Logistics was always the prize for ESR, complexity the price

You would be hard pressed to find a greater commitment to logistics in Asia than at ESR Group these days.

The firm this week announced the $270 million sale of ARA Private Funds – a business inherited as part of its $5.2 billion purchase of multi-asset investment manager ARA Asset Management in 2021 – to a consortium comprising Japan’s Sumitomo Mitsui Finance and Leasing Co, Japanese real estate investment firm Kenedix and current ARA chief executive Moses Song.

The offloaded business comprises $9.8 billion of assets under management across 22 funds in traditional real estate sectors including office, retail and hospitality in Australia, Singapore, South Korea and the US.

The sale represents a first step of ESR’s much-anticipated effort to divest up to $750 million worth of non-core assets following the ARA acquisition. The Hong Kong-headquartered manager has stated a focus on growing so-called ‘new economy’ offerings while divesting “any non-core/non-long-term value-enhancing aspects” of the combined business. At the heart of that drive is boosting its management of logistics properties.

Indeed, ESR made no secret of LOGOS Property Group being one of the most attractive parts of ARA. With the addition of LOGOS, ESR was able to meet its main objective, forming a real estate platform in Asia-Pacific with $59 billion of logistics and data center assets under management across 10 markets.

At the time of the ARA acquisition, Asia’s modern industrial market was at a nascent stage that saw managers competing to capture market share. Buying ARA allowed ESR to instantly pocket one of the most prominent logistics real estate businesses in Asia-Pacific.

Yet buying ARA to get to LOGOS has meant also engaging in the complicated unwind of businesses it considers ancillary to its strategy. The Singapore-based manager had $95 billion of assets under management at the time of sale, of which about 18 percent was LOGOS. As such, while this exit to Sumitomo, Kenedix and Song was meaningful, it only made an inroad into the wider ARA group of businesses.

On its latest earnings call, ESR said it was also exploring potential sales of its stakes in Cromwell Property Group, another private real estate manager, and certain Asian-listed REITs next. That still leaves other listed REITs, infrastructure and renewable energy management assets; ARA’s European equity and credit businesses, ARA Europe and ARA Venn; a Chinese manager called ARA China; and stakes in Kenedix.

While some of these businesses, such as the infrastructure and renewable energy platform and the listed vehicles, could have synergies with ESR’s new economy focus, others, ostensibly, do not. Consequently, ESR’s logistics market grab is a reminder that although M&A is often the quickest way to gain dominance in a market or sector, it can also be complex. Ultimately, for ESR, the logistics and data center prize at the heart of the deal was worth the complexity surrounding it.