Segro's losses narrow as interest rates stabilise

The fortunes of the UK's largest real estate investment trust (Reit) and warehouse landlord reveal much about the property market. Segro's (SGRO) pre-tax loss narrowed in its results for 2023 as a potential base rate peak gave real estate buyers more confidence. Segro stomached a £601mn valuation hit due to high interest rates in 2023, but this was less painful the £1.95bn valuation hit it took in 2022 when interest rates spiked.

From a trading perspective, there is a lot for investors to find appealing. Net rental income, rental revenue minus the costs of running the assets, rose by 12.5 per cent to £587mn from £522mn, signalling continued high occupier demand for warehouses for online shopping, even though the 2022 warehouse bubble has deflated.

Leasing demand is not as high as it was then, but Segro's vacancy rate remains below the wider market at 5 per cent, which still gives it plenty of room to increase rent further. And, while past performance does not guarantee future performance, annual net rental income and full-year dividend, which remains covered by earnings minus valuation changes, have consistently risen for a decade.

So, where will future growth come from? Reit rivals have been merging, and Segro does have a track record of buying businesses and buildings. However, chief financial offer Soumen Das told the IC its "default" is to grow through developing its undeveloped sites, which it puts a future value of £3.7bn on, larger than most UK Reits.

Shares trade around net asset value (NAV) per share, though we feel that underplays Segro's continued NAV and dividend growth potential. We stick with our bullish rating. Buy.

Last IC view: Buy, 779p, 27 Jul 2023