Shares in warehouse developer Segro (SGRO) jumped nearly 4% today after real estate investment struck a confident note after its sector’s second-half mauling last year.

Segro gained 3.7%, or 31p, to 867p, extending its year-to-date rally to 10.5% after annual results confirmed strong tenant demand for the prime distribution space in its £18bn portfolio. 

Chief executive David Sleath said this had offset some of the impact of last year’s severe de-rating of expensive logistics assets, which knocked 15% off the Reit’s net asset value.

With the outlook for interest rates still uncertain in the battle against inflation, investors were reassured by Segro ruling out the need for a share issue to strengthen its balance sheet with its next major refinancing three years away.

‘Our portfolio valuation fell in the second half of 2022 as investment yields rose and values weakened across the sector in response to macroeconomic conditions,’ said Sleath. ‘However, the impact on our portfolio was mitigated by its high quality and the strong rental growth we delivered across all of our markets.’

Bad fall…

A 110 basis point (or 1.1%) rise in valuation yields to 4.8%, exacerbated by the falls in UK government bonds after September’s notorious mini-Budget, sliced 21.4% off Segro’s UK assets in the second half of 2022.

Over the full year, however, the UK portfolio, which accounts for about 60% of Segro’s assets, fell 15.5%, beating the 17.4% slide in the benchmark MSCI Real Estate UK All Industrial Quarterly index.

Segro’s assets in Europe (spread across Poland, the Czech Republic, France, Germany and Holland) were more resilient. Properties held throughout the year fell 12.4% in the second half and by 8.8% over the year.

… but good demand

Overall, the portfolio fell 13.1% in 2022, hit by an average across-the-board increase in valuation yields of 1%, although this was partly ameliorated by valuers upping their estimates of the portfolio’s market rental value by 10.9%.

As evidence of strong occupier demand, the company reported a record £98m of new rental commitments, up from £95m in 2021, and a 23% average uplift on rent reviews and renewals. 

Like-for-like rental growth of 6.7% combined with new developments coming on stream saw net rental income rise 18.9% to £522m. 

Adjusted pre-tax profits rose 8.4% to £386m with earnings per share up 6.5% to 31p, more than covering dividends of 26.3p, up 8.2% after the declaration of a final dividend of 18.2p, up from 16.9p a year ago. 

The business, which manages 9.9 million square metres of property, has momentum with a pipeline of 915,600 sq m of projects under construction or in advanced pre-let discussions.

Chief financial officer Soumen Das told Citywire that Segro built the bulk of its ‘big boxes’ on a pre-let basis but was prepared to construct smaller developments speculatively and un-let, such as the new Park Tottenham, North London. The site, a former self-storage facility that burned down, had achieved a high Breeam environmental rating and was generating a lot of interest from potential investors, he said.

New wall of money

Despite fears that a retrenchment by Amazon last year would hurt the logistics sector, Das said a mix of new commercial tenants had broadly replaced the e-commerce giant as its share of the market slid from 25% to 6% after over-expanding in the 2020 pandemic. The increased diversity of tenants was healthy, he said.

With confidence beginning to return to the real estate market, Das said another ‘wall of money’ from investors could return to the logistics sector which continued to benefit from a state of high demand and low supply. 

Whether that will be enough to return Segro shares to their £14.36 peak at the end of 2021, before interest rate fears struck, is a moot point, but Numis Securities reiterated its ‘buy’ rating. Real estate analyst Max Nimmo said the shares’ 13% discount to net tangible assets and 3.7% earnings yield was ‘attractive for a business that is still able to deliver mid-to-high single-digit earnings growth compounding each year’.