Big boxes are big business and they are about to become even bigger. Tritax Big Box Reit, an investor in distribution centres, has grown market capitalisation from £200 million to £3.6 billion by building or acquiring 100 warehouses for companies such as Amazon, B&Q and Ocado to receive goods and send them out to branches or customers. A deal last month has the potential to transform the company into a very different animal, however.
It has bought 74 acres at Manor Farm, near Heathrow airport, to develop a major data centre. The company is aiming to start construction on the site in the first half of next year, creating 448,000 sq ft of data halls across three floors. A possible second phase could add further capacity.
Both phases are subject to planning approval, but it would be a brave local authority that turned this down in defiance of a government desperate for economic growth. On January 30, Sir Chris Bryant, the minister for data protection and telecoms, said: “Without enough data centres, artificial intelligence will run out of juice. We have just over 500, putting us third globally, and in the AI Opportunities Action Plan, we committed to upping public computing power twentyfold by 2030.”
The Manor Farm announcement sent the shares up from 129p to 149p and there looks to be more to come. They tumbled from a five-year peak of 249p at the outbreak of the Ukraine war amid the economic downturn three years ago and have since been in a 124p to 168p range. They could now be poised to break out.
Tritax management are not publishing specific targets for how many data centres they want, saying only that they expect them to become “a meaningful part of the portfolio”, but realistically they could account for a quarter of the portfolio by 2040. That would have a direct impact on profits, as Manor Farm is due to produce a 9.3 per cent yield compared with 7 per cent for new logistics centres. The group is generating funds for expansion by selling older centres yielding only 5 per cent, so the average is rising.
Tritax is managed by the unquoted Tritax Group, which also manages the privately owned Tritax Europe. While the board of Tritax Big Box has the right to end that relationship, it is hardly an arm’s length arrangement.
As data centres interact with cloud computing, a lay observer might think them impervious to distance and therefore capable of being located on the cheapest and most remote land. Not so, it seems. Greater distance perceptibly slows data transmission, so Tritax is committed to circling London, where customers such as Google, Meta and Apple have UK headquarters. However, London’s geographical position is a positive, as it is a halfway house for data communication between the United States and continental Europe.
These centres consume vast quantities of electricity but before Tritax buys land it ensures it has access to enough power, unlike some of its rivals. This may influence the location of the next generation of small nuclear plants, to secure supply for data centres.
Last February, Tritax paid £924 million in shares for UK Commercial Property Reit, known as UKCM, which owns higher yielding small warehouses as well as hotels, offices and leisure centres that were expected to be sold post-merger. That boosted the total portfolio value, including a land bank, to £6.5 billion, nearly twice the market cap. Its debt is only 29 per cent of asset value, with £500 million available to borrow, so there is plenty in the locker.
While the hunt is on for data centres, the group will keep adding to its logistics portfolio, having recently opened Britain’s biggest warehouse, 2 million sq ft for Amazon at Littlebrook, on the Thames. Expect more detailed plans with the full-year results due on February 28.
Shore Capital calls the move into data centres a game-changer and sees the price-earnings ratio falling from 16 to 14.9 over the next two years, and the dividend yield rising to 5.7 per cent then 6 per cent.
Advice Buy
Why Tritax is on the verge of long-term transformation
GCP Infrastructure Investments
Data centres are part of the government’s drive to improve Britain’s infrastructure and the sector’s specialised investment trusts offer a straightforward way of accessing a wider and thus arguably less risky spread of assets and projects. Interest has been stimulated by last week’s news that BBGI Global Infrastructure had accepted a £1 billion takeover by British Columbia Investment Management, the Canadian pension fund manager.
Colette Ord, head of real estate, infrastructure and renewable funds research at Deutsche Numis, said: “We believe the infrastructure investment trust sector can provide meaningful real returns by investing in growth areas like the transition to net zero and the digital revolution. Combined with the prospect for narrowing discounts, this means there is potential for outsized share price returns. Infrastructure investment companies currently offer some of the highest dividend yields in the wider investment trust sector.”
For income-seeking investors, GCP Infrastructure Investments is among the less risky as it buys debt rather than equity, lending money to special purpose vehicles building the assets. They appoint a contractor to run the business, then take income from rent or selling energy.
When GCP was floated on the stock market in 2010, it was largely committed to social housing but has shifted its focus towards environmental projects. There may have been too big a tilt towards wind and solar power, as its income was dented by last year’s unfriendly weather. On January 30, the trust sold two wind farms for £18.8 million in cash and tax benefits. Now it is going for decarbonisation across health, education and agriculture through methane, biomass and hydrogen, in line with government targets to remove 50 million tons of carbon a year. Nearly half GCP’s portfolio has contractual inflation protection.
The management are plainly affronted by the shares’ 30 per cent discount to net asset value, which has thrown up a 9.7 per cent dividend yield. The trust has paid dividends every year, cutting from 2020 only because of near-zero interest rates then. Deutsche Numis analysts say: “We believe sentiment is at a low ebb and ultimately the shares likely offer value.”
Advice Buy
Why A reliable beneficiary of the infrastructure drive
