ESR closes out $600m fund with $158.6m of fresh buys

ESR Australia chief executive Philip Pearce. Picture: James Croucher

Hong Kong-listed Asian warehousing giant ESR has again expanded its local logistics empire with a series of purchases across the country, in a sign that warehouses are still running hot.

The sector had been tipped to slow down as higher interest rates and expanding supply brought prices back to earth. But the sector is riding high on the shortage of space for big companies, which is driving up rents.

The ESR Australia Logistics Platform II has made $158.6m worth of purchases, snapping up eight logistics properties in Melbourne, Brisbane, and Perth, by buying two separate portfolios.

The properties are in high-growth industrial areas, where ESR plans to boost their value by positioning them to benefit from higher rents.

After the latest acquisitions, ESR Australia will have deployed all capital of EALP II in just 10 months of its launch and, once the properties are fully developed, the fund will hold $1.3bn worth of assets. This follows the success of its first EALP fund, which was seeded with assets from its acquisition of Propertylink.

ESR Australia CEO Phil Pearce said the firm was taking an active ­approach, with the company willing to redevelop assets it bought “down the track” while reaping their income. Some sites also have surplus land that can be redeveloped, and it has also picked up some greenfields sites to work on immediately.

ESR grabbed headlines when it bought the $3.8bn Milestone portfolio from Blackstone last year. Mr Pearce says the market is still moving, despite a stand-off between buyers and some sellers who have yet to adjust to higher interest rates.

Developers are also combating rising construction costs, but have been lifted by strong demand for warehouses.

“That strong demand, combined with low vacancy has translated into significant rental growth,” Mr Pearce said. He cited demand for e-commerce but said it was coming from well beyond that area as tenants looked to move into hi-tech facilities.

ESR has grown to having a $9.6bn of logistics empire across Australia with a development pipeline of $6.5bn. Mr Pearce said developments were still working as rental growth “has more than compensated” for cost rises.

The latest acquisitions were made by ESR picking up two large portfolios, with CBRE’s Jack Pershouse brokering the purchase of a Queensland portfolio from funds group Direct Commercial Property, and Chris Jones of Dawkins Occhiuto handling the national assets bought from syndicator Harmony Investments.

They were bought at a blended cap rate of 5.27 per cent. They have a weighted average lease expiry of about 3.4 years, giving the company the ability to capture rental rises.

ESR is capitalising on the supply shortage and increasing demand in the industrial markets along the eastern seaboard that are resulting in high expected growth in Queensland. “We’re delighted to expand our footprint to capitalise on the broad opportunities up north,” Mr Pearce said.

The warehouses only covered just over a third of the sites, so Mr Pearce said there was “ample opportunity” to develop them out.

The Brisbane portfolio containing five assets was acquired for $61.6m with an equivalent yield of 5.85 per cent and an average WALE of 2.7 years. ESR estimates the portfolio is about 5 per cent underlet, providing scope for rent rises.

About 90 per cent of the assets within the portfolio are on the Trade Coast, Brisbane’s premier industrial and logistics precinct.

Brisbane’s industrial market has a record low ­vacancy rate of 2 per cent, with buildings above 3000sq m recording an even lower rate of 1.4 per cent.