Valor Real Estate Partners is a fast-growing, last-mile logistics real estate specialist, with a £3bn UK portfolio and more than 10m sq ft of space across London, Birmingham, France and Germany.
Property Week sat down with Jeremy Achkar, Valor’s senior vice-president of investment, to find out about the company’s plans to continue investing in select assets despite the challenging market conditions.
What is the market outlook for last-mile logistics?
For the right product, we are continuing to see occupier demand. Our strategy has always been about identifying and owning ‘true’ last-mile real estate in the most critically undersupplied markets. Our current portfolio in the UK is M25-focused, with a large presence around the North Circular.
When we think of the make-up of industrial real estate in that market, the lack of modern, fit-for-purpose stock continues to underpin our conviction and is translating into strong leasing momentum for the right kit.
Around the North Circular in west and east London, for example, where we have a significant footprint, we are regularly achieving rents north of £30/sq ft, more than twice the rental rate if you go back five years.
For the right product, demand is outstripping supply, and we feel this supply will continue to be constrained due to a variety of factors. Build costs have shot up, while land pricing hasn’t recalibrated to the extent needed to make development viable, and that’s against the backdrop of London planning authorities taking a long time to grant consents.
How is investor confidence holding up?
If you look at quarterly 10-year averages, investment volumes so far this year are down about 50% to60%. There are a few reasons for that. First, funds have been able to stave off redemption-related selling pressures to date – it has been more a case of “what are we happy selling while trying to keep our crown jewels”. So there has been a mismatch in the quality of the kit being brought to market by vendors and what buyers would invest in.
Second, the UK has a high percentage of private landlords in the industrial space. This was part of the appeal of investing in the UK for us at inception. It was a fragmented landscape where you could work with these private individuals to acquire their property through a mix of creative deal structures.
But as investor interest increased in the space, a lot of landlords received increasing amounts of ballooning offers for warehouses and unless they are a forced seller, it’s very hard to approach them six, 12 or 15 months later and say “we think your warehouse is worth less than it was a year ago”.
This pricing mismatch has again led to the decreasing investment volumes we have witnessed in theindustrial space in 2023.
We are, however, starting to see a shift as the spread between what sellers are asking and what buyersare prepared to pay narrows.
This should translate into an uptick in deal volumes over the next few quarters.
What is Valor’s appetite for acquisitions?
We’re in deployment mode; we are sending a flurry of offers out every week. We recently completed a £146m acquisition in Greenford, west London. Ultimately, we want to own the most functional sheds in the best locations. In the case of our recent Greenford purchase, having that low site coverage in west London is basically in our view impossible to replicate today from a development perspective.
What are your thoughts on mixed-use developments and diversification?
The term ‘beds and sheds’ is often bandied about, but there are limited examples in practice of this actually working. While we remain open to exploring mixed-use developments, our primary focus is always on finding the most standardised warehouse development site where we can provide occupiers with enhanced functionality relative to the existing stock in a given submarket.
What regions or cities are on the radar for possible expansion?
What we have felt during the course of 2023 is that for standing assets, the yield spread in the regions isn’t wide enough relative to London to make it worthwhile on a risk-adjusted basis.
If you are getting similar or sometimes better yields in London through the off-market sourcing that we are doing, our preference is to continue investing in London. But we are actively tracking the regions and we are very much willing to deploy capital there. We are in dialogue for a Manchester property, for example.
On the development side, we continue to favour London over the regions as an investment target. Given where build costs are, this preference is purely a factor of the rents you can achieve in London versus the rest of the UK.