Blackstone has already built up two industrial empires. Now it is putting in place the backbone of its third.
In the U.S. it has logistics business IndCor, which it built up and sold in 2014 for $8.1B and then bought back earlier this month. In Europe it built up and sold a similar logistics business, Logicor, for €12B in 2017.
In the past few years the private equity firm has also bought about €6B of edge-of-town urban logistics assets in Europe. It has begun the process of turning that into a company it will ultimately sell.
According to Bloomberg, Blackstone has started looking for an executive to manage this European urban logistics platform. Currently the assets are managed by fund manager M7 Real Estate, which has advised Blackstone on its acquisitions strategy.
The portfolio has about 800 individual assets, and more than a third of the assets by value are in the UK.
The company has undertaken some large deals, including the purchase of 130 UK assets from Brockton Capital for £560M in 2017 and the purchase of 104 Dutch and German assets from Hansteen for €1.3B. But it has also undertaken a large number of small, granular deals, befitting the nature of the asset class: small, unglamorous units which nevertheless now have a high value.
Not every urban logistics unit is let to an e-commerce tenant, but the continuing rise of digital retail has made such assets vital for retailers needing to fulfil the last mile of online orders.
At Bisnow’s London Capital Markets Update last month, before the story in Bloomberg appeared, Blackstone European head of acquisitions Samir Amichi outlined why the investor is so bullish on the sector.
“We still have very strong conviction in the sector, both on the big box distribution side and on last mile logistics properties, as the fundamentals remain extremely supportive with strong demand growth and, generally speaking, muted new supply," he said.
“Given the scale of the capital we deploy, we tend to be quite thematic in our approach. In that context, we see the strong tailwinds that the logistics sector benefits from: online sales penetration is a big factor, if you look at Continental Europe the average is 7%, while in the US it is 15%, and in China approximately 30%. And e-commerce penetration is growing at double-digit growth rates in effectively every market in which we operate.
"That being said, there are meaningful disparities within Europe. For example, Italy and Spain are in the 3-4% range, the UK is at around 17%."
That is the demand side taken care of. But supply is just not keeping up, because of the sectors against which urban logistics has to compete. Simple economics dictates that when demand far exceeds supply, rents and values for these assets have to rise.
"We see e-commerce driven demand growth continuing to rise, which is not necessarily matched by supply, particularly in more urban, densely populated areas where alternative use value, such as residential for example, is meaningful," Amichi said.
“If you are a developer and have a plot within the M25 in London, you probably look to build residential, you don’t necessarily focus on building logistics. So even in the UK, where GDP growth has been impacted by the ongoing Brexit process, what we have seen in the last three years in logistics inside the M25 is that the vacancy rate has gone from 10% to 3%. As a result, rents were up 10% year-on-year, and there aren’t many sectors in the UK where you can say that today.
“We may not be in the first inning, but the fundamentals underpinning the sector over the long-term are compelling. For logistics, fundamental demand drivers have changed materially. It is no longer correlated with GDP, it is driven by changing consumption patterns. Despite that, if you look at the spread of logistics to office yields, it is still quite material, particularly on a capex-adjusted basis."
Amichi said that Blackstone is in the process of doing what it had done previously with Logicor in particular: putting in place a team and corporate structure which mean that at some point in the future, the platform can be sold as a whole.
“We’re aiming to build a company," he said. "We think that the scale of the business that we’ve created adds to more than the sum of its parts.
“So yes, we’re building a management team, we have about 800 last mile logistics assets today and we think that should be a company with a proper management team and that gives it runway to grow from there. Ultimately, we may not remain that business’s shareholder forever, but our sense is, whether in the private or public markets, that business will be quite appealing to institutional capital.”
Bloomberg pointed out that Blackstone has no intention of selling just yet, and in fact is on the lookout for more acquisitions to further increase the size of the business. If you look at how Blackstone went about the process of building up and selling Logicor then this makes sense: There was a full five years between its first European logistics acquisitions and the sale of the business to China Investment Corp. There is nothing to suggest it will be acquiring for the same amount of time with the urban logistics platform, but it does suggest that Blackstone is not afraid to take its time and build very large platforms before selling out.
The company is focusing on the last-mile logistics sector in the U.S. also: when making the recent $19B purchase of assets from GLP that saw it buy back IndCor, it stressed that the majority of the portfolio was urban, infill logistics.