers are planning to expand in the next three years. This is a critical juncture because our clients need to expand.
The biggest driver for space continues to be e-commerce. The second major demand driver is the fact that we’re moving from a world of ‘just in time’ to a ‘just in case’ inventory model, requiring higher levels of local inventory that need to be stored in warehouses. The third driver is a changing approach to food. Cold storage is going to grow significantly because of higher food safety standards, the acceleration of fresh grocery delivery, cloud kitchens and other key changes.
These are the major factors underpinning the growth of modern warehousing and they are especially pronounced in Asia where there are high degrees of e-commerce penetration in markets such as China and South Korea.
QESR has focused exclusively on logistics in the Asia-Pacific region. Will that change?
Asia-Pacific and logistics, or in a broader sense new economy which also includes data centers, will remain at the core of the enlarged ESR Group. Geographically, there is potential to build the business in other regions.
However, we think being Asia-Pacific’s largest real asset manager powered by the new economy is incredibly valuable for two key reasons. First, a lot of the synergies that exist on the tenant or customer side are regional. If we’re talking to the head of a major client, that person is typically sitting in either Hong Kong or Singapore, making regional decisions.
The second is our capital partners. Most of our capital partners also organize themselves regionally, with a head of real estate tasked with deploying capital across Asia. We want to build on those synergies. At the same time, because of our footprint and capabilities, some of our clients tell us we could help them beyond Asia; expanding outside the region is something we will continue to explore over the longer term. However, our focus remains on Asia because of the outsized potential here.
ARA has 11 REITs. What are you looking to do in this space?
We fundamentally believe in what I call the ‘financialization’ of real estate. There is going to be substantial growth of the REIT market in Asia-Pacific over the next decade. If you go back 20 years, the total market capitalization of the US REIT market was $100 billion. Today, that’s $1.2 trillion, which is about 6 percent of US GDP. If we think about Asia today, we have about $400 billion of REIT market cap which is only about 1 percent of GDP, which means there is tremendous potential for growth.
We have been waiting on a big catalyst and we now have it in the form of new REIT legislation around the region:C-REITs in China, K-REITs in South Korea, REITs in India, and now opportunities emerging in Southeast Asia. There is also a cultural dynamic in Asia where people want to own real estate. The REIT sector presents a much bigger opportunity for those who are already predisposed to want to own real estate.
The supply-demand dynamic is going to be very, very strong in the region. Some of the real estate advisory companies estimate that the current $400 billion market cap can grow to more than $1 trillion by 2030. Post-acquisition of ARA, ESR is the largest sponsor and manager of REITs in Asia-Pacific with 14 listed REITs. This positions ESR well to capitalize on the above trends. We also strongly believe there are opportunities for more new economy REITs, whether country-specific logistics REITs or data center REITs.
How can a logistics developer manage its balance sheet and a diversity of products and capital sources, while keeping its fiduciary obligations?
For any fund manager, rule numbers one to three are: Be as good a fiduciary as you can be. We firmly believe that, as a group, if we put our capital partners first we will always be able to manage a diverse set of products. Increasingly, global capital partners want to give more capital to fewer managers and as a result, it raises the bar even higher in terms of the need to deliver both best-in class governance as well as attractive returns. We feel the enlarged ESR is even better positioned today to deliver on that mission.
Capital partners do not want to lose their exposure to logistics and new economy assets. They understand that if they sell down their exposure to logistics, especially once assets stabilize in development funds, which is what they have historically done, it is going to be cost-prohibitive over time for them to get back that exposure. So, they want options for longer-term core exposure to the sector.
One of the other major trends we are seeing is that some of the larger pension funds have consolidated the private and public sides of their real estate portfolio under one leader. That also makes it easier, because sometimes the best takeout from a development fund will be a REIT. They are able to then swap their stake in a private vehicle for a stake in a listed vehicle, which historically would have been less likely to happen as one side of the business wouldn’t want to lose assets under management to the other.
$2.5bn of plans for Asia-Pacific data centers
Both ESR and LOGOS have already begun developing data centers and are now raising capital for two new separate funds, with an aggregate capital target of $2 billion-$2.5 billion.
The ESR and LOGOS funds will target complementary geographic markets in Asia. ESR’s fund will potentially partner with operators, whereas LOGOS’s will be geared towards investing purely in the underlying real estate. The combined group already has a pipeline of over 1,200 megawatts of capacity.
Perlman says: “Our core competitive advantage for data centers is what we do so well on the logistics side: We have great local country teams that have boots on the ground, can source land and can engage with local governments. We excel in design and construction.
Probably the biggest weakness for traditional data center operators is that they’re not real estate people, so their biggest challenge is not only identifying and acquiring the real estate, but importantly also securing the necessary power. We are used to dealing with local approvals on that front, as it is also an important element for cold storage facilities.”
Perlman says the challenges for real estate businesses targeting data centers are firstly understanding the customers and their unique needs and, secondly, having a strong sustainability strategy, which is imperative for capital partners, customers and local governments who are looking for carbon-neutral solutions.