LondonMetric's results reveal two-sided warehouse market

The warehouse boom is well and truly over – or is it? Warehouse developer LondonMetric’s (LMP) results for the six months to 30 September offer two possible answers.

On the one hand, pumped-up values for warehouse assets have most certainly deflated. LondonMetric is one of several real estate investment trusts (Reits) that have recently posted a hefty valuation drop (due to the soaring cost of debt putting off buyers) and swung to a loss as a result. Warehouse values have been hit much harder than other asset classes because the surge in online shopping over the last decade made valuations much frothier. In October, property agency CBRE reported a 10.6 per cent drop in the capital value of UK warehouses – more than twice the 4.8 per cent and 5.1 per cent drops for retail and offices, respectively.

On the other hand, October also saw CBRE record a 0.4 per cent increase in rental income for warehouses at the same time as it reported 0.2 per cent increase for offices and a 0.1 per cent drop for retail. The reason for this is that although the race to buy warehouse assets had been driven by cheap debt and speculative investment, the race to rent them is being driven by something much less cyclical: our increasing dependence on eCommerce and – by extension – the warehouse space needed to serve eCommerce.

This would explain why, even as warehouse values fall and a recession looms, LondonMetric has posted a 14 per cent increase in net rental income. A move into other long-income assets such as supermarkets has helped, too. The immense valuation hit can’t simply be waved away, but the underlying business looks strong. Hold.

Last IC view: Buy, 258p, 26 May 2022