Pan-Asian warehouse builder ESR has raised $1.2 billion of equity for new logistics projects in Japan, continuing a fundraising streak as the Hong Kong-based developer moves quickly to ramp up its portfolio across the region.
ESR, formerly known as e-Shang Redwood, announced the final close of its Redwood Japan Logistics Fund 2 (RJLF2) on Wednesday with total discretionary commitments of $575 million, topping its $500 million target, after German insurer Allianz Group boosted its earlier contribution to around $185 million. Closed co-investment vehicles bring the total haul to $1.2 billion.
Allianz is joined by other global investors including State Oil Fund of Azerbaijan (SOFAZ), a fund managed by Aviva Investors, and an unidentified German pension fund advised by Mercer, which is already invested in ESR’s predecessor fund RJLF1. A major Southeast Asian pension fund also took part, making an inaugural commitment of $200 million.
ESR expects its total portfolio of prime logistics properties stabilised and under development in Japan to reach over $5 billion in value in the next two years as it continues to deploy the fund, according to a statement.
Japanese Shed Supply Needs Upgrading
Set up in 2016, RJLF2 is a build-to-core, closed-end vehicle that develops institutional-grade logistics and distribution properties in the key markets of Tokyo, Osaka and Nagoya. Allianz last September made its initial commitment of $100 million to the fund, one of Japan’s largest in the sector to date.
The vehicle seeks to capitalise on changing supply chain requirements in Japan, as an expanding array of e-commerce tenants and logistics service providers demand modern, multi-tenanted sheds in the world’s second-largest retail market.
“The majority of the existing product is older stock and less than 10 percent of the stock nationally is considered class A, much of it was built 30-50 years ago and it’s now reaching the end of its life cycle,” ESR president Charles de Portes commented to Mingtiandi. “And certainly it’s out of date, not only in terms of building age, but just in terms of what is necessary for today’s sophisticated occupiers from end-users to third-party logistics providers and e-commerce players.”
In addition to the fund investors, projects undertaken by RJLF2 have also drawn co-investment capital from Zell’s Equity International and ESR’s long-time partner PGGM, as well as companies identified as a leading US pension fund and a major Asian insurance firm.
The fund and related co-investment capital have enabled ESR to capitalise up to $3 billion worth of developments, of which around 70 percent is already committed to nine projects. The developer estimates that full commitment will be achieved next year.
ESR is betting that the fund’s projects, harnessing seismic design and green technologies such as rooftop solar panels, will drive superior long-term returns for investors. The predecessor fund, RJLF1, has already been fully deployed on logistics developments after raising over $300 million in 2014.
ESR Aims to Capture Key Asian Markets
The move in Japan forms part of an aggressive regional growth strategy by ESR, which was created by the merger of Warburg Pincus-backed e-Shang and Japan-focused warehouse builder Redwood Group in 2016. With further backing by global investors including APG, CPPIB, and Goldman Sachs, ESR has built a portfolio of $12 billion of assets under management in Asia, with over 10 million square metres of projects across Japan, China, Singapore, South Korea and India.
Earlier this month, ESR received a $306 million investment from Chinese e-commerce giant JD.com, in the same week that it announced a new partnership with an arm of Hong Kong-listed Beijing Properties to set up an offshore fund for the acquisition of logistics projects worth $1 billion from the mainland builder.
ESR competes for Asian logistics dominance with global heavyweights including GLP, Goodman, and Prologis, but is distinguished by its exclusive focus on the Asia Pacific region.
“I think that we are really the only one that’s going credibly for a true pan-Asia strategy,” de Portes told Mingtiandi. “Some of our largest competitors have a presence in two maybe three countries in Asia for example, but very few are focused on being in a number one or number two position in each major distribution market in Asia.”
That regional focus “allows us to move faster on projects, because we have our management and key decision makers here on the ground as well as synergistic occupier relationships and dedicated pools of capital for each country,” the executive reckons.
Warehouse Builder Links Strategy to Globalisation
Aside from the Japanese trinity of Tokyo, Osaka and Nagoya, ESR’s expansion drive concentrates on India’s top markets, China’s tier-1, tier “1.5” and “very selective” tier-2 cities, Seoul and Busan in South Korea, and Sydney and Melbourne in Australia, de Portes noted. “The idea is to target the cities that are most tied to globalisation, as well as trade within Asia,” he said.
The company is also active in Southeast Asia, having bought an 80 percent stake in the manager of Singaporean industrial REIT Cambridge Industrial Trust in January 2017. The real estate investment trust, later renamed ESR-REIT, is poised to merge with Singapore’s Viva Industrial Trust (VIT), creating the city-state’s fourth-largest industrial REIT under a proposed deal unveiled two weeks ago.