Investing in Logistics
The February issue of PERE magazine featured our special supplement, Investing in Logistics. For more on the sector, see our stories below:
Multi-story on the rise
Where the stakes are higher
Emerging logistics corridors
Last year saw a dramatic transformation in the competitive landscape of the logistics real estate market. Platform deals had been a feature of the preceding two years in the sector, but never before had it seen transactions on such a large scale.
Three huge deals dominated the headlines: in June, Blackstone sold its European business, Logicor, to China Investment Corporation for €12.25 billion; later in the summer, it emerged that Global Logistic Properties would be taken private in a deal valuing the company at around $10 billion; and at the close of the year, GLP bought another European platform, Gazeley, for $2.8 billion.
Any one of these deals would have been a landmark for the sector, but the Logicor sale in particular caught the eye of the global investment community. Not only did it represent the biggest ever transaction in the sector, but the biggest transaction across any asset class in 2017.
Blackstone had built the business with a flurry of acquisitions over the preceding five years, and a disposal had been on the cards since mid-2016, either as a flotation on the public markets or an outright sale. Ultimately, Blackstone chose the latter approach and Chinese sovereign wealth investor CIC emerged victorious in a bidding process that also involved GLP and a joint venture between two Singapore state funds, Mapletree and Temasek. In many respects, the series of events closely mirrored Blackstone’s creation of, and exit from, its US logistics platform, IndCor, which was sold to GLP and Singapore fund GIC in 2015 for $8.1 billion.
Market participants are still analyzing the implications of the Logicor transaction. Jack Cox, head of EMEA industrial and logistics capital markets at CBRE, says: “It would be hard to find a stronger vote of confidence in any market than a €12.25 billion liquidity event, but I would probably go further: that was a highly competitive process with three parties really getting into it. You could extrapolate that and say there was €36 billion-€37 billion of capital chasing that transaction. The turnover of the European logistics market in 2015-16 was €25 billion-€26 billion. This year it will be €40 billion. Even if you strip out Logicor, you still end up with a record transaction year. That was an enormous feather in the cap of the logistics market, particularly when you consider it is a pure asset management platform without any development capability.”
Blackstone’s creation of Logicor and its subsequent sale shows how well the private equity house read growing investor appetite for the sector, says Jeremy Plummer, Europe chief executive of CBRE’s investment management business CBRE Global Investors: “Most people would say the Logicor portfolio is of quite mixed quality, but by buying warehouses in scale, Blackstone was able to take advantage of the macro play. Attitudes to logistics changed, the whole sector got re-rated, yields came in and they made a huge amount of money.”
“The battles lines are drawn for the next two or three years. What is interesting is what will happen next”
The price paid by CIC surprised some observers. A figure of €11 billion was widely touted in the run-up to the sales process. “The pricing for the Logicor and Gazeley transactions is extremely aggressive and only works if you are penciling in fairly strong rental growth – which is what we are likely to see in 2018,” says Ben Bannatyne, president of Europe at Prologis.
Despite the enormous outlay, CIC’s strategy is sensible when considered from their perspective, says a senior figure at a pan-European investment house who declined to be named: “What else could they do to generate that cash-on-cash yield and deploy their capital in really big volume? Even if that portfolio has some problems because some of it is old, other parts of it will be growing. And if it just flatlined overall that cash-on-cash yield would still make sense.”
GLP on the block
One of the disappointed bidders for Logicor was GLP, which at the time of the transaction was itself reaching the endgame of a sales process. GLP’s chief operating officer Steve Schutte explains: “Our stock price was relatively flat for a period of time. In 2016, [GLP’s largest shareholder] GIC had come to us and asked us to undertake a strategic review to look at ways to boost that stock price. We felt that there was still a lot of value within the company and within the portfolio and our strategy which wasn’t necessarily being represented in the stock price. That was the genesis of it.”
In the summer, it was announced that GLP’s shareholders had accepted a bid from Nesta Investment Holdings, a consortium of international investors including a business headed by GLP’s own chief executive Ming Mei, to take the company private. Schutte says the new ownership structure does not herald a change of strategy: “I think for us it is a matter of continuing to push hard on the path that we were going down, although when you are not in a public structure it gives you more flexibility in terms of the things that you may pursue or the timing of how you do certain things.”
The only other shortlisted bidder was Asian logistics platform e-Shang Redwood. Chief executive Stuart Gibson claims ESR had insight into many of GLP’s Asian assets because they had been developed by Prologis’ Asian business, which formerly employed him and several of his colleagues, and from which GLP was spun out in 2009. “GLP have a lot of assets on their balance sheet that shouldn’t be there. We would have sold those assets into funds and repatriated the capital back to the company for new development,” he says. “They have a great fund management business. We liked and wanted that. We spent a lot of time on due diligence. It is a pity it never worked out in our favor, but we certainly gave it a good run.”
That GLP’s tilt at Logicor was possible at all while the company was up for sale demonstrates the resilience of its capital base, argues a European investment broker: “GLP have at no point become capital constrained. Anyone else would have been dead in the water on the Logicor process, but because of the strength of their investor network and their reputation they were able to continue.”
The right fit
GLP already had a strong presence in Asia-Pacific and the Americas and only needed a European foothold to establish itself as a competitor to Prologis and Goodman as the third truly global logistics real estate provider. While it missed out on Logicor, it was not long before GLP secured its long-desired European foothold by acquiring Gazeley from real assets fund management giant Brookfield in a deal completed in December.
GLP had also previously looked at buying European logistics platform P3 before it was sold in 2016 to GIC. “Europe was very high on our radar and we were looking at any large transaction there, but we weren’t in a rush to get in when it was less than the best opportunity for us,” says Schutte. “When Gazeley came up, we knew it was the right fit at the right time and we put a great deal of effort into securing it. The assets the Gazeley team had put together were some of the best in Europe, but as important to us was the team. For us, having the right operating team is critical.”
As well as 16 million square feet of existing warehouses that will be put into a newly-created GLP Europe Income Partners I fund, GLP acquired a land bank capable of development for a similar amount of space. “We want to grow that existing portfolio quickly,” says Schutte.
Nick Cook, who took over as Gazeley chief executive after the acquisition, says: “We are going to be developing more, acquiring more, and buying more land to facilitate development in the key markets in western Europe.”
Gazeley is currently active in the UK, Germany, France and the Netherlands, but Cook does not rule out expanding into other markets, especially where Gazeley has been active in the past, including Spain and Italy.
He adds that Gazeley will likely step up its speculative building program in 2018 in locations where the market conditions suit. “As a strategy, it is something we would have pursued anyway, but I think the ambitious plans for growth and the availability of capital will make it easier to achieve under GLP’s ownership,” he says.
With the obvious targets having already been secured, the surge of platform deals in Europe appears likely to run out of steam. However, Blackstone is still buying up logistics property which could imply that it is looking to build up another Logicor.
That leaves Prologis, which completed a consolidation of its European funds into a single €8.2 billion vehicle in 2017, plus Goodman, GLP and Logicor/CIC in possession of the field. Logan Smith, head of logistics at broker BNP Paribas Real Estate, says: “The battles lines are drawn for the next two or three years. What is interesting is what will happen next. There is an increased amount of capital targeting this sector and the deals in 2017 did not happen with investors that expect to do nothing, they all have strong management teams and everybody expects to grow. It is really starting to get interesting at this point.”
Meanwhile in the US, private equity firms may look to create a new wave of platforms for sale to international institutional capital, suggests John Hugenard, international director in the industrial capital markets team at JLL. “Chips are coming off the table in Europe and being redeployed back in the US,” he says. “There is not a huge amount of acquisition by the domestic institutional investors. They are doing more of a build-to-core strategy by providing development capital. The investors buying in volume are aggregators rather than long-term owners.”
The trend towards big platform and portfolio deals is a natural development in a sector where investors have often been thwarted in deploying capital because of relatively small ticket sizes, argues Cox. “They are more efficient ways for the big sovereign and pension funds to deploy into the sector. We have seen the emergence of a portfolio premium, which is another example of the sector maturing and offering appropriate product types to the global capital markets audience.”
With no let-up in investor appetite for logistics, and the example of Logicor to encourage them, managers established and up-and-coming alike continue to have plenty of incentive to build up and sell logistics platforms.