ESR Books 62% Gain on $68M Sale of Sydney Logistics Estate to Australia’s Arrow Capital

ESR has sold a north Sydney logistics estate to Australian real estate investment manager and operator Arrow Capital Partners for A$101.8 million ($68 million) in Australia’s largest single-asset industrial transaction so far this year.

The HKEX-listed industrial specialist backed by US private equity giant Warburg Pincus sold the Gateway Industrial Estate in Mount Kuring-Gai five years after acquiring the multi-building property as part of its 2019 buyout of Sydney-based real estate investment firm Propertylink.

The transaction price represents a 62 percent premium to the property’s A$63 million valuation as of November 2018, when Propertylink agreed to ESR’s takeover, with that valuation gain reflecting rising demand for Australian logistics properties post-pandemic, with average net face rents in Sydney having surged 75 percent over the last three years, according to Colliers.

“Year-to-date, industrial and logistics sales volumes have increased 44 percent (as of May 2024) compared to the same period in 2023, as proven economic resilience, including market expectations of cash rate decreases early next year, have boosted sentiment, and aligned buyer and seller pricing expectations,” said Gavin Bishop, head of Australia industrial and logistics capital markets at Colliers, which served as exclusive advisor on the transaction.

Supply-Constrained Area

Sydney-based Arrow Capital, which acquired the 2009-vintage property through its Australian Strategic Industrial Real Estate (SIRE) fund, is picking up the asset at A$3,099 per square metre. That compares to average prime capital values of A$4,641 per square metre citywide and A$5,206 per square metre in northern Sydney, according to second quarter statistics from Cushman & Wakefield.

Arrow Capital launched the SIRE fund in 2020 after having raised A$1 billion in commitments, with US private equity firm Cerberus Capital Management reportedly among the vehicle’s backers. The fund manager currently manages over A$5 billion of global equity and debt assets and specialises in value-add and repositioning opportunities across multiple sectors, including logistics, office, and residential.

Located at 7-15 Gundah Road, approximately 40 kilometres (25 miles) northwest of Sydney’s central business district, the freehold property comprises four warehouses as well as ancillary offices with a combined gross lettable area of 32,846 square metres on a 5.8 hectare site.

“The asset is situated in a land-constrained market with limited supply and benefits from immediate proximity to the M1 Pacific Motorway and the Sydney Orbital network via the NorthConnex tunnel, which provides easy access to the Sydney and Central Coast population catchment,” Arrow Capital said in an announcement on LinkedIn.

Currently 92 percent occupied, the property generates annual net passing income of A$5.2 million and counts Australia Post, retailers Harvey Norman and Everten, poultry firm Steggles, and cookie maker Mrs Fields among its tenants.

The marketing campaign for the off-market asset received interest from a range of domestic and international institutional investors, according to Colliers.

Market Normalisation

Arrow Capital’s acquisition comes a month after a joint venture between the fund manager and an affiliate of Miami-based Starwood Capital sold a portfolio of seven logistics properties near Sydney and Melbourne for A$166.8 million ($110 million). That disposal took place in a series of transactions with buyers including ASX-listed Lendlease and a joint venture between local property firms MaxCap Group and Troon Group.

While sales of income-earning logistics properties in Australia reverted to roughly pre-pandemic average in 2023 with $1.6 billion worth of trades, compared to a $6.2 billion wave of investment in 2021 and $2.6 billion in 2022, according to MSCI, deal volume in the first quarter hit $581 million, representing a 36 percent year-on-year increase, according to Cushman & Wakefield.

Rental growth has moderated after average prime net face rents for Australian sheds grew more than 50 percent over the last three years, according to Colliers, but vacancy has remained in the low single-digits in most markets. Simon Sayers, general manager of development for Victoria at ESR Australia, told Mingtiand’s 2024 APAC logistics forum last month that undersupply of logistics space continues to support positive rental reversion.

“I do think we’re at a turning point in the market now, and normalisation is certainly coming back to the market,” said Sayers. “When you’re talking about vacancies between 1 percent and 2 percent across most markets, when you look at the prime vacancy levels in most markets being sub 1 percent, maybe around half a percent, that’s not a lot of supply. So that is definitely driving rent growth.”