FTSE 350: Reit income prospects diverge

In contrast, the rise of e-commerce and a lack of supply of urban logistics and big-box warehouse space has driven up rents and industrial property valuations, with prime investment yields across multi-let sites falling to 4 per cent at the end of last year, according to research by real estate services specialise Savills (SVS), compared with 6 per cent five years earlier. Given the lack of new space being developed, particularly within the so-called ‘last mile delivery’ market, further consolidation within the logistics market could occur this year, following LondonMetric’s (LMP) takeover of A&J Mucklow in May. The impressive rental growth delivered by industrial property groups has allowed them to trade at premiums to portfolio net asset value (NAV). 

The office sector has been relatively constant in delivering rental growth and maintaining high occupancy rates, but has not been rewarded by investors with the same high valuations. As some of the political uncertainty that caused developers and landlords such as Derwent London (DLN) to trade at sharp valuations to the NAV of their portfolios has dissipated, the discounts being applied to many of these companies have turned to premiums. 

Office assets have been generating relatively stable rental income in recent years, although the rate at which new rents are being agreed above estimated rental values is reducing. Is the market at risk of being ‘over-rented’? During the first half of last year, 11 per cent of passing rent generated by the UK's offices was greater than the open market value, according to research by MSCI and BNP Paribas, a higher level than the retail and industrial sectors.

*The original version of this article incorrectly stated that Warehouse Reit was a constituent of the FTSE 350, that has now been amended