How to invest in Europe’s e-commerce boom

Online sales are growing fast. That means strong demand for warehouses and opportunity for investors.

Lorries in front of loading docks © iStockphotos

The rise in internet shopping means warehouses are in demand

Lorries in front of loading docks © iStockphotos

Anyone who drives regularly on the motorways of Britain and Europe will have noticed the big warehouses that have appeared at the side of the roads. These represent the flipside of internet shopping and corporate supply chains: every delivery has to be backed up by vans or lorries delivering from local hubs. These are in turn supplied from large warehouses situated close to road networks; they handle the bulk deliveries from factories and airports.

E-commerce, according to Evert Castelein, manager of Aberdeen Standard Investments European Logistics Income PLC (LSE: ASLI), now accounts for 20% of sales in the UK, but only 10% in Europe, where it is growing faster. This means strong growth in demand combined with continuing falls in vacancy rates, now down to 5.5%.

A big footprint in Europe

Since raising £187m in a December 2017 flotation, ASLI has spent or committed €311m acquiring 11 such properties in five countries. As the numbers imply, equity investment is supplemented by debt of up to 35% of assets but even so, ASLI is fully invested. Consequently, it is seeking to raise another £100m for further investment, having 14 potential deals in its sights. ASLI targets a 5% yield to investors from a total return of 7.5%.

The investment model that makes this target realistic is a rental yield from the assets of 5.3%. Borrowings gear this return above 8% on equity, from which has to be deducted management costs of 0.75%, cost of debt of 0.7% (a 1.4% interest rate on 50% of net assets) and other corporate costs of 0.25%. To get back up to the 7.5% target, ASLI needs to add value of about 1% per annum. Castelein is confident of this, citing examples such as the potential to extend the building at Meung-sur-Loire, which only covers 29% of the site, and a development opportunity in Lyon. He also thinks that higher leases can be negotiated with existing or new tenants when the lease expires. Within the terms of each lease, rents are fully indexed to inflation for two thirds of the portfolio, capped at 2.5% per annum for another 20% and indexed subject to a threshold for the remainder. With inflation at 1.5%-2%, rental income will rise slowly, but the hedge provides reassurance should inflation return.

The fund is allowed to invest in the UK, but it's "more advanced in the cycle with keener yields and higher financing costs", says Castelein. Should yields in Europe compress to, or below, those in the UK, where prime yields are 4%, there would be significant capital upside to ASLI's shares. Its target return looks achievable without any assumption about valuation gains, backed by sustained and visible growth in demand for modern warehouses. A 5% dividend yield, growing slowly, should appeal to the risk-averse or those wanting a quiet corner in their portfolio.

Recommended

Invest in VCTs: tax-free investments set to break records
Investment strategy

Invest in VCTs: tax-free investments set to break records

Generous tax breaks make VCTs – venture capital funds – an attractive supplement to pensions.
21 Jan 2022
Index fund
Funds

Index fund

Index funds (also known as passive funds or "trackers") aim to track the performance of a particular index, such as the FTSE 100 or S&P 500.
18 Jan 2022
Cladding crisis: what new proposals for mean for housebuilders and leaseholders
Property

Cladding crisis: what new proposals for mean for housebuilders and leaseholders

The government is seeking an extra £4bn from house developers to fix the UK’s cladding crisis. Saloni Sardana explains how the new proposals affect bo…
17 Jan 2022
Seize these investment trust bargains in 2022
Investment trusts

Seize these investment trust bargains in 2022

Attractive investment trusts are trading at a discount, and those waiting for the perfect time to buy will miss out. Max King picks a selection of the…
17 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Interest rates might rise faster than expected – what does that mean for your money?
Global Economy

Interest rates might rise faster than expected – what does that mean for your money?

The idea that the US Federal Reserve could raise interest rates much earlier than anticipated has upset the markets. John Stepek explains why, and wha…
6 Jan 2022