Global private investment company Arrow Capital Partners has gained a reputation for identifying its targets and executing with a clear aim. Operating out of 12 offices throughout Asia-Pacific and Europe, the firm manages real estate assets worth more than $5 bn and likes to manage the assets it owns. Logistics has been a clear conviction for several years, working on its own and with investment partners.
In 2019, Arrow partnered with Cerberus, one of the leading North American private equity investors, to compile a €2 bn portfolio of European industrial and urban logistics property for long term ownership. The Strategic Industrial Real Estate (SIRE) joint venture was designed to invest in core plus industrial and logistics assets yielding in excess of 5%, as well as vacant assets with strong lease up potential.
The joint venture is led by Katherine Parker, head of investment management Europe at Arrow, who says that both Arrow and SIRE have been in ‘selective buying mode’ throughout the recent period of ‘capital market adjustment’. ‘We have continually been seeking opportunities that complement our existing portfolio,’ Parker tells Logistics Watch.
‘Within our SIRE JV with Cerberus alone we have 500 tenants in 140 assets across six countries throughout Europe, which gives us excellent primary data on where market conditions are ripe for rental growth, where tenants simply cannot find sufficient accommodation to suit their evolving businesses, where economic rents on new build assets are rising through necessity,’ Parker explains.
‘We remain a high conviction investor in the logistics sector and very much see the current dislocation as an opportunity, albeit there has been limited evident distress to date and availability of compelling investment stock does remain scarce across all the markets we are active in.’
Parker notes that ‘SIRE has always been selective on its stock selection as it built out its portfolio construct’. She adds: ‘We remain focused on submarkets that offer projected population and urbanisation growth, demographics that support increasing e-commerce penetration, where availability of development ready land remains constrained. We are actively focused on acquiring and developing assets with strong ESG credentials or where we have the ability to demonstrably improve sustainability metrics.’
Small yet perfect
One hallmark of recent dealmaking in the SIRE venture has been a willingness to go small for the right price. At the end of April, the vehicle picked up a logistics warehouse in Leeds, West Yorkshire, for £10.35 mln at a net initial yield of 7.25%. The 140,000 ft2 logistics warehouse, Birstall 140, was acquired from the occupier in a sale and leaseback transaction, and is located a minute from the intersection of the M621 and M62, and a 10-minute drive from Leeds city centre.
The asset is powered by ‘green’ electricity and incorporates several strong sustainability characteristics including EV charging points, LED lighting throughout the warehouse and has the potential to support PV panels. The occupier, XL Joinery, is also heavily invested in sustainability and currently operates as a carbon neutral business.
Notes Parker: ‘This deal is exactly in line with our strategy to aggregate individual deals beneath the typical institutional lost size threshold which offer attractive yield arbitrage. A large number of our acquisitions are done off market and we pride ourselves on our ability to ability to build productive mutually beneficial relationships with our occupiers. This deal is a great example of that approach.
‘It was a sale and leaseback with a very well-run joinery business that has demonstrated sustained growth and were looking for a structure that enabled them to invest into the business to position them for future growth. We were able to negotiate in a midterm rent review after three years to ensure we can realise the growth we are anticipating given the strong dynamics of the specific submarket.’
Constructing the portfolio
Parker confirms that SIRE maintains reasonably broad horizons in geographical terms. ‘From a portfolio construct perspective, our primary markets remain Germany, Netherlands and the UK which are supplemented with additional exposure to Spain, Nordics, Ireland and Poland.
‘However when we analyse potential investments, we are much more focused on sub market dynamics rather than country level box ticking. Country-level averages can mask very attractive logistics locations.
The type of asset is also a factor, she notes. ‘We firmly believe that last-mile distribution models are more viable in more densely populated areas. Continued urbanisation, and projected growth in European cities, adds to densification.’
Parker adds: ‘Transport costs dominate the total cost of a logistics supply chain. Minimising transports costs will result in demand hot spots for occupiers. For a 3PL, the higher the population density, the more economically viable the operation they can run from a single warehouse and it is this fundamental principle that underscores our stock selection when it comes to where we invest.’
Specifically for the SIRE strategy, preferred asset types have to date included urban logistics and well-located mid-box assets in diverse locations. ‘Where we have pivoted in the last couple of years is increasing our focus on sourcing and building out development assets across all our jurisdictions, either partnering with local developers or constructing ourselves,’ she adds. ‘Given current market conditions, we are continuing to selectively target good quality, well located investment assets and development sites.’
Approach to disposals
SIRE made its first disposal earlier this year, selling a logistics warehouse in Corby, UK to Leftfield for £30 mln (€34 mln). The 248,000 sq ft (23,000 m2) property with a BREEAM ‘Excellent’ rating was pre-let to Smyths Toys in 2021 on a 15-year lease with a 10-year break. Arrow forward funded this speculative warehouse development in 2020.
Adds Parker: ‘Midlands Logistics Park was one of our first development projects within SIRE which we forward funded during Covid with Mulberry Developments. The asset was pre-leased ahead of business plan prior to practical completion and was effectively stabilised from a business plan perspective. We therefore decided to exit to crystallise a very successful cradle to grave investment for SIRE.’
Overall, Parker is positive on occupier dynamics across the SIRE portfolio. ‘We have seen a number of examples in recent months where assets have re-leased to new occupiers prior to exiting tenant’s leases expiring. We have also seen a notable increase in incumbent tenants approaching us to extend their lease terms a year in advance of their contractual expiries to provide operational certainty to their businesses given the lack of supply for relocation.’
Furthermore, she is confident that ecommerce will continue to grow. ‘Ecommerce revenues are expected to increase by 50% between 2022 and 2025 to hit $1.2 tn,’ she states. ‘Internet-connected devices are expected to double globally between 2023 and 2030. Savills have frequently commented that for every $1 bn of additional online sales, a further 1 million ft2 of logistics warehousing is required to facilitate it. But by no means are they the only drivers of demand.
‘We are seeing the supply chain disruption from the Ukraine conflict, the energy crisis, the long tail of COVID are all having an impact on warehouse demand. These issues are driving trends across Europe of re/near/friend – shoring and local stock building coupled with more demand for local manufacturing which all adds to the demand induced by e-commerce.’
