Segro was primed for trouble heading into last year. Raging inflation and higher financing costs for commercial property investors had unravelled the warehouse landlord’s meaty premium.
Shares in the former stock (and property) market darling have declined by almost 40 per cent since the start of last year, equating to a 32 per cent discount to the value of the group’s assets at the end of June.
That the underlying worth of Segro’s logistics assets has fallen since then seems likely. The value of industrial assets in the UK sank by just over 17 per cent over the first 11 months of last year, according to CBRE, the property services group. That is a period that includes the chaotic fallout from the mini-budget, which led two-year gilt yields to spike at more than twice the level they traded at two months earlier.
But the slide in the prices being attributed to warehouse assets began in July, according to CBRE’s data, a result of rising interest rates and a downturn that stifled demand from corporate occupiers. Since June, analysts have steadily downgraded expectations for where Segro’s net asset value will end this year, forecasting £10.46 a share, according to Refinitiv data. If accurate, that would represent a decline of just over 6 per cent on the company’s 2021 asset value.
That seems small fry compared with the hefty falls recorded by the retail and office markets, but it should also be judged against the heady rise in value in previous years. Between the end of 2019 and 2021, Segro’s net asset value rose by almost 60 per cent, a result of the rapid rise in ecommerce, ultra-low vacancy rates and gains made on developing new sites. Still, signs of weakness from stocks that benefited the most from the tumult of the pandemic are harshly punished.
Segro’s shares are priced at an 18 per cent discount to the NAV forecast at the end of December this year. The magnitude of that discount reflects the high level of uncertainty about where Segro’s valuation will land. June values, the last available, are out of date. In the third quarter, take-up of space equated to rent of £16 million, half the level agreed in the same period the year before.
Segro’s tenant base spans almost 1,500 companies. What a lot have in common is a reliance on consumer spending. The US ecommerce giant Amazon is its biggest tenant, representing 7 per cent of headline rent. Moves by Amazon to downsize its footprint after an overexpansion during the pandemic hardly bodes well. Other high-profile names that might raise an eyebrow include the electric car maker Tesla, the grocery delivery group Ocado and the DIY retailer Toolstation. Just under 40 per cent of new lettings came from sectors linked to ecommerce in the first half of last year.
Scale separates Segro from the rest of the London-listed industrial landlords. So does a lengthy pipeline of developments. The FTSE 100 group’s roster of schemes could add £86 million of potential annual rent, Segro reckons, which would represent 15 per cent of its existing rent roll. Most of the committed developments have been let, but 36 per cent of space has not.
Is it relevant that the pipeline is weighted more heavily towards big boxes than urban warehouses? That is a part of the market where capacity is growing more quickly and where rents are forecast to grow more slowly, at between 2 and 4 per cent versus the 3-6 per cent increase Segro reckons its urban warehouses can notch up over the medium term.
About 78 per cent of the debt pile has been fixed, which eases the pain of higher finance costs on the bottom line. The pace of rate rises this year will be key to catalysing a recovery or sending Segro’s shares south.
ADVICE Hold
WHY The discount adequately reflects a likely decline in the value of Segro’s net asset value
Impax Environmental Markets
Convincing investors to park their cash in funds that display green credentials requires something more than worthiness. Impax Environmental Markets rightly asks to be judged on its ability to outperform the MSCI All Country World Index, a yardstick that incorporates global equities rather than only those with a sustainable bent.
The comparison is not working in Impax’s favour. Investing in globally listed companies specialising in clean energy, water and waste management has exposed the FTSE 250 investment trust to the sell-off in highly valued growth stocks in favour of value plays.
The result? At its peak the average price/earnings ratio of the 58 companies held by the trust stood at a multiple of 26, or a premium of more than 40 per cent to the MSCI index.
As inflation has risen, the value of the fund’s assets have slid 15 per cent, against an 8 per cent decline in the trust’s global benchmark. The shares’ chunky premium has slipped to a 2.9 per cent discount against the value of the underlying companies.
But there are reasons not to write off the fund completely. For one, Impax is not interested in the raciest and most speculative green companies. An historic allowance for up to 10 per cent of the portfolio in unlisted companies was scrapped before the current downturn and none of its holdings are pre-profit.
Also the portfolio’s price/earnings multiple is now just over 18, back in line with the long-running average. If inflation has already peaked, as some economists suspect, some of the companies that have been most beaten down by rising consumer prices and looming global recessions could kick higher.
The Impax fund eyes a longer-term horizon, holding stocks for an average four to five years. Over the latter timeframe, the trust’s net asset value is up 57.5 per cent, compared with a 45.1 per cent rise in the global index. Naturally, that reflects a period when global interest rates were in and around historic lows. Pushing returns higher will not be as easy over the next couple of years, but the worst of the pain might have already been felt.
ADVICE Hold
WHY The worst of the fall in asset values could be behind the trust if inflation eases
