A milestone transaction – taking a closer look at our deal with Fortress REIT
CEO, Rael Levitt, explains more about the Fortress REIT deal, why the partnership is aligned with Inospace's long-term strategy and how they'll grow and succeed together with Fortress.
Three weeks ago, Inospace announced a transaction with Fortress REIT, one of the largest listed property groups on the JSE. With an asset base over R40bn, Fortress invests in direct real estate and listed property securities, focusing on logistics, retail, and investment properties in South Africa and Eastern Europe.
It's a major milestone for Inospace and marks our involvement with the listed real estate sector, acquiring an established portfolio of assets, a partial exit for shareholders and a new partner in one transaction. Inospace now manages a R2,3billion portfolio of investments.
In this blog, I'll explain a little more about this deal, why the partnership is aligned with Inospace's long-term strategy and how we'll grow and succeed together with Fortress. I will also explore why the South African industrial and logistics sector is such an attractive space for us.
What is Inofort?
Inofort is a new company that Fortress and Inospace shareholders almost equally own. The joint venture company owns an initial portfolio of twenty parks valued at R1,25billion, with a lettable area of 200,000 square metres and over 600 tenants.
Fortress injected twelve of its properties into Inofort, and we put eight of our parks into the new company. The two companies' assets are of almost equal value and are located in Cape Town and Johannesburg.
How was the deal funded and who was the corporate advisor?
The transaction was funded through a combination of bank debt, funded by Standard Bank, as well as vendor debt and the corporate advisor was Gary Vogelman of Java Capital.
What is the background of the relationship between Fortress and Inospace?
Over two years ago, we ran a pilot project to manage two Fortress industrial properties in Jet Park and Wadeville, Johannesburg.
Wadeville Works was our first project and quickly became a landmark and high-demand park with low vacancies. The second project, Electron Exchange, near OR Tambo Airport was a single-tenanted property that we converted into an impressive multi-let serviced logistics park. We completed the refurbishment program during the first Covid lockdown period and achieved a high occupancy rate.
After the trial was completed, one of our founding shareholders, Jeremy Katzen, put together a larger corporate deal with the Fortress team.
What does the rest of Inospace look like?
To answer the question, I need to explain the group structure of Inospace: we are currently a group of several privately-owned property-owning companies - "InoVest" - and a separate management company - "InoServe".
Our first branded park was launched in March 2017 in Epping Industria, Cape Town. After we acquired our third park, in Maitland Cape Town, Buffet and KLT investments, invested in a larger number of new properties that we acquired.
In 2019, Buffet and KLT sold a portion of their shares to a related company, Setso Investments. The common shareholder is the management team (including me). Inofort is one of the property-owning companies making up the combined group. The rest of our parks, another 23, belong to a combination of the founding shareholders and our management team.
InoServe runs our business platform and manages all the parks in terms of management agreements.
Will the new parks be refurbished and branded as Inospace?
Yes. Ten parks are already branded as Inospace and offer our various range of products and services. Our model is to develop a three-year optimisation plan for every park we own. The optimisation plans include creating yield-enhancing spaces, as well as creating new revenue lines and client facilities.
Over the next eighteen months, the ten unbranded parks will be repositioned and refurbished. We will introduce our newest range of logistics solutions for small businesses and build "Logistics Hubs" for last-mile delivery. Our well-known "Business Hubs" will be introduced at most of the parks and will offer shared meeting rooms, reception areas and shared workspaces.
How will Fortress be involved with Inospace in the future?
Our team will work with the dynamic Fortress team. We will combine management skills to manage and grow Inofort. This complementary approach means greater synergies between our teams, and we are already seeing the fruits of the growing relationship.
Fortress REIT may spin out (sell) more of its non-core industrial properties to Inofort if this ensures a profitable exit for its shareholders.
The energetic and entrepreneurial Fortress team have deep knowledge and understanding of institutional real estate, and they understand how commercial real estate is transforming into a niched asset class managed by focused operators.
Will the rest of Inospace continue to grow?
Yes. Our three-year strategy "Thrive to 25" is to grow Inospace into a R5billion company.
Outside of asset growth, we will expand our services and technology platform, particularly our Inocircle offering, which provides value-adding services and facilities to our clients (tenants).
Will all the Inospace entities eventually merge and list?
Our medium-term strategy is to merge all the entities into one, with the various shareholders owning equity in a merged holding company.
We have been repeatedly asked whether we would list the combined group on the Johannesburg Stock Exchange. The answer is that at this stage, we believe that Inospace is not at the scale to achieve a successful listing. If we get to sufficient size and market conditions are right, we will look at listing or doing whatever makes sense at the time. Right now, it's too early.
We would prefer to grow privately and focus on providing innovative solutions to our large SME customer base.
What does the SA commercial real estate market look like for us?
We are well aware of South Africa's challenges, but the country has a large population and a need for goods and products. Industrial and logistics real estate is a great market sector.
What is happening in the industrial property sector?
There is a race for industrial space, in South Africa and globally. That's the most fitting way to describe the strong industrial market since the onset of the health crisis. Limited new supply of multi-industrial property has also fueled demand from users.
Throughout 2021, strong e-commerce sales — combined with supply chain challenges — fueled demand for space in the industrial sector, especially for warehouse, and logistics distribution spaces. The "delivery economy" is in full swing and growing.
With the demand continuing to outpace supply, the national vacancy rate for industrial property stands in the low single-digit percentages.
What is happening in last-mile logistics?
With supply chain bottlenecks and rising transportation costs, companies are switching from a just-in-time inventory to a just-in-case supply chain strategy, pushing up the need for space.
At the same time, occupiers are also racing to improve their last-mile strategies by being closer to end consumers. Indeed, location matters more than ever when it comes to logistics and distribution; properties with close access to urban areas are in high demand.