Investec Property Fund (through its wholly owned subsidiary, Investec Property Fund Offshore Investments Proprietary Limited) has announced the acquisition of a 42.9% interest in a portfolio consisting of twenty-two logistics properties located across Europe of EUR74.2 million.
The entire initial portfolio of properties asset value amounts to EU423 million, equating to a net income yield of 6.0%. The fund’s initial investment yield equates to approximately 10.5%.
Investec Property Fund will be investing alongside funds and other segregated mandates managed by Ares Management L.P. or its affiliate. The acquisition represents an investment into a platform providing access into core logistics markets across Europe, with the initial portfolio located across Germany, France, Netherlands, Spain, Italy and Poland. Inclusive of the initial investment, Investec Property Fund has committed to investing up to EUR150 million into the platform over the next four years – a total of EU350 million has been committed to the platform by the consortium. The investment will assist in the timely aggregation of a scaled and diversified logistics portfolio across Europe.
This transaction will provide the fund with:
- an initial investment into a sizeable diversified pan European logistics portfolio and experienced management team, increasing the funds offshore exposure to 11% of total assets;
- an acquisition price at below replacement cost where there is “value in the buy” and in advance of any value add created by the Manager;
- exposure to an asset strategy that is well suited to the current macro environment, whereby the investment returns are generated through income and hands on asset management versus reliance on cap rate compression; and
- earnings accretion due to:
- attractive risk adjusted returns at an asset level;
- reduced absolute price through the recent strengthening in the South African Rand (resulting in cheaper entry into Offshore Assets); and;
- attractive funding costs due to the continued low interest rate environment in Europe.
There has been significant growth in the European logistics sector, boosted by a favourable economic backdrop that is stimulating exports, retail sales and consumer spending, despite on-going economic and political uncertainties. However, despite this recent growth, the European logistics market remains less advanced than that of the UK and USA, and therefore presents an attractive investment opportunity. The rapid growth of e-commerce across Europe is further driving demand in the logistics sector as e-commerce is quickly becoming as important as physical store networks, specifically given the fact that sales generated through e-commerce require three times more logistics space than those generated through traditional retail stores. In addition, trade growth across Europe has been higher than GDP growth and is expected to continue to grow faster than GDP, implying a greater requirement for the storage and movement of goods utilising logistic facilities.
The intention is to deploy the balance of the Consortium’s committed capital and to create a pan-European logistics platform with an asset base of circa EUR 875 million within the next 2 to 3 years. The core investment strategy will be based on some of the following key principles:
- Major western European geographies which are both liquid and transparent.
- Micro-location – targeting assets in established logistics hubs with high concentrations of industry and consumers.
- High quality assets and strong property fundamentals – assets below 20 years of age with asset management opportunities and assets which provide maximum occupational flexibility and attractiveness;
- Targeting assets with pricing that reflects a discount to replacement cost and / or competing assets, as well as providing positive positioning to benefit from the secular trend of increased demand for logistics and resulting rental growth;
“This investment is not only an opportunity to fulfil our stated strategic priority of enhancing our offshore exposure but also brings the first Pan-European logistics property offering to South African investors. In line with Europe’s recovery from the global financial crisis, the region is seeing positive real estate dynamics, particularly in the logistics sector where demand is strong but supply limited. Moreover, the European logistics sector remains less advanced than in the UK and US and therefore presents significant opportunities to be capitalised on prior to the sector reaching maturity, for the benefit of shareholders” commented Investec Property Fund’s CEO Nick Riley.
The fund’s international strategy to date has been premised on investing in geographies where the Investec group has infrastructure and personnel on the ground, hence the current investments in Australia and the United Kingdom. The Fund has however continued to consider offshore opportunities outside of these jurisdictions, where the Fund has the ability to invest with partners that have a well-established track record and a like minded approach to property investments. The transaction fully supports the Fund’s offshore investment approach. Ares is an experienced investor in Europe, with an impressive track record in accessing opportunities and unlocking value in core plus and value add strategies.
“Investec Property Fund has an opportunity to partner with a Consortium and Manager that have a strong track record of investing across multiple asset classes throughout Europe. A key contributor to Ares’ Real Estate Group’s demonstrated track record is the length and breadth of the European Real Estate Team’s investment experience” Riley added.
The in-country asset management will be executed by Urban Real Estate Partners, a dedicated management platform led by Paul Rodger (CEO of UREP). Mr Rodger has significant experience in all the core competencies required to manage the Pan-European logistics portfolio having headed up Hansteen Holdings Plc’s European property portfolio. Hansteen is a commercial property REIT that invests in light industrial, warehousing and logistics properties throughout continental Europe and the United Kingdom. The platform into which Investec Property Fund is invested also owns 50% of UREP.
Investec Property Fund’s Initial Investment of EUR74.2 million will be funded through a combination of existing debt facilities and a new Euro 40 million secured term loan provided by Standard Chartered. The Standard Chartered Facility is for a term of 4 years and has a fixed interest rate of 2.25%.
The fund has hedged 100% of the expected income from the transaction for a period of 5 years at a commencing spot rate of R15 / Euro 1. The average forward ZAR / Euro curve over the 5 year period has embedded growth of approximately 7%.
Following this acquisition, the growth in core dividend per share for the financial year ending 31 March 2019 is expected to be between 6.5% and 7.5%. While the South African market remains under pressure, the completion of the Ares transaction will contribute to the forecast growth. This ensures that when the recent improvement in sentiment filters through to the real economy, the South African portfolio, which comprises 89% of the fund’s asset base will potentially present upside.
The guidance for the financial year ending 31 March 2018 provided in the trading and investor update on 28 March 2018 remains unchanged. The Fund will release its annual financial results for the year ended March 2018 on 15 May 2018.
Riley concluded; “while we are excited about the upswing in sentiment that we have seen in South Africa since December, it will take some time to filter through to the property market and we expect the challenging sector dynamics to continue in the short to medium term. Our strategy of investing in quality assets with strong property fundamentals remains core to our business.”