Tritax Big Box has growth potential despite tough year

As might be expected after the warehouse boom was followed by the worst commercial property downturn since 2008, warehouse developer Tritax Big Box Reit (BBOX) swung to a loss in its results for the last calendar year thanks to a chunky valuation slump. The mood music has meant the equity market is now pricing in another 17.3 per cent drop through its discount to net asset value (NAV).

However, we think this is overdone. The discount is almost as much as last year’s 17.9 per cent NAV hit, and the data just doesn’t support another drop that big. Rather, according to real estate capital value numbers from CBRE, the trend curve in warehouse valuation declines suggests that the worst may be over. This does not mean a surging return to valuation growth, with Oxford Economics predicting paltry capital value growth of just 2.7 per cent over the next four years, but that is more than it is predicting for any other sector. Either way, the price is not justified.

This is especially true when you consider the underlying performance of Tritax Big Box. Operating profit, which looks at income from rent and service charge less operating costs but before valuation hits, is up 2.9 per cent, and there is scope for this to grow further. According to Savills, despite the economic malaise, last year saw the third-highest amount of newly leased warehouse space on record and supply is the lowest it’s been in any year on record apart from 2021. This is because the need for warehouse space is a response to the growth of online shopping rather than economic cycles.

Servicing that demand will mean developing assets in a higher debt environment, but the underlying business case remains strong. So, with the shares changing hands at a 17 per cent discount to FactSet consensus EPRA NAV for 2023, we remain buyers. Buy.

Last IC view: Buy, 149p, 17 Nov 2022