ESR Forms $1B Japan Logistics Real Estate JV with AXA and Sovereign Fund

Asia logistics real estate developer ESR today announced that it has formed a new joint venture with an unnamed sovereign wealth fund and France’s AXA Investment Managers to acquire core logistics properties in Japan, starting with the purchase of six Tokyo and Osaka assets for around $1 billion.

Distinct from ESR’s earlier Japan funds, the joint venture with the real estate division of AXA Investment Managers and the mystery sovereign fund aims specifically at acquiring established, stabilised assets, rather than at developing new facilities.

This latest joint venture comes within two months of the Hong Kong-based warehouse builder and fund manager establishing new footholds in Australia and India, as the Warburg Pincus-backed firm builds out its regional presence.

Betting on Japan’s Distribution Demand

“We view this as a unique international private investment partnership, offering long-term exposure to a highly scalable, diversified portfolio of logistics and e-commerce assets located throughout Japan’s primary distribution markets tied most closely with domestic and global trade,” ESR co-founders Stuart Gibson and Charles de Portes jointly said in a statement, adding that, this new investment platform is a testimony to the global institutional investment demand for stable logistics assets and income streams in Japan.

The Japanese logistics sector has been expanding at eight percent annually, according to figures cited by ESR from the Japan Logistics Institute.

The opportunities from providing modern distribution facilities also recently helped to attract a new investment initiative from ESR competitor GLP, with the Singapore-based firm announcing last month that it had set up the largest fund ever targetting Japan’s logistics real estate sector.

After having secured primary backing from the Canada Pension Plan Investment Board (CPPIB), GLP Japan Development Partners III aims to raise JPY 625 billion ($5.6 billion) for investment in new logistics facilities in Japan through the new fund.

ESR Goes Core in Japan

The six properties that ESR is using to seed the new joint venture are all three years old or less, according to the company’s statement. The partners said that they “will seek further investment opportunities diversified across Japan’s gateway cities utilising commitments from the existing investors while over time considering raising additional capital from new investors.”

For future acquisitions, the JV partners indicated that they may continue to buy from within ESR’s portfolio of existing and under-development properties, while also considering opportunities to acquire assets from other sources.

Laurent Jacquemin, Head of Asia Pacific at AXA IM – Real Assets, whose company is investing in the joint venture on behalf of clients, commented that, “This transaction represents a rare opportunity for us to not only invest in a large and well-established logistics portfolio in high demand locations that serve Japan’s two largest cities, but also establish a new joint venture with two like-minded investors.”

Building a Warehouse Network in Japan

In addition to providing ESR and its partners a way to monetise their existing Japanese assets, the core joint venture give the opportunity to build a network of logistics properties in Japan and to leverage ESR’s regional platform.

In their statement, ESR executives emphasised that, along with managing debt, being able to manage tenant relationships at scale is “key to achieving superior core returns in logistics.”

In another sign of that drive for scale, ESR in late November raised $225 million from Allianz for a $1 billion Indian logistics joint venture, just two weeks after it expanded its Australian presence by finalising a $522 million buyout of Aussie real estate investment firm Propertylink.

Building on a Japanese History

In Japan, ESR and its partners said of their new venture that ‘the perpetual investment vehicle has the potential to grow several-fold in the coming years, with a strong pipeline of stabilised assets while offering a higher-yielding alternative to J-REITs.”

The core fund comes less than one year after ESR raised $1.2 billion in equity for new Japan projects from investors including Allianz Group. The company currently has a portfolio of 18 Japanese logistics projects, and in early 2017 ESR, when it was still known as e-Shang Redwood, announced that the State Oil Fund of Azerbaijan (“SOFAZ”) had agreed to invest $100 million in Japanese projects, however, sources familiar with the transaction stressed that the sovereign wealth fund referenced in this latest announcement was not the central Asian entity.

The company has previously established a pair of Japan-focused funds, Redwood Japan Logistics Fund, and Redwood Japan Logistics Fund 2, and in addition to AXA, Allianz and the Azerbaijani fund, counts among the investors in its Japanese ventures, PGGM, Ping An, Aviva and Mercer.

Both Stuart Gibson and Charles de Portes have long experience in Japan’s logistics markets, having previously been involved in ventures with Prologis in Japan, before that company sold its Japan and China assets to what in 2008 became GLP, and having sold another logistics firm to US giant AMB before that company merged with Prologis in 2011. Gibson and de Portes’ Redwood Group merged with Warburg Pincus-backed e-Shang in 2016.