Buy warehouses, not Amazon
As the rise of e-commerce continues, invest in the logistics necessary to keep it all going, says Sarah Moore.
As the rise of e-commerce continues, invest in the logistics necessary to keep it all going.
Investing in industrial property has become a popular way to buy into the rise of e-commerce, without having to spend $1,400 (or thereabouts) per Amazon share. In 2017, £3.7bn was invested in logistics warehouses in the UK, making it the second-strongest year on record. A quarter of buyers came from overseas, according to estate agent Savills. Meanwhile, the wider industrial sector accounted for 17% of total investment in commercial property, a record high.
Although it may not be obvious to those who don't frequent industrial estates, the UK is apparently "under-warehoused". Britain has 7.61 sq ft of warehousing per head, compared with the US on 39 sq ft per head. As a result, warehouse space remains in demand. The industrial property sector saw rents rise by 5.5% on average last year, according to the MSCI IPD quarterly index, with growth strongest in London and the southeast. "Industrial remains one of the strongest-performing sectors within UK real estate, benefiting from a cyclical recovery in demand from occupiers as well as growth in online logistics", says David Brockton of broker Liberum. Between now and 2020, the sector will see a total return (capital gains plus rental income) of 8.8% a year, reckons real-estate investment manager JLL.
If you'd rather not go to the trouble of buying or building your own warehouse, one way to buy into this sector is to invest in Segro (LSE: SGRO) an investment and development company that specialises in buying, building and renting out logistics properties. Segro draws its customers primarily from transport and logistics, food and general manufacturing, and physical and online retail sectors. Its top-ten customers include the likes of Amazon, FedEx and Sainsbury's. Forty percent of its property portfolio is in Greater London, 18% in the Thames Valley, and 10% in the Midlands, with smaller proportions across continental Europe.
The company's most important acquisition last year ("one of the jewels in its crown", according to the chief executive), was its £365m purchase of the remaining 50% of the Airport Property Partnership portfolio, which had been owned by its joint-venture partner Aviva. This portfolio of 21 properties is valued at £1.1bn and comprises 350,000 sq m, 87% of which (by value) are located at Heathrow Airport, including the majority of the airport's "airside cargo facilities". At the moment, Heathrow accounts for roughly two-thirds of UK air freight, with volumes through the airport growing by around 10% in 2017.
Segro's portfolio went up in value by 13.6% last year, while its adjusted profit-before-tax rose by 25.7% to £194.2m. The net asset value (NAV) per share grew by 16.3% to 556p. As of the end of December, the company had development projects "approved, contracted or under construction" totalling nearly 700,000 sq m in capacity, capable of generating an estimated £43.3m a year of rental income when fully let. It's a fair bet that the growth of online shopping will continue for the foreseeable future, if perhaps not at the same rapid pace as in recent years. Segro looks a solid way to bet on this trend. It currently trades on a dividend yield of 2.75%, but the dividend is rising and analysts' forecasts suggest the yield on the current price will reach 3.5% by 2020.