It is a well told story but the continuing shift of shopping habits from the high street to the internet is still boosting the companies which invest in the infrastructure required to meet this change.
Among them is industrial properties landlord Segro (SGRO), whose shares gain 5.9% to 588.2p on Friday as 2017 results reveal a 26% increase in profit to £194m. The results were underpinned by the strong market drivers in the warehousing sector where the growth of e-commerce is seeing demand for warehouses outstripping supply.
This is reflected in a vacancy rate of just 4%, below the company’s target of between 5% and 7%. The valuation of its portfolio increases 14% and like-for-like rental growth is up 3%.
The company is seeing yields on standing properties squeezed as more investment and therefore competition comes into the space. Surplus capital is therefore being put into developing its own assets where the returns are higher.
FOCUS ON DEVELOPMENTS
Nearly £600m was deployed on developments in 2017 with these projects expected to generate an 8.3% yield on cost once fully let. Total development spend for 2018 is expected to exceed £350m.
Chief executive David Sleath says: ‘The prospects for rental growth, particularly in the UK, remain good, and rental values are improving in our continental Europe urban warehouse portfolio. Investor appetite for prime warehouses remains unsated, attracted by the occupational market fundamentals.’
Liberum analyst David Brockton reiterates his ‘buy’ recommendation on the stock and 640p price target. He says: ‘Industrial remains one of the strongest performing sectors within UK real estate, benefiting from cyclical recovery in occupier demand as well as growth in online logistics. While this has already driven a significant re-rating in valuations, we believe a continued lag in the supply response relative to strong demand should support further growth through 2018.’
Based on Liberum’s forecasts Segro is more expensive relative to its assets than the wider peer group. Prior to today’s share price rise, it traded on a price to net asset value of 0.97 times against the sector average of 0.83 times.
You can read about other plays on the industrial logistics space in this article.
