Elite Partners Capital, the sponsor of Elite Commercial REIT, is likely to launch the IPO of a second REIT by the end of this year or early next year, if everything goes according to plan. “We hope to pick a time so that the listing benefits investors, and for the REIT IPO to be done well, if it’s a REIT listing,” says Victor Song, managing director of Elite Partners Capital.
The potential REIT portfolio is in Elite Logistics Fund which has just completed its first close with a target equity size of EUR150 million ($236.2 million) and four million sq ft of logistics assets. The properties are in Warsaw, Lodz, Gdansk and the UK.
“We are looking at other opportunities that could derive value for investors. We live on the basis of earning for investors. We put our money in as well,” says Song, describing his investment philosophy.
Unlike some private equity funds, Elite Partners Capital’s funds have a shorter duration. The fund that seeded Elite Commercial REIT had a life of 2+1+1 years. Similarly, Elite Logistics Fund also has a life of 2+1+1 years.
When asked about its exit strategy, Song says one of the options is through a REIT or a bigger fund. “We do best in preparing for a REIT but that does not preclude us from other options. The key is to allow investors to come in and reap profits. Gone are the days when private equity investors put in money for 10 years,” says Song, “I want to hand the establishment the idea that we can roll money and grow money and that formula will allow investors to get liquidity. If you come in now for these assets, you are yield-accretive and we create liquidity and allow everyone to cash out and invest again.”
The case for Poland
Song, who was formerly part of the management team at the manager of Viva Industrial Trust (VIT), made his way to Poland in 2017 with Micheal Tan, Elite Partners Capital’s executive chairman. Tan is also executive director of Ho Lee Group, which is the largest shareholder of Elite Partners Capital. Ho Lee was previously one of the sponsors of VIT. A merger between VIT and ESRREIT was announced in 2017, and completed in Aug 2018, when Song and chairman Tan exited.
The trip to Poland was to scour for logistics properties. As China’s Belt and Road Initiative (BRI) continues to develop, Poland is emerging as a natural hub for the cross continental rail cargo and breaking bulk, between China and cities in Western Europe.
As part of the BRI, China has developed trans-continental railways that stretch across Eurasia. Poland’s capital Warsaw is a stop along the Zhengzhou-Warsaw trans-continental rail line and Lodz is the final stop for the Chengdu-Lodz transcontinental rail line. Warsaw is also a hub with 20 national roads and about 40 railway lines running through the capital.
“In Warsaw, our assets are near railway stations,” Song describes. “We bought five plots of land for development in 2017 and developed them together with Panattoni Development Co and amalgamated the land to build big boxes currently leased to a cold chain logistics operator.” Privately-held Panattoni specialises in industrial, commercial and build-to-suit development.
Elite Logistics Fund’s Warsaw portfolio is located near Pruszków Terminal, Warsaw city centre and Chopin Airport and Łodz Terminal. Both the terminals serve trains to and from China. These locations are selected by tenants such as Pepsi who want to be located with direct ring road access to Germany via highway.
Elite Logistics Fund also bought assets in Gdansk – famous for the shipyard strikes led by unionist Lech Walesa which toppled the Communist regime back in the 80s. Song was in for a surprise though. “When we got the land, we found out that PSA had bought a deep sea port because Polish seaports serve the Baltic Sea and Scandinavian waters,” Song reveals.
Lloyd’s List said that PSA is planning a 7 million-TEU mega hub in Gdansk following its joint takeover of DCT Gdansk in 2019 and looking to position Gdansk as the “gateway to the Baltic”. The Port of Gdansk Authority has also outlined plans to build the “Euro Central Port”, a US$3.1-billion ($4.3-billion) expansion which, in addition to further box capacity, would include passenger, offshore, LNG operations and shipbuilding capabilities.
“Within the European Union, Poland has positioned itself as one of the key logistics hubs because geographically, it’s pretty much the centre of Europe. It has a Baltic Sea coast and is also one of the fastest growing economies in Europe, with a young and hungry population. Cost of labour is reasonable compared to Western Europe. These factors make it an ideal destination,” explains Enoch Tan, portfolio director of Elite Logistics Fund.
Stable sector, low vacancy rates
Usually leases depend on the type of tenant. Elite Logistics Fund’s tenants include DHL and Pepsi. The average lease length is around five years with well spread lease expiry profile with no large space due for renewal within the next four years.
“Tenants need to stay for longer periods of time as they form part of the supply chain and they are unlikely to break leases. Therefore we see the demand for this asset class to continue as Europe transitions to an ecommerce market, there is further digitalisation of the economy, and consumers are demanding faster delivery of goods and services,” Enoch Tan says.
In addition to Poland, Elite Logistics Fund has also acquired warehouses in the UK. “In UK, we bought a few assets with the intention of serving the domestic market after Brexit,” Enoch Tan says. Ecommerce in the UK has been growing, and Elite Logistics Fund’s assets are strategically located he adds.
The assets in the fund are fully leased and focused on 3PL, ecommerce and food distribution. “The logistics sector has been quite a hot sector in Europe for quite a few years and institutional and private investors are looking at this asset so yields have compressed. In Europe, capitalisation rates range from 4% to 7% depending on which markets you are in,” Enoch Tan says.
According to Enoch Tan, the rental process in Europe is very transparent. For long leases, rents are tied to the equivalent rate of inflation. European inflation is low, hence rentals tend to be very stable. Vacancy rates of logistics assets in the Port of Gdansk vicinity are 2% while those around Warsaw are around 5%.
“We have more than 10 tenants but more of our properties are to single let tenants. We don’t have that many multi-tenanted properties because of stringent control,” Enoch Tan says. The fund’s risk assessment ensures that its tenants have strong covenants. “We have to ask ourselves where the sustainability of income comes from. We’ve done quite a few checks with other developers, banks and other institutions and I’m quite happy this portfolio is established with very strong covenants to provide long and sustainable income,” Enoch Tan says.
Jacqueline Wang, executive director of JMD Group of Companies, a family office which has co-invested into Elite Logistics Fund, and is a unitholder of Elite Commercial REIT, says she is very happy with the performance of the fund. “We are a return investor with Elite Partners Capital and I’m happy with the yield of the logistic portfolio,” she says. “They are better than yields on commercial properties in the countries the logistics assets are in,” she adds.
“We have been investing in real estate in Singapore and Malaysia. We want to find good people who have the conviction to invest. We invested in Elite Commercial REIT and the sponsor has a proven strong track record in bringing private equity money to the public market in a short time. When they came out with this logistic fund we were very interested because we believe in logistics assets and we believe in the team that is executing the strategy and hopefully giving us a superb return,” Wang elaborates.
No acquisition fee for Elite Commercial REIT IPO
Interestingly Elite Commercial REIT, with its main tenant, UK’s Department of Work and Pensions (DWP), has managed to hold at or above its IPO price of GBP0.68 ($1.23) despite the market’s selldown since the start of March.
This could be because of the counter-cyclical nature of the assets in the REIT and also the realisation that the sponsor is aligned with the REIT’s unitholders. “We are sharing the returns both pre-IPO and with IPO investors,” Song says. As an example he points to a plot of land in Peel Park, Blackpool which includes around 11.7ha undeveloped grassland which accounts for 75% of the property. The vacant land could be used either by DWP to expand its footprint or a portion could be carved out and developed for other uses.
“I could have taken out this plot of land and built something and dumped it in the REIT, but I did not,” Song says passionately. Moreover he points out that the sponsor did not charge Elite Commercial REIT an acquisition fee at IPO.
“The reason why we’re able to IPO [in this manner with no acquisition fee] is the way we managed the process. We bought the portfolio first, owned it for a period of time and we are collecting real income from the portfolio, unlike some managers who acquire the portfolio at the time of listing, where the numbers are all pro forma,” explains chairman Tan. “Our numbers are historical.”
The rental process is also very transparent. Whatever rental that is collected from the properties passes through to investors. This is also the case with the logistics fund.
As for some of the online financial blogs which allude to the profit Elite Commercial Fund 1 made in selling the portfolio into the REIT, Song points out that the portfolio was acquired in 2017, during the greatest uncertainty over Brexit.
“We took a risk to buy these assets at a certain timing and we shouldn’t penalised for entering the market during a time of uncertainty. We still delivered returns for pre-IPO investors, and IPO investors also benefitted,” Chairman Tan says. “We owe a fiduciary duty to pre-IPO investors as they invested with us during a time of uncertainty. Now the uncertainty has cleared up and valuation has increased.”