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Robert Stephens, CFA, discusses why a particular FTSE 100 property company may have a favourable long-term outlook.
Last week’s third-quarter trading update from FTSE 100-listed Segro (LON:SGRO) highlighted that structural trends such as e-commerce continue to catalyse its financial performance.
The real estate investment trust (REIT) focuses on developing large out-of-town warehouses, as well as urban warehouses, across the UK and Europe. Demand for its assets has remained buoyant, with the company having let 88% of its completed 765,900 sq m of new developments since the start of 2019.
Since Segro’s new developments benefit from favourable demand/supply imbalances, as well as the impact of low interest rates and environmental considerations, its long-term investment appeal seems to be high.
Structural changes to the retail sector are leading to rising demand for warehouses in prime urban, as well as out-of-town, locations. For instance, online sales as a proportion of total retail sales have trebled to 18% over the last decade. This trend is expected to continue over the long run, as shoppers increasingly favour the convenience of shopping online versus in-store.
This is likely to lead to rising demand for Segro’s assets. At the same time, it may benefit from a lack of supply of warehouses – particularly in urban areas. Industrial land which could be converted into warehouses is often used for other higher-value purposes, such as residential properties. Therefore, as its recent quarterly update showed, Segro may be able to quickly let new developments.
The company may also benefit from rising demand due to environmental concerns across a range of industries. Companies are seeking to minimise their environmental footprint, and one way of achieving this goal is to occupy buildings that meet higher environmental targets. Since 98% of Segro’s UK assets are E-Rated or above for the purposes of Minimum Energy Efficiency Standards, it may enjoy heightened demand from a range of industries that increases the diversity of its customer base.
In addition, Segro has a modest level of debt following an equity placing earlier in the current year. This has reduced its loan-to-value (LTV) ratio from 29% in December 2018 to 27% in September 2019, which suggests that it has the financial flexibility to invest for future growth.
Segro’s share price has risen 35% over the last year. Investor demand for its shares could remain high over the medium term due to the prospect of low interest rates remaining in place. This increases the appeal of industrial real estate yields compared to other assets and may produce favourable market dynamics for the company’s investors.
Trading on a price-to-book ratio of 1.2, the stock appears to offer a margin of safety. This may be necessary should the short-term economic outlook for the UK and Europe deteriorate as a result of local and global political risks.
However, the long-term trends that are likely to impact on the company’s financial performance remain favourable. Structural changes, low interest rates and environmental concerns could catalyse the Segro share price and lead to further capital growth for its investors.