The industrial-focused real estate investment trust Segro has reported like-for-like rental growth of 5.1%, rising profits and a raised dividend in the first half of 2023 as it benefited from continued positive supply-demand dynamics.
The UK's largest REIT said it had secured £44 million of new headline rents commitments in the period, while its chief financial officer suggested investors are "putting their hands back into their pockets" amid improving macroeconomic stability.
Half-year results to end of June showed Segro had secured £251 million of like-for-like net rental income for the six months to 30 June 2023, compared with £239 million for the same period a year earlier. It also grew customer retention to 85% from 76% in the second half of 2022, while its occupancy rate fell slightly to 95.5% from 96% a year earlier.
Segro said its £43 million headline rent commitments total was driven by its “customer focus and active management” of its portfolio, now valued at £18.1 billion. This represented a decrease of 1.4% compared with an increase of 7.2% in the value of its portfolio during the first half of 2022. But the decline occurred at a slower rate than when it fell by 16.6% in the second half of 2022, due to “some modest, market-driven yield expansion".
Speaking to CoStar News, chief financial officer Soumen Das said a large part of the company's success in achieving like-for-like rental growth was down to its investment in the right areas of the UK. He said: "It goes back to the heart of our strategy, which is to own the very best buildings, in the very best locations. We are relatively indifferent as to who we lease to, and I think people who have designed their portfolio to play to e-commerce specifically will have a problem in this world.
"I know that market take-up stats are down and are quite weak [for the sector], but we've had a record year, effectively, and its [down to] stock selection. In the UK, we are only in London, Slough and the Midlands. We were not chasing Amazon prelets in the North East or the North West, South West, which have dried up completely. Whereas the market in the Midlands is still really tight, because there aren't many sites out there.
"So the volatility in terms of our demands is different to the volatility of the whole market, because we were never trying to market to the whole of Europe or the whole of the UK."
According to the REIT, it made “great progress in capturing reversion” as it delivered an average rental uplift of 20% at lease events during H1 2023. Customers from the transport and logistics and retail sectors continued to be its largest takers of space during H1 2023, which it said were focused on strengthening supply chains after COVID and being prepared to respond to heightened e-commerce demand.
Having observed increased transaction volumes in the first quarter of the year, the results find investors were “see[ing] value” at the current levels of pricing for prime industrial and logistics assets. The company disposed of £74 million of assets in the first six months of 2023. More than two-thirds of that total was generated from the sale of two non-core office assets.
The report said: “Valuations have been much more stable in the first half of 2023 and investment has activity picked up across the market, including our own disposal of a UK portfolio since the period end. This demonstrates that investors are seeing value at current levels of pricing.
"We believe that demand will further increase as clarity emerges around future interest rates, with investors attracted by the positive fundamentals and long-term structural growth potential in logistics and industrial warehousing."
Das echoed this sentiment, adding that it looked like industrial pricing had "gone through" the worst of it, with the UK finding some level of stability around inflation and interest rates. Although he said the crystal ball to predict how asset values would play out for the rest of the year remained "pretty murky".
"Investor activity in the first quarter in the UK was less than a billion [pounds], in the second quarter it was over £2 billion. It is only two quarters, so we have to be careful, but if investors are putting their hands in their pockets and writing new cheques on new deals, that gives us some confidence that the investment market is coming back into the right place.
"Looking forward, we feel pretty good because if we're at an inflation point in values and, if we are still able to drive rent and grow our rent roll, that feels like a good place to be."
The REIT registered a net investment of £551 million for the period, which broke down into £299 million of development capital expenditure and £326 million of acquisitions. Assets acquired by the REIT in the first half of the year included Bath Road Shopping Centre in Slough for £120 million, identified as having potential for data centre development.
It also agreed a £120 million deal for the former Radlett Aerodrome in Hertfordshire, a brownfield site on the edge of London. “[It] provides us with the opportunity to develop an exceptionally rare site of scale that will deliver over 330,000 square metres of logistics buildings".
Segro's land bank totalled 1,125 square hectares at 30 June 2023, valued at £1.8 billion, or roughly 10% of its total portfolio value. It estimated that its land bank can support 3.7 million square metres of development over the next five to seven years.
The REIT completed 340,900 square metres of new space during H1 2023, of which 77% was let prior to the start of construction and 83% let at the end of the period. This space contributed £23 million of headline rent, and will generate a further £5 million once fully let.
Projects completed included one of its last remaining plots at Segro Logistics Park East Midlands Gateway, part of 260,100 square metres of big box warehouse space in the first half of 2023. It has 197,900 square metres of space approved or under construction in the UK.
The REIT recorded an adjusted pre-tax profit of £198 million, up 2.6% compared with H1 2022, while adjusted EPS is 15.9 pence, which represented an increase of 1.9% (H1 2022 15.6 pence).