April 21, 2021
Chris Button, Head of Value Add REIM, and Sam Fleming, Associate Director, spoke with Charlie Schouten at REACT News for a Q&A on logistics demand.
Fiera’s £250m Real Estate Opportunity Fund V – the latest in a series of value-add funds – launched in November 2019. Since then the investor has started to build a portfolio of residential, office and logistics properties across the country.
Since the start of the year, there has been another flurry of activity. The investor has acquired three sites in partnership with one of its operating partners, Wrenbridge, with a gross development value of more than £100m, in Bishop’s Stortford, Dartford, and Houghton Regis.
The three projects encapsulate Fiera’s approach to building its logistics porfolio, and React News caught up with head of value-add REIM Chris Button and associate director Sam Fleming to hear about what’s next as the investor continues its drive into logistics.
Are your three recent logistics acquisitions typical of the assets and the opportunities that you’re looking to buy at the moment?
Chris Button: Yes, our value-add fund is largely a sheds and beds strategy, and those three are pretty typical of the logistics sites that we’re targeting, which are generally in the 5-15 acre size range where we can provide a range of mid-box units. We’re not aiming to compete with the national logistics developers with several 100,000 sq ft single units or big 500,000 sq ft+ units.
Our “smaller” schemes have a common criteria: well connected but linked to conurbations rather than purely the national motorway network, and I think the three recent acquisitions at Bishop’s Stortford, Houghton Regis, and Dartford are overall in line with those overarching principles of what we’re trying to achieve.
Is the desire to be near conurbations part of a drive for the certain type of occupier you’re trying to attract, in terms of last-mile logistics play? Or is this taken on a site-by-site basis?
CB: We have very specific search criteria for new sites, including drive times to major population centres, population densities, socio-demographic data for the area, and so on. For example, we’ll always bear in mind the numbers of people within a 30-minute drive time of any site we’re looking to acquire.
Bishop’s Stortford is a great example: the town is on the M11 motorway corridor between London and Cambridge, an area growing both economically and demographically quite phenomenally at the moment.
Similarly, Dartford is very well located with access to the M25 only a mile or two away, as well as access to east London and Canary Wharf.
Are you looking across the UK at the moment for logistics sites that fit that criteria?
CB: One of our unique attributes at Fiera Real Estate is our network of operating partners that we work in partnership with. It’s a pan-UK focused network, it just happens that the three recent logistics acquisitions that we have managed to buy off-market are in the South East, an area where Wrenbridge has specialist focus.
We like to think we’ve got a national occupational understanding combined with regional knowledge and expertise to be able to unearth some really interesting opportunities, largely off-market. We have the boots on the ground to ensure we’ve got the best professional team and the best contractors to then deliver our properties wherever they are.
We’re not here just to land bank and wait for the build, or to see requirements to come along for logistics. We firmly believe in actually getting on and committing to build, largely because quite a lot of the occupiers for the schemes that we’re looking at doing want to have the confidence to see that something is actually being built.
In addition, many occupiers for the size of schemes we deliver have shorter lead-in times than perhaps the occupiers with bigger space requirements. Therefore, there may only be three to six months prior to taking occupation when they’re prepared to commit, rather than a company with longer lead in times who are prepared and able to pre-let a scheme off plan.
We firmly believe in building out the sites we buy. And therefore, having the operating partners to joint venture with us in those regions means we can manage those overall, on a nationwide basis.
Sam Fleming: We’ve done a lot of work of mapping the locations of 3PL and parcel operators across the UK. And we’re seeing the likes of Amazon popping up in not just in London, but in places like Leeds, Manchester, Glasgow and its last-mile-style units, which has very much fed into our pan-UK strategy.
We need to be flexible in terms of the delivery of space. And we want the buildings that we’re developing to be available to as wide a pool of occupiers as possible.
Is it the intention to speculatively develop all the logistics sites you’ve bought, or is there going to be a site-by-site basis for that?
CB: We’re committing to speculatively build them. The buildings that we’re looking to build probably don’t suit a build-to-suit requirement but if these requirements come along during the course of obtaining planning consent we will, of course, accommodate them where possible.
And what sort of funding are you using to deliver these projects speculatively?
CB: We’re funding the acquisition, planning and construction from equity resources. We don’t like to buy something if we don’t have the financial ability to build it out.
The three that we’ve bought are all relatively early in terms of their business plans; we are working up planning applications for two of them, which should be submitted in the next two to three months.
In the meantime, we will be marketing them to occupiers. If a requirement comes along that’s prepared to move relatively quickly then that’s something we could certainly accommodate. But we won’t be blown off course from the central business plan. We don’t need the prelets to build out, which is essentially our business plan for these logistics sites.
You’re looking for external funding partners for other sites you’ve bought with the fund, including build-to-rent. Is the approach different across the two sectors?
CB: The amount of equity required for a build-to-rent development is generally much higher, and the institutional buyer generally wants to be involved at an early stage to ensure the product that you’re building is suitable for their long-term investment requirements.
I would suggest that in the industrial sector, the property specification can be probably more “generic” to appeal to a wide range of prospective buyers once we’ve completed development.
And therefore, that means there’s less need to tailor the property early on in the process. For industrial, it makes more sense to build it out, secure tenants, and then have a competitive sale process to maximise revenue for our investors.
Is the intention to sell the assets from the fund individually or as a portfolio?
CB: I think we will wait to see and we’ll adopt a flexible business plan, according to the levels of preletting, levels of letting, interest from potential investors. It’s far too early to say. All I would say is that all options are on the table and will be considered during the course of the project.
What we are thinking about already is an increased focus on sustainability for our industrial assets, and that’s becoming all the more important from both a corporate perspective and being good custodians and developers of real estate.
There’s also an increasing awareness from both occupiers and investors about the quality of the real estate that they’re buying. We’ve inherently got an advantage on this as we’re not adapting existing stock, which some investors are looking to buy; we’re creating brand-new stock and that gives us the unique opportunity to create the very best space with the best credentials for both occupiers and investors.
Bidding for logistics sites can be fiercely competitive – how is Fiera mitigating this to try and get best value from each of the sites that you buy?
SF: This is a very hot market that hopefully through having boots on the ground and knowing the individual market, you can still pick up some sites at reasonably attractive prices. There’s no doubt the underwriting has become more aggressive from the capitalisation rates that are being achieved in the market. And that is leading to some land inflation, but it appears that the occupational market conditions and the investment market conditions are sustaining those value increases that we’re seeing.
We try and be as selective as we can and put more effort into those opportunities where we can secure something quietly or off market, than competing purely in the market with everybody else.
There have been some personnel changes in the business in the last few months: James Nicholson took his stake back in Harlex recently, and you brought Joe Downey on board for Cubex Land to focus on last-mile logistics. Is the intention to grow the team further?
CB: With current resource, I think we have sufficient bandwidth at Fiera Real Estate to deal with the assets that we are buying and have been managing with our operating partners.
In the North West, there is the opportunity to work with Harlex in the future. While we’ve gone separate ways in terms of the shareholding, we haven’t shut that off.
And we have internal resource: Sam and the acquisition team have a nationwide brief in terms of looking for new sites and new investments across the Fiera portfolio.