Putting the ‘real’ back into real estate

I wrote last month on how sheds remain flavour of the month, or perhaps that should be flavour of the year, with most having in mind a shiny Amazon fulfilment center filled with automated activity. But I want to burst that bubble and make the case for good honest industrial properties that have been swept up in what is verging on a buying frenzy.

That bubble needs bursting as any notion that you can buy a modern long leased logistics property and request a ‘COVID discount’ needs to be dispelled. These assets are hugely in demand, with prices being driven up and so purchase yields are down based simply on the growth in e-commerce and a positive differential to bond or Sukuk yields.

Thinking back on my Islamic finance qualification, I recall that Shariah compliant investing should be into something tangible and real, with few endeavours shouting that clearer than industrial properties, where value is being added through a manufacturing process. Real activity is being conducted in real estate.

One of our own 90 North’s first acquisitions, with a Kuwaiti investment partner back in 2012, was a gas turbine maintenance facility let to Siemens outside Lincoln in the UK. From across the globe, gas turbines in need of repair or servicing were shipped into Hull and driven by truck down to Lincoln to be tended to.

Aside from the bricks and mortar we purchased, Siemens had invested heavily into the equipment required for such tasks, with a high chance of lease renewal given the cost of ‘lifting and shifting’ such equipment elsewhere.

Coming back up to date, last month Investcorp announced the purchase of a significant portfolio of 32 industrial properties for US$280 million across the US Midwest.

With the tenants identified as being from the healthcare, logistics, e-commerce, industrials, telecommunications and food service businesses, this acquisition is a major statement in support of the economies of the states of Illinois and Ohio.

Meanwhile, over the summer we advised a Middle Eastern client on the purchase of a more modest but not dissimilar portfolio of industrial properties.

Being slightly older properties and with varying lease lengths there was a material yield premium, but tenants still included the recognizable names of Tesla, AT&T and Walmart.

So, while these assets require increased due diligence to fully understand the nature of the tenant’s business, with record low yields being recorded on logistics, real industrial properties may offer a tangible solution.

This article was first published in Islamic Finance news dated 11th November 2020 (Volume 17, Issue 45)