ESR has reached a first closing on $750 million in equity for a new core logistics fund targeting Japan, including commitments from the real estate division of France’s AXA Investment Managers, a sovereign fund reported to be Singapore’s GIC and other backers, as demand from warehouse users continues to drive up asset values and fill ever-larger facilities in Asia’s second-largest economy.
The Hong Kong-listed fund management titan said in a release on Thursday that among the investments in its ESR Japan Income Fund (ESR JIF) is a cornerstone commitment from its sovereign fund backer, which a story in IPE identified as GIC, and it is targeting a gross asset value for the strategy of $10 billion by 2026.
“The secular trends fuelling modern logistics real estate growth are still nascent. Logistics facilities are getting larger and larger to meet the increasingly complex needs of the tenants and we are now seeing $1 billion warehousing values,” said ESR co-founder and co-CEO Stuart Gibson. “The Japan Income Fund’s scalable structure combines diversification with capacity to meet this increasing capital intensity.”
ESR has seeded its latest fund with an initial 618,000 square metre (6.65 million square foot) portfolio of properties valued at $2.1 billion, which it aims to grow fivefold over the next five years.
ESR, which has been aggressively expanding even as it prepares to take over Singapore-based ARA Asset Management in a $5.2 billion deal announced in August, is injecting some of the largest assets in its portfolio into the new fund, including warehouses in the Tokyo and Osaka areas.
The portfolio is currently 99 percent occupied according to the real estate firm, noting that the sale of the properties to the new income fund is in line with ESR’s investment and disposition strategies.
One of the four assets in the seed portfolio is the ESR Amagasaki Distribution Centre near Osaka, a 388,570 square metre property which ranks as the largest single-block warehouse in Asia Pacific and has a gross asset value of more than $1 billion.
The site was first acquired by ESR four years ago for $500 million and the project is now 98 percent occupied by a diverse group of 16 tenants including e-commerce firms.
Also in the Greater Osaka area is the ESR Nanko Distribution Centre 1, a 125,813 square metre facility which was completed in November 2016. ESR had developed that distribution centre through a joint venture with Angelo Gordon, before buying out the project company in March this year for JPY 29.5 billion ($259 million).
The largest asset in Greater Tokyo is the ESR Toda Distribution Centre in Saitama prefecture, which measures 86,950 square metres and was completed in September of last year. During that same month, ESR said that it had leased the entire building to local logistics service provider Nakano Shokai Co.
Lastly, ESR Kawasaki Yako Distribution Centre is a 78,119 square metre facility in Kanagawa prefecture’s Kawasaki City, which ESR agreed to lease en bloc to Japanese industrial group Daiwa in August last year after kicking off construction in February 2020.
That project was funded at least in part from ESR’s Japan Logistics Fund II, which raised approximately $1.2 billion in 2018 from investors including Allianz Real Estate, the State Oil Fund of Azerbaijan (SOFAZ), a fund managed by Aviva Investors, and an unidentified German pension fund advised by Mercer.
The newly established income generating vehicle is expected to benefit from access to a pipeline of ESR projects under construction measuring over one million square metres in gross floor area, which provides opportunities for institutions hungry to put their money into what is increasingly seen as the real estate infrastructure of the Internet economy.
“Institutional investors are becoming increasingly aware of the extremely compelling long-term income potential of well-located urban logistics portfolios,” said ESR Managing Director Pierre-Alexandre Humblot, who is also heading its fund management and capital division. “JIF was correspondingly structured to allow ownership in perpetuity and to incentivise sustainable income growth. The fact that JIF was vastly oversubscribed is a testament to the strategy.”
Laurent Jacquemin, head of Asia Pacific for AXA Investment Managers Real Assets confirmed to Mingtiandi today that his firm is among the investors backing ESR’s new income fund.
Today’s announcement comes just four months after the warehouse builder expanded its Japan Logistics Fund III development vehicle to JPY 470 billion ($4.12 billion) in an expansion of a partnership it had launched in 2019 with Dutch pension fund APG and an unnamed sovereign wealth fund based in Asia.
While ESR was not able to provide further details on investors backing its development funds by time of publication, other Japan-focused development strategies managed by the developer include Redwood Japan Logistics Fund and Redwood Japan Logistics Fund 2.
Once ESR’s acquisition of ARA is completed the developer’s combined assets under management are expected to hit $131 billion.
Japan in Vogue
The launch of its JIF follows a slew of similar deals made by its competitors in the country, including the JIF established by Singapore-based GLP holding 11 assets worth JPY 560 billion after its second closing in January.
Earlier this week, GLP also announced that, in partnership with CPPIB, it had reached a first closing of JPY 311 billion for its flagship Japan Development Partners IV fund, which aims to develop new warehouses in the Greater Tokyo and Osaka areas.
Note: This story has been updated to show that GLP reached a first closing of JPY 311 billion on its Japan Development Partners IV fund this week. An earlier version had indicated a final closing. Mingtiandi regrets the error.