ESR snares Blackstone industrial property portfolio for $3.8bn

The coronavirus crisis has changed commercial property with logistics real estate coming out on top and big institutions are paying record prices.

Warehouse prices are likely to be reset

Hong Kong based-property company ESR has splashed out $3.8bn to buy a portfolio of warehouses from US private equity firm Blackstone in a move that will reset values across the country and puts on display the power of the e-commerce boom.

The price, which has set new benchmarks for industrial property across Australia, is the largest to be paid in a direct property deal in Australia, outstripping a $2.5bn portfolio of office towers that Investa sold six years ago.

ESR’s purchase – backed Singaporean sovereign wealth fund GIC – also put an end to hopes of floating the portfolio on the Australian Securities Exchange.

Despite a recovery by property companies in recent months the stock market could not compete with the sharper price paid by ESR, which will become one of the country’s largest industrial landlords under the deal.

It will join the likes of the Greg Goodman-led Goodman Group and Charter Hall, which have major portfolios in the sector, and its purchase means it has already overhauled other long-established local rivals.

ESR has surged into the local market under the direction of former Goodman executive, Phil Pearce, and has substantial holdings as well as development and investment funds that specialise in buying up property along the east coast of Australia.

The deal reinforces the shift towards industrial property and away from large malls as the value of warehouses and distribution centres outstrips the traditional mainstays of retail and office property as it offers both certainty of income and potential for growth while the other sectors are under pressure.

The ESR Australia CEO indicated that the company was riding the deeper trends that are transforming commercial real estate.

“We’re seeing a structural shift in real estate asset classes where e-commerce is really changing and making warehouses in some way more like retail,” Mr Pearce said.

“Instead of people going to the shop they are just getting online and buying and that’s having a massive impact.”

Australia had been a “slow adopter” of e-commerce by global standards but Mr Pearce said that once it broke through the 10 per cent penetration barrier it ”really accelerates”.

“As a result of COVID we’ve had years of growth in one year,” he said. ”We expect it to continue like that so that’s a big shift in a very short period.”

Mr Pearce said that the shifts in the big money behind property deals had been accelerated by the pandemic.

“The global pension funds and sovereign wealth funds have been reallocating away from retail into office and industrial logistics,” he said.

“With COVID, I think the reallocation is then ... maybe we won’t put any more capital into office, we’ll put it all into industrial. I think the demand for logistics assets accelerated hugely over the last 12 months.”

Mr Pearce pointed to multiple drivers for big companies taking up more industrial space beyond e-commerce as they shifted away from just in time delivery after the pandemic.

“Lots of organisations were caught out as a result of transportation, roads or supply chains being interrupted [and] they weren’t able to serve customers. I think people are actually going to be carrying more inventory, warehousing is clearly a beneficiary of that in terms of requirements for additional space,” he said.

Mr Pearce said the portfolio was land rich and ESR could start developing on some sites reasonably soon with the purchase also extending the company‘s holdings in Perth and Adelaide.

Buying the assets, known as the Milestone portfolio, will jump ESR up to become the third-largest logistics landlord in Australia with assets under management rising to $7.9bn.

The company flagged that it would look to expand the warehouses on the sites its has bought that Australia’s major capital cities. The portfolio has a land area of 3.6m sqm and only about 38 per cent of the sites are covered by warehouses allowing for expansion.

ESR Australia partnered with GIC as its capital partner for the acquisition under a newly formed investment vehicle, EMP, which will see ESR contribute 20 per cent of the equity and the Singapore fund 80 per cent.

Logistics are booming following the Covid pandemic.

ANZ Banking Group, Mitsubishi UFJ Financial Group, Standard Chartered and United Overseas Bank are providing fully underwritten debt facilities for the acquisition of the real estate assets.

The portfolio is occupied national, multinational, ASX listed or government clients such as Woolworths, Lineage Logistics, Toll (Japan Post), Daimler Benz, Australia Post, Mazda and WesTrac.

The consideration attributed to the portfolio is expected to provide an initial yield of 4.5 per cent with a 6.9-year Weighted Average Lease Expiry.

Mr Pearce described the acquisition as transformative, providing ESR Australia with immediate scale making ESR the third largest owner of logistics real estate in Australia.

“The opportunity to secure such a large portfolio with extremely well-located assets across Adelaide, Brisbane, Melbourne, Perth and Sydney, strategically positions EMP to benefit from the continued growth in demand for warehouse space, particularly as the robust demand for logistics real estate is expected to remain strong due to sustained growth in e-commerce sales,” he said

“The portfolio is land rich, with low site coverage of only 38 per cent, providing plenty of scope for ESR Australia to redevelop these assets over time,” Mr Pearce said.

Blackstone worked through the coronavirus crisis last year readying for what was pitched as the world’s largest industrial property sale of 2021.

The switch to e-commerce during the pandemic helped heighten demand for logistics property and final bids for the 45 property portfolio came in ahead of bullish initial expectations of $3.5bn.

ESR beat stiff competition from a final field that included a venture between specialist manager Logos and Axa Investment Managers. the listed Dexus, and Singapore’s Mapletree, which came close to snaring the portfolio.

Blackstone mulled listing the portfolio and had intended to retain a stake of about 45 per cent if it opted for a float of the property logistics group under the Milestone banner.

The firm planned to raise about $1.2bn in equity as part of an IPO, meaning Milestone’s market cap would have approached $2.7bn.

The listed company was to be chaired by former Morgan Stanley Australia chief and Westpac board member Steve Harker and led by property executive Chris Judd.

Investment banks JPMorgan and Morgan Stanley were mandated to manage a Milestone IPO, while real estate agencies Eastdil Secured and JLL went out to property buyers.

The sale is Blackstone’s largest ever move in Australia. Although it missed taking over the then listed Investa Office Fund it had built up a $12bn local property operation and will remain active in industrial property.

The deal also realises huge profits for the firm as it had bought unwanted industrial property assets, including three sizeable portfolios from Goodman, ahead of the boom in the area really taking off.

The size of Blackstone’s windfall is difficult to calculate but it won a premium both for the scale of the portfolio and on the management platform associated with the properties.

The groups that vied for the portfolio saw it as an opportunity to buy scale in the hot sector where major corporations are committing to increasingly complex, large warehouses as they overhaul their supply chains.

The portfolio is a blend of older style warehouses and modern facilities and ESR is likely to develop out and reposition some assets, setting itself up for further expansion.

The transaction also shows the global appetite for industrial real estate on a huge scale with the portfolio the largest to trade globally this year, bettering even transactions for industrial platforms in Europe and North America.

Global bidders chased the portfolio as local industrial properties are relatively inexpensive compared to prices paid in other developed markets.

ESR promotes itself as a leading logistics real estate platform that specialises in the Asia-Pacific region and boasts total assets under management of close to $US30bn, mainly in developed Asian markets, ahead of the deal and a 600 strong team.

The group has rapidly grown in Australia to become an industrial and business park property company and had local assets under management of more than $4.4bn, and a robust pipeline of developments underway, mainly backed by global institutional investors, ahead of the deal.

It entered Australia in 2018 when it acquired developer Commercial and Industrial Property from Charter Hall and private investors for $102.5m and followed this with the takeover of PropertyLink for about $700m. The company also holds a stake in funds manager Centuria Capital.