Sam Zell Re-Ups with ESR – Puts $205M into Japan Warehouse Projects

Sam Zell thinks Asia needs more warehouses, and the Chicago-based real estate magnate has just closed on his first Asian-focused fund, with the objective of profiting from development and operation of new logistics facilities in Japan.

Zell’s Equity International, which focuses on opportunities in emerging markets, last week announced the $205 million closing of ZEI Co-Invest 1 Fund, L.P. (ZEI Asia Fund), which –- according to a statement from the investment firm – is expected to invest alongside more than $2 billion in other capital into Asian logistics projects to be developed by logistics development platform ESR (e-Shang Redwood).

Zell Ties Up With Texas Teachers to Target Japanese Sheds

The investment is targetted at developing new logistics facilities in key locations in Japan, including Tokyo, Nagoya and other locations identified by ESR as being under-served by the current supply of distribution centers in the country.

“This is the first Asian-focused fund in our history. It reflects the opportunities we are seeing in the region’s logistics sector, particularly in Japanese warehouse assets,” said Equity International CEO Tom Heneghan. “We are pleased to have a sophisticated institutional investor base that invests alongside EI in various vehicles to take advantage of specific marketplace opportunities, and we look forward to continuing to work with ESR to create a leading pan-Asian logistics platform.”

Sources with knowledge of the matter confirmed to Mingtiandi that Zell has personally invested along with Teacher Retirement System of Texas as partners in the new fund, which is to be allocated entirely to ESR projects in Japan. In October last year, Texas Teachers reportedly committed $200 million to two joint efforts with Equity International with capital said to be invested outside the US in non-core real estate.

Low Interest Rates and Strong Demand Create Opportunity for ESR

The appeal of ESR’s Japan platform is fuelled in part by a combination of the country’s low interest rates, and strong demand from end-users looking for modern logistics facilities in key markets.

“It’s a compelling time and we have an accelerated pipeline this year, so we are taking advantage with relationship investors who have been discussing with us for some time and view this as the right combination of circumstances and opportunity,” ESR president and co-founder Charles de Portes told Mingtiandi in an interview. “Japan is still completely undersupplied for modern logistics space. This, coupled with record low interest rates and strong development yields, leads to very attractive returns for our investors.”

The commitment follows up on Equity International’s earlier stake in ESR, with Zell’s investment firm having established a strategic partnership with The Redwood Group in 2013. Shanghai-based e-Shang and The Redwood Group formed ESR, one of the region’s largest logistics players, when they merged in January this year, in an event first reported here on Mingtiandi.

“We are fortunate that ours are all long term investors,” de Portes pointed out. “Japan offers opportunities for consolidating older space, and for creating new, state-of-the-art seismically compliant space, especially in Tokyo, Osaka and Nagoya.

Logistics Shows Pan-Asian Appeal

ESR’s Japan strategy is proving to be popular with institutional investors this year, with China’s Ping An Real Estate committing $300 million of its capital to the company’s Japan projects. The warehouse platform has reached a few major milestones in Japan this year, a 39,000 square metre project was rolled out in Saitama prefecture in March and ESR then secured a site for a 560,000 square metre facility near Tokyo in July.

Warburg Pincus, Dutch pension fund managers PGGM and APG, and Canada’s CPPIB are also all major investors in ESR.

One milestone that does not appear to be on the horizon for ESR this year is a public listing. While reports last year had e-Shang targetting a $1 billion IPO within 2016, and sources familiar with the company’s plans mentioned a target for a much larger market debut following the merger, these plans now appear less urgent. Sources who spoke with Mingtiandi said that with 2016 rapidly being depleted, no public listing is on the way this year, and the company is in no rush to list on public markets in the near future.

While logistics has long been a sought after sector in mainland China, a number of international investment funds have begun chasing opportunities to generate returns from warehouses in other locations around the region. ESR, in addition to developing in China and Japan, also last year set up a $500 million joint venture in Korea.

While Asian market leader GLP has branched out into the US and Brazil, Sydney and Shanghai-based Logos Property has been targetting other Asian markets, including establishing a joint venture in Singapore in June this year.