Market viewpoint:
Ronan O'Donoghue
CFO Arrow Capital Partners
Arrow Capital Partners is a private investment company with over $5 billion in real estate assets under management and offices in Asia-Pacific and Europe. Positioned in the market as both an investor and operator, it specialises in commercial property value-add and repositioning opportunities, investing equity and debt. One of its core areas of focus is the logistics arena, and last year it completed one of the UK’s new generation ARS warehouse deals: a two million-plus square foot space let to Amazon for 20 years in Yorkshire.
Ronan O'Donoghue
CFO
Arrow Capital Partners
What’s your outlook on the real estate market in general this year?
I’m cautiously optimistic. In terms of investment, with interest rates up, what made sense 12 months ago is very different versus today in terms of the cost of real estate and the cost of debt. There has been a seismic change in capital markets and we’re now seeing potential opportunities in the debt space open-up. Real estate pricing has had to shift for returns to be achievable, and investors have been recalibrating their expectations accordingly.
The inflation situation remains tough, but the interest rate cycle appears to be coming to an end. The dislocation needs to settle down, but there are plenty of investors ready and able to put parked cash into real estate.
That doesn’t mean there won’t be some pain, though. We’ve seen a number of retail insolvencies, for example, with wider restructuring happening across numerous other sectors. At the same time, this is likely to also bring with it opportunities – not least in terms of acquiring and potentially repurposing and adding value to distressed assets.
There is real appetite for high quality assets in this space.
And on logistics specifically?
The logistics market is still characterised by strong demand and a lack of supply. Vacancy rates are sitting at around 1% - 3% depending on location and many retailers are struggling to secure the space they need for their e-commerce operations, where they need it. Build-to-own is driving a lot of development activity. This makes logistics one of the strongest asset classes, with excellent underlying fundamentals.
For us, land opportunities in accessible areas which provide good transport links across regions and in more urban, last-mile locations, offer potential. Retailers need larger logistics networks and recent deal flows are a positive signal that the market is going to remain strong.
What impact is tech and ESG having on the market and your business?
Many large institutional tenants want to occupy environmentally friendly buildings to reduce their carbon footprints, and there certainly seems to be a green premium developing for warehouses and logistics hubs, similar to what we’ve seen happen with office buildings. Everyone’s got an eye on ESG credentials, and better quality properties will attract grade A (especially institutional) tenants – who need to demonstrate progress on these issues to their own stakeholders, whether that’s employees, shareholders or customers. Older warehouse assets are still very much in demand and given the current levels of demand, still command strong rents, but we still consider how the ESG credentials of all assets can be improved upon. We’re on this journey as is everyone else in the industry.
It is part of our acquisition and asset management strategy, and we’ve recently completed a stewardship report on one of our larger assets which achieved Building Research Establishment Environmental Assessment Method (BREEAM) ‘Excellent’. This is a real marker of the progress that’s being made.
Likewise, we’ve made major investments in technology recently, including appointing an in-house head of technology. It’s all pervasive: from new HR and training tools to the use of data to better manage assets. The speed of technological innovation is hugely exciting, and logistics itself is not immune. Just look at our Amazon facility in Wakefield. It was one of the biggest deals in the market last year and what you’ve got there is a truly state of the art facility which offers local jobs, but which is also powered by advanced technology like robot de-palletisers.
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