Can these 2 FTSE 350 REITs deliver further share price growth?

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Can these 2 FTSE 350 REITs deliver further share price growth?

The share prices of warehousing and logistics companies Segro (LON: SGRO) and Tritax Big Box (LON: BBOX) have soared in the past year. They have risen by 46% and 37%, respectively, as demand for the urban and out-of-town warehouses they provide has surged among retailers and investors.

Could further share price growth be ahead for both FTSE 350 real estate investment trusts (REITs)? Or do their valuations fail to take into account potential threats, such as an uncertain economic outlook?

A growth sector

Urban warehouses make up 66% of Segro’s asset base, with the remainder being larger out-of-town sites. It operates across Europe but has 61% of its assets in the UK. Tritax Big Box focuses on larger warehouses that are generally not located in urban centres. It focuses solely on the UK.

While the two companies have slightly different business models in terms of asset type and geography, they have both enjoyed rising demand for their properties in recent years due to a growing trend towards online retail that has been accelerated by the pandemic. For example, a decade ago 8% of all UK retail sales were conducted online. Today, that figure stands at 26%.

Although both businesses have hugely ambitious development programmes, demand continues to far outweigh supply. For example, Tritax Big Box recently stated when raising £300m for its development pipeline that there is around four years’ worth of unsatisfied occupational demand for logistics assets. Meanwhile, Segro’s vacancy rate has continued to fall. It stood at just 3.2% last month.

Supply/demand imbalance

Meanwhile, supply-side challenges mean that closing the imbalance versus demand could prove to be challenging. Land suitable for logistics assets has to compete with other potential uses – especially residential housing. This problem is particularly acute in major cities, such as London, which could lead to rising valuations for well-located warehouse assets over the long run.

The prospect of an ongoing supply/demand imbalance has led to increased investor interest in the sector. The long-term nature of rental agreements at a yield that is often in excess of 4% during a period of low interest rates means that the wider sector has gained in popularity. Furthermore, the apparent lack of potential within other commercial property segments, such as office and retail space, could prompt commercial property investors to continue to switch their attention towards warehousing and logistics assets.

Investment potential

Of course, risks such as the potential for rising interest rates and an uncertain economic outlook could moderate demand among investors for logistics assets. Furthermore, the recent trend towards online purchases could slow, or even reverse to some degree, as the pandemic subsides.

However, Segro and Tritax Big Box’s valuations do not yet appear to be excessive. Indeed, they have price-to-book ratios of 1.4 and 1.2, respectively. This suggests they continue to offer margins of safety that factor in potential risks facing the wider sector.

While they may not be among the cheapest FTSE 350 REITs, their growth potential due to a likely persistent supply/demand imbalance means that they could offer long-term investment appeal.

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