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The UK warehouse and logistics market has become centre stage, being the stand out asset class within the real estate sector, experiencing investor interest from across the globe with in excess of £10 billion of stock changing hands last year.
This recent trend, which has emerged over the last five years, has been driven by the growth of e-commerce, now accounting for around 29% of UK market share. The competition for stock has resulted in yield compression yet the spread over the 10 year gilt yield remains at or around the long term average.
The warehouse/industrial sector has been the outstanding performer over the last five, three and one year periods; the market dynamics suggest it is well placed to continue to hold the top spot.
During 2020, despite the impact of the Covid-19 pandemic, take-up of UK warehouse space exceeded 50 million square feet, exceeding the previous record year set in 2016, leaving UK wide vacancy just over 5%, equivalent to around 30 million square foot.
GROWING DEMAND
Last year, Knight Frank Research reported that every £1 billion of on-line expenditure requires 1.35 million square foot of warehouse space and went on to conclude that there will be demand for another 92 million square feet over the next three years. For the last three years completions of new development space has run at or around 20 million square feet.
Even before demand from other sectors is taken into account, there seems little hope of the market providing sufficient space to meet this demand. Therefore, it seems very likely that the imbalance of insufficient supply available to meet occupational demand will continue, giving rise to rental growth resulting from operating companies competing for space.
The consensus market forecasts predict 2.4% per annum rental growth for the next five years.
However, many tenants operate very low effort rations (amount of rent as a percentage of turnover) suggesting that rents are very affordable at prevailing levels so maybe the growth forecasts are light?
STRONG PERFORMANCE
Against this backdrop, Warehouse REIT (WHR:AIM) has experienced a very strong year, driving a total accounting return of 27.7% with like-for-like valuation growth of 18.8%.
Much of the performance has come from a realisation that the portfolio of £792.8 million has produced pandemic proof income with rent collection in the year achieving 98.6%.
Average rents across the portfolio are still only £5.51 per square foot and the valuation equates to just £90.00 per square foot capital value being less than the cost of replacement so effectively the land is in for nothing.
With an economic moat preventing new supply of warehouse stock at the portfolio prevailing passing rent, the portfolio is well placed to continue to participate in the structural change of ongoing occupational demand.
As asset manager, Tilstone Partners has worked hard to ensure that the portfolio of assets are all located in what it deems to be economically relevant locations which, in its opinion, will outperform the wider market.
RAISING FUNDS
During the financial year ending March 2021, Warehouse REIT had two equity events raising £199 million of new equity which has been deployed into assets generating a blended net initial yield of 6% from locations such as Milton Keynes, Rugby and Cambridge.
Amazon now accounts for in excess of 8.7% of the portfolio income from four separate warehouses; the top 10 tenants account for just over 30% of the total rent roll with other e-commerce operators including Direct Wines (part of Laithwaite’s), JLP, TaylorMade (selling via Amazon), Victorian Plumbing (VIC:AIM) (the subject of a recent IPO), not to mention the third party logistics firms whose business is expanding as the number of parcels delivered continually rises.
With like-for-like rental growth of 2.9% for the 12 months to March 2021, Warehouse REIT continues to outperform its valuer’s estimate of ERV (estimate rental value) by, on average, 9% a year. As well as driving value through active asset management activity, the REIT’s asset manager is looking at the development opportunities on under-utilised land within the current assets.
Whilst still relatively early days, a number of planning permissions have been obtained allowing the space to be marketed with a view to obtaining pre-lets prior to commencement of construction on site. With this approach to minimising risk, the REIT will target returns of 200 basis points over and above those available from buying comparable built stock.
The new-build schemes also present an important opportunity to drive the sustainability credentials of the portfolio with a focus on renewable energy, low energy consumption and buildings with high grade EPC ratings, ensuring that the whole portfolio remains economically relevant and that no assets are stranded.
FURTHER ACQUISTIONS EYED
With year end gearing of just 24.6%, the REIT is well placed to make further near-term acquisitions, seeking to grow earnings per share, as well as continuing to strengthen the portfolio KPIs (key performance indicators).
Warehouse REIT commented: ‘Tilstone Partners and the Warehouse REIT board continue to hold £28 million worth of shares in the REIT, what better endorsement of their commitment to the future of the company’s performance.’
DISCLAIMER: This article was written by Warehouse REIT and published by Shares under a commercial agreement. It is not a recommendation to buy or sell the shares. The article originally appeared in Shares’ Spotlight report on 26 August 2021.
