Cain’s real estate bosses on their £1bn ESG logistics ambitions

Cain International’s £550m logistics debut has laid the groundwork for a £1bn-plus push into the sought-after sector, with its bosses underlining its scope to set the bar for ESG in the market. Spearheaded by senior managing directors Richard Pilkington and Daniel Harris, Cain inked a deal to buy developer Firethorn Trust’s entire logistics portfolio last week for £550m, which the private investment firm plans to double to at least £1bn in value in the next 12 to 18 months. The acquisition comprises seven UK sites totalling some 3.3m sq ft, including two new-builds – a 354,000 sq ft warehouse leased to e-tailer MH Star in Northampton and the 25.5-acre Ascent Logistics Park in Leighton Buzzard – and five consented sites, including a 640,000 sq ft scheme in Ellesmere Port (pictured), that Firethorn will develop and manage. Beyond this, Harris, who is also head of European investment at Cain, is keen to deploy a similar strategy in a European jurisdiction that is still “to be determined”. He says: “We’ll probably expand our footprint across Europe, and maybe into the US as well. This is a big opportunity for us.” Investing in ESG Pilkington, who is also head of European real estate at the firm, said one of the portfolio’s major draws is the scope to build a platform around an ESG agenda, since it comprises solely net-zero carbon new-builds. “With a ground-up portfolio, we have a real opportunity to walk the walk,” says Pilkington. “The industry is reasonably advanced around the ‘E’ piece. But the other two bits – the ‘S’ and the ‘G’ – are hard to truly focus on without being in a ground-up space. That’s what we like about it. It gives us an opportunity to really add some value, but we’ve got to do that step by step. “I’m sure big corporates, the BPs of the world, have ready-made answers. But in the real estate world, I don’t think a lot of people have great answers for those two aspects. We have the opportunity to try and do better.” Flight to quality Moreover, tenant and investor demand for longer-term, more sustainable warehouses is expected to increase. “Generally, when markets get challenged, there’s a ‘flight to quality’,” he says. “If you look back 10 years, no one would have used that term in connection with sheds, whereas now there’s more sophistication to it.” The sector’s robust rental growth and take-up levels were also key drivers behind the deal. In terms of risk profile, Harris says the deal presented a “nice risk balance”, adding: “We’re not taking cost or development risks, but we are going slightly up the risk curve on forward-funding those assets. “At the moment, there is a good opportunity in the market to take the leasing risk [given there is] record demand. We’re going to see relatively strong rental growth over this year and the next, and we’re able to capitalise on that potential.” Singular focus The partnership with Firethorn marks the culmination of a search for a stronger foothold in the market that had been “on and off” for the past few years. Logistics was on the wish list when Cain launched its debut European fund in 2019, which closed at €324m (£267m) last year, but Pilkington says the barriers to entry were too high. “With logistics, you need to enter at a level of scale, and that never presented itself in the right way across Europe,” says Pilkington. Harris adds: “We wanted to come in with a splash. We wanted to find a reasonably sized portfolio, and that was hard.” About 18 months ago – “once the pandemic had economically settled down a bit,” says Pilkington – the firm decided to diversify by focusing on ‘beds and sheds’ as single-sector, single-geography platform opportunities, in line with demand from investors. As well as the deal with Firethorn, Cain launched a jv with Fusion Students earlier this year to create a £1.5bn purpose-built student accommodation platform. For Harris, a homogenous approach is important for driving value. “We didn’t want to have one logistics unit in Spain, one in the Netherlands, one in the UK,” he says. Striking a balance At first, the team began by considering strategies that would have assumed more planning and development risks, given the relative lack of competition in that space. However, it ultimately chose to pivot to partnerships as a more viable route into the sector. “The way we have gone into it is not unique, but we think this is a smart structure,” says Pilkington. “It creates a partnership with a lot of complementary skills. Those that are most capable of managing the execution risk are doing that, and those most able to manage the financial risk are doing that. And we’re doing it at a moment in time when the leasing market is strong.” Pilkington adds: “What we like about what we have invested in here, and how we want to grow, is to create a balanced portfolio in terms of size, lease lengths and, to a degree, geographies – perhaps between a London and wider UK split.” For Pilkington, the “real ideal” would be to stitch in last-mile logistics, although it remains a tough market to enter. “Ideally, if we can build some of that into the portfolio, that would be the real icing on the cake, but it’s a challenging space,” he says. To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews Photo © Cain International