The big deal about portfolios

The strong performance is expected to continue in the last three months of the year. Indeed, a blockbuster final quarter is on the cards as a number of big-ticket deals near conclusion.

More than £400m of industrial portfolios are officially on the market, including Ares Management and Revelan Group’s £100m R32 portfolio and Hansteen’s £102m Pegasus portfolio. If the sales go through before the end of the year, they would push the total volume of industrial portfolio deals up towards the £3bn mark, easily eclipsing the £2.2bn transacted in 2017.

So what is driving this surge in portfolio deals?

The simple answer is that investors are eager to pile into the industrial market. Unlike some other parts of the property market, notably retail, the underlying occupational market for industrial is in rude health. “You are seeing rental growth, you’ve got very low vacancy rates and you’ve got take-up rising,” says Paul Stewart, head of real estate research and strategy – Europe, at Barings.

As a result, investors are eager to strike deals that increase their exposure to industrial portfolios, which is an easy way to deploy large sums of money quickly.

Peter Cooper-Parry, head of portfolio investment sales at Savills, says that in the past, institutional investors would have “stayed clear” of industrial portfolios if they didn’t like all of the assets, whereas now they are more prepared to overlook a couple of unattractive properties within a portfolio.

Investment criteria lapses

“Because of the desire to get into the sector, they would probably now buy one or two properties as part of a portfolio that they wouldn’t ideally have bought individually,” he says. “Their criteria has probably lapsed a little bit and is being overridden by the desire to get money invested in the sector.”

Institutional investors’ appetite for industrial portfolios is also being driven by the fact that many are underweight to the industrial sector. The outsized returns being achieved by industrial property means they risk underperforming against their benchmark unless they ramp up their industrial holdings quickly.

“Most institutional portfolios are weighted largely towards the office and retail sectors,” says Andrew Bird, chief executive of Warehouse REIT. “So for those fund managers remunerated on the performance of their portfolio as against MSCI, you need to be rotating your capital into the industrial sector pretty quickly to stand any chance of matching the benchmark.”

It is not just institutional investors that are snapping up industrial portfolios. Despite the yield compression in the sector, private equity investors are still very active because they see the potential to add value to industrial property through asset management and rental growth.

Many of these private equity investors are natural portfolio buyers because to deploy the large amounts of money they have raised efficiently, they need to make large deals – and in the industrial market, that inevitably means buying portfolios.

Blackstone is an obvious example. Fresh from the success of building up and selling Logicor, the US private equity firm has teamed up with M7 Real Estate to rapidly build up a large holding of multi-let industrial property.

Blackstone is the largest buyer by a distance in the sector this year and almost exclusively in portfolios

Peter Cooper-Parry, Savills

“Blackstone is the largest buyer by a distance in the sector this year and almost exclusively in portfolios,” says Cooper-Parry. “They have done this only because of the amount of money they are trying to invest… and the time it would take to get that money invested if you tried to do it individually.”

The market is also being driven by foreign investors coming in for the first time, such as Singapore’s Ascendas REIT, which made its UK logistics debut in July with the purchase of a £207m portfolio of 12 assets from Oxenwood Real Estate and Catalina Holdings.

New domestic specialist investors have also emerged in recent years, such as Warehouse REIT and Urban Logistics REIT. They are attracted to portfolios as a way of establishing themselves quickly. For example, Warehouse REIT acquired the £116m IMPT portfolio at the start of the year.

The range of different types of buyers in the market means that there is demand for a broad range of stock, from the high-quality, low-yielding assets that tend to appeal to institutions, to the more secondary properties that property companies and private equity funds are targeting.

The depth of investor demand across the industrial market is another factor driving interest in portfolios, because buyers are confident they can sell the properties in a portfolio that don’t meet their investment criteria.

“With liquidity throughout most of the market people have confidence that if they buy a portfolio with 10 assets but only want to keep five, five can be traded today,” says David Hutchings, Cushman & Wakefield’s head of EMEA investment strategy.

Targeting specific buyers

However, strong investor appetite for industrial property doesn’t mean every industrial portfolio is destined to sell well. Cooper-Parry says sellers need to assemble portfolios tailored with a specific buyer in mind to achieve the best possible price.

There is also a question mark over whether investor appetite for industrial portfolios will remain as strong as it is today. The latest IPF Consensus Forecasts report indicates that industrial returns will moderate significantly next year – it is forecasting total returns of 13.6% this year and 6.4% next year. There are also risks that Brexit may have a negative impact on the market.

As a result, some investors are cautious about buying portfolios. Since launching its debut fund in 2016, multi-let industrial specialist Ribston has bought 35 properties in 33 deals totalling £140m. Co-founder James Havery says it has “resisted the temptation” to buy portfolios that may have left it with assets it didn’t want to own and would struggle to sell in a weaker market.

“The paradox of prices increasing on all industrials in what is an uncertain market because of Brexit leads us to be conservative in asset selection,” he says.

Warehouse REIT’s Bird adds that buyers have to be careful when assessing the assets in a portfolio. “You have to be very disciplined when examining a potential portfolio purchase,” he says.

If the market does take a turn for the worse, careful scrutiny of portfolios would become increasingly important and investor appetite would undoubtedly wane. However, for now, with returns from industrial comfortably outstripping returns from other sectors, industrial portfolios are hot property.