John Toukatly: Where We Plan to Invest EQT’s €3bn European Logistics Fund
EQT Partner John Toukatly discusses his recent fund raise, the outlook for Europe’s logistics sector, and why warehouses are still investable
Q: Explain your strategy for the latest Logistics Value fund?
John Toukatly: The strategy revolves around being a tenant-centric property company that happens to have a private equity capital structure behind it. We think of what we do as going to tenants, finding out where they need space and how much space they need, and then go build or buy a building to accommodate that growth.
We try to buy and build right-sized buildings in the right locations. These are close to major highways with a quality labor base nearby to them. We are also looking for the most generic buildings that appeal to the widest occupier bench. Some peers go for off-piste locations and bespoke buildings thinking they’re getting good relative value. The key though is generic rectangular shaped buildings, ample car / truck parking and good amenities in the vicinity - at the end of a long shift in a warehouse, everyone wants a McDonalds, a KFC and a petrol station. It’s our job to find those buildings, and our job to serve blue chip tenants like Amazon, DHL, Zara, GSK and the like. With great tenants in great buildings and locations comes great liquidity.
Q: How was the reception to your fund raise?
John Toukatly: Our latest fund is the largest pan-European, sector-specific closed-ended real estate fund ever raised, with commitments from a diversified, global group of institutional investors. We were very pleased with that result, grateful for the team’s efforts to achieve this closing, and humbled by the opportunity to ‘win’ for our investors.
Few private capital managers have longevity in the logistics industry. Many only started investing in the warehouse sector around the time Covid started.
Our team has been in this space for 20 years and remains one of the few managers to have invested successfully through multiple logistics market cycles. That experience gives us the understanding for when to get out. In 2021, many of our peers subscribed to the lower for longer interest rate theory and that didn’t end well. What we saw during the boom years was irrational exuberance and across the logistics business - we exited about $11bn of real estate assets.
Q: Institutions have been backing logistics for decades. Where are the gaps in the space that still need fresh capital?
John Toukatly: The European logistics market became an investment trend around 2017 and then really boomed for about 24 months during Covid. There are now many undercapitalized developers and undercapitalized funds that are increasingly desperate to sell - fund redemptions, end of fund life, and construction loan maturities are driving the bid ask to an acceptable level where debt is finally accretive to returns. At the same time, there is a tenant marketplace that is desperate for modern and sustainable warehouses.
We believe the current market environment is presenting some of the most attractive entry pricing we’ve seen in European logistics in nearly a decade. Pricing across the risk spectrum continues to normalize, financing conditions for well-located and well-let assets remain robust, and supply remains constrained across the majority of key submarkets.
It couldn’t be a more perfect storm for us to deploy capital. You have got robust tenant demand, functional obsolescence in existing buildings and across portfolios, and here we are sitting in the middle.
“Our team has been in this space for 20 years and remains one of the few managers to have invested successfully through multiple logistics market cycles”
Q: What geographies are you seeing the most opportunity in?
John Toukatly: Germany and the UK are far and away the largest logistics markets, and as a result, were the most overheated at the top of the cycle. We now see substantial opportunities in these markets to deploy at scale.
We also see opportunities in Spain and Italy. Spain is outperforming other European economies while Italy is sitting on a lot of obsolete logistics warehousing that needs upgrading.
We expect to deploy 20 to 25 percent of the fund in the UK and Germany with 5 to 10 percent across countries like Poland, Italy, Spain, France, Netherlands, Sweden and maybe Austria and Czech Republic.
Q: Logistics is a crowded market. What gives EQT Real Estate an edge and why do you believe you are poised to capture the best opportunities?
John Toukatly: Our benefit is our scale and liquidity. Tenants are coming to us with their requirements at a far greater frequency than ever before because they are looking for a reliable capital partner to fund their developments and own their warehouses.
And again, there are a lot of logistics projects traded in 2020 and 2021 that are severely undercapitalized or over-leveraged and we can swoop in and buy those assets at discounted prices.
Ultimately, it comes down to conviction and reputation. Those are two things that we’ve always valued immensely about ourselves. We lean in when we want to lean in and we are one of the most reputable buyers and counterparties on the market.
Q: Europe logistics net yields have gone from 4 percent to 6 percent in the past four years. What is driving this largest repricing since the GFC?
John Toukatly: We see pricing is probably off 20 to 30 percent from the peak and it is all driven by the irrational exuberance we saw at the top – and the debt correction / inflationary cycle we’ve experienced ever since. People bought into the lower for longer mentality and the safe haven place of logistics as an asset class.
The repricing we are seeing is all about the debt capital market. If you remember, 7 to 8 years ago German 10-Year bonds were in negative territory. Now they’re around 2.5-3.0 percent. Real estate is fundamentally linked to debt so if German 10-Year bonds are 2.5 percent and borrowing costs for us are 4.5 percent, then yields are going to stabilize at 6 percent. That is the nature of the beast for real estate. Yet, just because pricing comes down doesn’t mean that the asset class is less attractive. It just means there is a massive correction in what it’s worth. It’s all relative.
“Our local presence gives us a distinct advantage when it comes to navigating planning and land use complexities”
Q: When compared to the U.S., European logistics is constrained by land availability and planning restrictions. How does one overcome these barriers?
John Toukatly: Our local presence gives us a distinct advantage when it comes to navigating planning and land use complexities. Through the more than 70 logistics developments we have completed across Europe, we have built deep relationships with local governments and municipalities - and those relationships matter enormously when planning restrictions are involved.
Land use laws differ significantly from one European market to the next, and having teams that understand those local nuances, and are known and trusted by local authorities, is a distinct EQT competitive advantage. Further, when we bring a tenant to a municipality, we are not just a faceless investor - we are a known local partner creating jobs and supporting the local economy, which makes planning conversations substantially more productive.
Q: How is the EQT Real Estate team leveraging data and technology?
John Toukatly: We are one of the largest logistics owners in the world and have an immense amount of internal data points from which to draw from. Utilizing that data to make informed decisions around building availability, new construction starts, and occupier demand means we are constantly inputting data and knowledge into our analytics system. We have built out an incredible PowerBI model and adoption across the business and are constantly working to improve and fine that data.
One example, we have a project called Operation Hard Hat where we go back to our old investment committee emails and notes to see where we got it right or wrong and what lessons we can learn from those experiences.
We’ve also got enough support data from our own portfolio to track rents in real-time. While a lot of our peers are relying on third party data around occupier demand and rents, we use an in-house system called Dawkins to analyze all our data. If we want to build a 200,000 square foot warehouse in the U.K.’s Midlands we ask ourselves and our app where do we build it, why do we build it there, what’s the rent going to be? We are drawing on real time internal comparables, we can see where rents are trending, how many occupiers are in the portfolio looking for space, and who will have a real-time requirement in the next couple of years for more or less space.
Q: Looking ahead, what do you believe European logistics will look like in the next 5-10 years? How is EQT Real Estate positioning for that future?
John Toukatly: We cannot ignore the impact data centers are having. A data center is upwards of an $800m investment in the same plot size as a $20m warehouse. When those opportunities are being chased by so much capital and there is so much occupier demand there is a knock-on effect to land values. Moreover, e-commerce penetration rates still have space to grow.
As a result, we believe that logistics rents, especially in cities like London, Frankfurt, Paris, Madrid and others, will continue to increase at double-digit rates over the next 5 to 10 years.
Whereas, we see capital values today at €800 to €1,000 per square meter today, we believe that those numbers could be 50 percent to 100 percent higher in the next 5 years. So we remain long term bullish about the future of European logistics real estate.
John Toukatly joined EQT Real Estate in Philadelphia in 2007 and opened the Chicago and London offices in 2011 and 2014 respectively. John is Partner and CIO of all EQT Real Estate Industrial funds and investments in Europe. John holds a B.Sc. in Economics and Real Estate from Wharton Business School at the University of Pennsylvania.
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