Segro's Heathrow masterstroke

Most of the metrics associated with the business are positive. During the post recession era, there was virtually no building of new warehouse facilities, and as economic growth has started to accelerate, a significant imbalance between supply and demand has emerged. The situation has been exacerbated by a change of direction in consumer spending habits away from the traditional retail outlet toward buying goods through the internet. This has given rise to further demand for distribution hubs, notably to accommodate last mile deliveries, and the quality of Segro's portfolio is reflected by the fact that in 2016 it achieved a valuation uplift, despite all the predictions of Brexit doom.

Given market nervousness, investors are understandably wary of companies with development arms, which tend to be very cyclical. But in Segro’s case, its building programme has been largely de-risked through pre-letting. In 2016, it delivered a record 422,000 sqm of new warehouse space of which 80 per cent is now let. This will generate £23.5m additional rent, with a further £5.8m to come when the remainder of the space is let. Net like-for-like rental income last year rose by 4 per cent, with a 0.7 per cent dip in income from mainland Europe more than offset by a 6 per cent jump in the UK. Around £45m of new rent was contracted, up 14 per cent from a year earlier, including £23m from new development pre-let agreements, and in 2017 Segro expects to spend a further £300m on new developments. Helping to fund this, it raised £325m in September through a share placing and sold off £565m of non-core assets at a blended yield of 5.9 per cent.

A further £556m was raised last month through a one-for-five rights issue priced at 345p, a chunky 29 per cent discount to the share price at the time. This has been put to good use with £365m spent on acquiring the half-stake it did not already own in the joint venture partnership Airport Property Partnership from Aviva Group Equities. The purchase price, equating to a net initial yield of 3.6 per cent, might look expensive at first but the deal looks very a smart strategic move. The portfolio has 21 property assets, valued at £1.1bn, that are mostly are located at Heathrow airport and include nearly all the airport's cargo facilities. This comes at a time when the airport is set to expand making demand for cargo space even stronger.

Other developments include a 10-year agreement with the Greater London Authority to develop 35 hectares of industrial land in East London that will support around 140,000 sqm of urban distribution and light industrial space. And in a joint venture with Roxhill Development Group, a further 12 sites will be available for big box warehouse development measuring over 1m sqm.