Segro posts 21% NAV rise as it completes repositioning

UK-listed property developer Segro reported a 21% increase in the Net Asset Value of its assets last year as it benefited from a successful repositioning strategy and strong supply-demand dynamics in the logistics sector.

The company, which over the year completed the transformation from a mixed-asset real estate investment trust into a European industrial property specialist, said the higher-than-expected growth was largely a result of positive revaluations, strong operational performance as well as the lowest ever vacancy rate across its portfolio.

‘2015 represents a watershed in our history, as it saw us become a pure play pan-European warehouse industrial REIT,’ CEO David Sleath told PropertyEU.

Portfolio revaluation of 11.1% on average across the portfolio was driven by a 13.1% rise in the value of the group’s UK assets, largely due to yield compression as well as increasing rental levels. The Continental European portfolio increased by 7.9%, reflecting mainly a 100 basis point improvement in equivalent yield.

‘What we are seeing is that there is very good occupational demand for assets across the business but also very good demand from investors, attracted by occupational fundamentals and attractive yields,’ Sleath said.

Sleath is also forecasting value increases for 2016, although at a more modest pace. ‘What we see in a number of markets now is that yields are below the level at the peak of the cycle in 2007, but of course today is a very different world, in that interest rates are at an all-time low. The yield gap between what the assets are offering and government bond rates is extremely wide and there is opportunity for rental growth. Capital growth will slow down in 2016 - yield cannot go down forever - but assets where rental growth prospects are stronger will continue to see a rise in capital values.’

Rental income was up 4.2% on a like-for-like basis, while the portfolio’s vacancy rate dropped from 6.3% to 4.8% over the year. The developer spent £221 mln on 229 hectares of land in 2015, focusing on sites around London while also buying in Germany, Spain and Italy.

Sleath: ‘We would like to boost our position in markets such as Italy, Spain, the Netherlands and some parts of Germany. We want to gain scale and critical mass in these markets which are relatively underserved. Growth will be more about developing new property rather than acquiring assets.'

Earlier this week, Segro announced a partnership with Roxhill Development which will provide the UK REIT with access to a portfolio of big box logistics warehouse development sites with the potential for over 929,000 m2 in the English South East and Midlands. Last year it also acquired the assets and platform of Vailog Srl, a major logistics developer in northern Italy.

‘We would like to find other opportunities like the Vailog or the Roxhill one but they are quite rare and so we will probably focus on developing land that we own,' Sleath told PropertyEU. 'We have a good land position in the Netherlands, and we just made our first land acquisitions in Munich, Cologne and also Barcelona.’

New land Investments will be financed by selling mature assets, Sleath added. ‘We want to keep our gearing at manageable levels, even if we are confident about the market outlook for the sector, as shown by the increase in dividend payout.’ Final dividend increased by 3.9% to 10.6 pence in 2015, from 10.2 pence in 2014.

While there are a number of broader economic and geopolitical uncertainties – largely China’s slowdown and the chance of a so-called Brexit in 2016, Sleath said he is confident that the Segro portfolio will be able ‘to deliver growth and outperform the wider property market’ in 2016'.

‘There are factors to watch out for and we are mindful and aware of those factors,’ Sleath said. ‘However, because of all the work undertaken, we are well placed to withstand short-term market volatility and outperform in the long term. ‘

Commenting on the logistics property sector in general, he predicted that market fundamentals will remain good in 2016 although lower investment volumes are to be expected. In particular, investors looking for exposure to logistics may have to take the listed route, he noted.

‘There is strong investor demand for logistics and it is very difficult to get exposure to underlying assets unless you have a logistics platform. Therefore, some of the companies that are listed will continue to see strong demand for their shares so long as the current demand-supply remain the same.’