Segro has acquired the 50% interest in the Airport Property Partnership joint venture (‘APP’) it does not already own for €418.6m (£365m). The vendor is Aviva Investors, which acted on behalf of its clients. The consideration for the transaction comprises €247.8m of cash and the disposal to Aviva Investors of €170.9m of assets.
APP contains 21 direct property assets, valued at €1.258m and totalling 350.000 m², 87% of which (by value) are located at London’s Heathrow Airport, including the majority of the airport’s airside cargo facilities. At 31 December 2016, the portfolio had a vacancy rate of 7.5% with an average lease length of 11 years to the earliest of break or expiry. The portfolio also includes one development project which is underway and is expected to complete in 2017. The valuation is in line with book value at 31 December 2016.
As at 31 December 2016, the properties generated annualised passing rent of €48.26m, with a further €6.9m payable after expiry of rent-free periods. This translates into a net initial yield of 4.2% once rent-free periods expire. The portfolio is reversionary and the initial yield on acquisition does not reflect the potential uplift of rent on expiry of a number of leases on peppercorn rents in 2019.
Segro acquired its stake in APP in June 2010 and acted as asset manager for the joint venture, with Aviva Investors acting as fund manager.
The portfolio of assets acquired by Aviva Investors as part of the transaction comprises four London industrial assets and a recently-completed manufacturing facility in Portsmouth, valued at €170.9m, in line with book value at 31 December 2016. The assets total approximately 70,000 m² of space, and generated €6.9m of annualised passing rent at 31 December 2016, with a further €1.8m payable after expiry of rent-free periods. This translates into a net initial yield of 4.8% once rent-free periods expire.
Commenting on the acquisition, Segro’s Chief Executive Officer, David Sleath, said: “The strong working relationship between the teams at Segro and Aviva Investors has enabled the APP portfolio to deliver excellent performance over the last five years and we appreciate Aviva’s contribution to making APP such a successful partnership"
“We believe now is the right time to take full control and ownership over APP in which we see a number of opportunities to realise further value from its unique portfolio in the short and long term. We look forward to pursuing our development plans, taking advantage of strong occupier demand for facilities around Heathrow from customers needing rapid access both to the airport and to Central London."
“Our Heathrow portfolio is one of the jewels in our crown and we are delighted to be able to add scale in this supply-constrained market.”
Ed Casal, Chief Executive Officer, Aviva Investors Real Estate, said: “This is a very positive deal for our clients, and in line with our broader real estate strategy to have direct control of assets and focus on core markets where we are able to drive performance through expert local market knowledge. We see real upside in the assets we have acquired through this transaction, and are confident they will contribute strong performance for our clients.”
Benefits for SEGRO
- Asset management opportunities within the portfolio: There are a number of opportunities to enhance the income generation of the portfolio over the next three years, including reducing the portfolio void rate and the capture of reversionary potential, particularly the re-gearing of peppercorn leases that expire in 2019.
- Future development potential: There is one development underway, within the North Feltham Trading Estate, on which 7.300m² of new urban warehouse properties are being constructed, but there are also a number of other sites suitable for either near-term in-fill developments or longer-term redevelopment. The most significant of the longer-term opportunities is the Heathrow Cargo Centre which was built in the 1960s and requires redevelopment to cater for the current needs of cargo handlers and to expand its capacity to meet occupier demand for space.
- Future expansion of Heathrow Airport: The UK government’s decision to support a third runway at Heathrow significantly increases the likelihood of expansion in the medium to long-term which would enable airlines to serve an increased number of international and domestic markets. This should, in turn, increase the volume of cargo passing through Heathrow Airport and, therefore, the demand from airlines, airport and airline service companies, cargo handlers and other users of industrial property for the limited space in and around the airport.
- In line with SEGRO’s strategy: Segro is familiar with the assets through its current asset management role and will not incur any incremental management costs through attaining full ownership, although it will no longer earn fees in relation to its role as asset manager. The acquisition is in line with Segro’s strategy of building scale in its core markets, and having full control will improve operational flexibility to take future decisions regarding the portfolio and to pursue asset management and investment opportunities.
Benefits for Aviva Investors’ clients
- Asset management opportunities: The assets being acquired are all located close to existing investments managed by Aviva Investors, which sees long term benefits in clustering in core locations where it has asset management control.
- Future development potential: There are strong development opportunities within the five assets being acquired, notably at Nelson Trade Park, Merton. Alongside the existing ownership of Merton Industrial Estate, Aviva Investors believes it can deliver an exciting opportunity.
- In line with Aviva investors’ strategy: Having enjoyed significant performance from the APP portfolio, Aviva Investors is now focusing on investments where it has direct control of the entire value chain, including asset management, and building scale in its target markets.
