Segro-Canadian JV to ride logistics wave

UK-based REIT Segro is linking up with one of Canada's largest pension funds to double the size of its continental European portfolio to roughly €2 bn.

Segro, which recently announced the launch of a €1 bn joint venture with Canada's Public Sector Pension Investment Board (PSP Investments), said it plans to ‘at least double the size of this partnership and grow the portfolio to at least €2 bn through developments and acquisitions over the coming years’.

‘There is a lot of activity in the logistics space at the moment, and we are tracking a lot of portfolios. We are very optimistic that we will be able to find new assets,’ CEO David Sleath said, adding that the focus will be on core and core-plus investment opportunities. Against a background of low supply levels, he also noted that the venture will allow for speculative development, which is virtually absent in Europe at the moment.

GERMANY
The partnership will be primarily looking to grow in the German property market, which currently has a weighting of roughly 10% in the total portfolio.

‘Germany is the biggest continental European logistics market and has a great economy. If I had to pick a single market where we want to grow I would say Germany - that is absolutely at the centre of our attention,' Sleath added.

Slough-based Segro recently contributed virtually all its assets in mainland Europe to the new 50-50 partnership with PSP Investments. The deal is in line with Segro's strategy to increase the use of third-party capital in order to expand its foothold in mainland Europe. ‘This deal represents a significant step forward in our strategic plan to grow in Europe and this partnership will give us the financial capability to do it. It also benefits us in the short term by reducing our loan to value ratio,' Sleath commented.

PSP Investments, which manages CA$68 bn worth of assets, was one of a number of ‘credible investors’ from across the globe which manifested interest in acquiring Segro’s continental European assets after the company launched a closed bidding process in late 2012.

The deal involves a portfolio valued at €974 mln, offering 1.6 million m2 of Grade A logistics space across 34 sites in France, Germany, the Netherlands, Belgium, Poland and the Czech Republic. The venture will also have a right of first refusal on logistics land retained by Segro in these markets, which totals 170 hectares.

EUROPEAN LAND BANKS
Segro and PSP are committing equity of €303 mln each to fund the venture, and have agreed to provide another €62 mln each to finance the development of a land bank of 84 hectares in Poland, Germany and Belgium, which offers potential for a further 390,000 m2 of modern logistics space. The partnership is also being financed with medium-term debt of up to €390 mln priced at 185 basis points over Euribor. Closing is expected for the third quarter of the year.

Segro’s Sleath noted that the constant, strong capital flow generated by logistics real estate suits the requirements of long-term institutional investors such as PSP. 'The transaction is the first step in building what we expect to be a strong long-term relationship with PSP Investments as we seek to take advantage of the growth and consolidation opportunities in the Continental European logistics market.’

He did not rule out that Segro may further reduce its interest in the portfolio in the future by selling down its stake to PSP or by allowing a new investor into the joint venture. ‘There is flexibility on both sides but the intention is to co-invest,’ he pointed out.

Segro will act as asset, property and development manager for the portfolio and will earn management fees from the venture. The proceeds from the transaction will initially reduce Segro's loan to value ratio (LTV) by 4% to 46%.

Following the deal, the UK REIT's remaining Continental European portfolio will include core assets in France, Germany, Poland, Belgium and The Netherlands valued at €340 mln. Morgan Stanley and CBRE acted as the exclusive financial adviser to Segro on the transaction.

LOGISTICS BONANZA
Europe’s logistics sector is seeing increasing interest from institutional investors which are attracted to the sector’s higher yields and good prospects in the occupier market. According to those who track the market, occupier appetite for industrial and logistics property is expected to rise significantly in the next two years, driven by growth in e-commerce activity and the associated impact on the supply chain.

James Markby, head of capital markets logistics & industrial at CBRE, believes that institutional investors are warming up to the sector thanks to both its positive rental dynamics and capital growth perspective. ‘Logistics is a high-yielding investment and it performs incredibly well against other asset classes. If you look at where yields were in the sector at end 2012, you could get a total cash on cash return of 9-10% on a five year horizon. This is definitely not a bad place to be as a buyer,’ Markby said.

Against this background, Norway's giant oil pension fund in March this year completed the acquisition of a half-share in a €2.4 bn portfolio from New York-listed Prologis. The deal involved a portfolio of 4.5 million m2 comprising 195 Class-A logistics facilities. Furthermore, Brookfield Property Partners in June announced the purchase of UK-based logistics developer Gazeley, the owner of 524,000 m2 of lettable space and land bank of 1.3 million m2 with a further 1.1 million m2 held under option agreements.

According to CBRE's Investor Intentions report released earlier this year some 20% of investors surveyed selected the logistics sector as the most attractive for purchases. In particular, Markby sees a ‘fundamental shift’ towards logistics in both the direct and indirect investment market. 'There is a lot happening in terms of company or fund recapitalisations,' he noted.

Recent transactions pointing to this trend include Goodman European Logistics Fund (GELF)’s €550 mln capital raising which was oversubscribed with demand reaching over €900 mln as well as the recent launch of a number of logistics property funds backed by institutional money. Henderson Global Investors, HIH and Heitman have all set up or are in the process of launching specialist sector funds while US-based private equity group Blackstone has built up a €1.5 bn logistics portfolio over the past 18 months.

‘We are starting to see real competition in terms of prices for €100 mln + portfolios. This situation did not exist six months ago and will likely result in further yield compression in the coming months. It definitely shows that the logistics asset class is getting more institutionalised,’ Markby concluded.