April 29, 2019
Investors tend to lump industrial and logistics property together but, as entrenched consumer buying habits push online sales towards 25% of total UK sales, logistics real estate is a corner of the sector breaking free of its traditionally cyclical nature.
In recent years money and media attention has chased the vast distribution warehouses used by the likes of Amazon. Smaller sheds under 200,000 square feet have gone under the radar but demand for them is strong.
Urban Logistics owns a portfolio of smaller “last-mile” warehouses that enable the likes of Boots and DHL to offer next-day delivery. It aims to generate high-quality income backed by institutional grade tenants, outperforming multi-let and larger warehouse assets.
For every £1 billion of new online retail sales, businesses need to find approximately 1.125 million sq ft of additional distribution space. Based on current online retail growth forecasts, the UK needs approximately seven million square feet of new space annually. Getting it wrong is costly, too, as AIM-listed music instruments specialist Gear4Music found out when distribution problems ruined Christmas trading.
The UK’s supply of warehouses has fallen 36% compared with 2012 and cannot keep up with demand. New-build costs are high, planning controls remain restrictive and available land is often being put to other uses.
For all these reasons, Urban Logistics is in an exciting (if somewhat unglamorous) business. It listed on AIM in April 2016 and has since built a £185 million portfolio of warehouses across the UK, generating annualised NAV and dividend returns of 17.7%.
It’s on track to achieve 10%-15% total returns in the year to March 31. A fifth of its warehouses have tenants whose leases will soon be up for negotiation, meaning shareholders can look forward to growing rental income as rents rise to reflect market rates. Savills thinks nationwide rental growth is expected to average 11.5% up to 2022. In London prices will rise nearly 19%.
Run by ex-CBRE logistician, Richard Moffitt, the company is fully invested and has a strong pipeline of acquisition opportunities. Future fundraisings will open access to its equity, especially attractive now as the shares trade at a discount to NAV of around 7%-10%, making it something of a bargain.