With each week that passes, the question becomes ever more pressing for investors (Louisa Clarence-Smith writes). Is it too late in the cycle to be investing in property?
The answer may lie in the nature of that cycle this time around. Though the global economy is widely believed to be facing its first downturn since the financial crisis of 2008, any new crisis is likely to look different to the previous one. That began when house prices in the United States began to fall. The next recession is more likely to be triggered by global political, rather than financial events, not least Brexit. The Bank of England has said, for example, that Britain has a 33 per cent chance of falling into recession by the end of the first quarter of 2020, even if an exit deal is reached with the European Union.
The solution also lies in the nature of the property you are talking about. In general, property is attractive because it offers a sustainable income when interest rates remain low. However, at a time of uncertainty, sectors such as industrial locations and logistics are seen as safer bets than traditional commercial property, such as shops and office buildings, thanks to the strong underlying demand from businesses wanting to rent space.
And this is where the focus falls on Segro, Britain’s largest listed property company investing in warehouses. The FTSE 100 group has ridden a wave of rising demand for warehouse space from online retailers. Founded in 1920 when a group of businessmen bought a site in Slough covering nearly 26.2 million sq ft, along with more than 1.8 million sq ft of workshops and vehicles that had been used in the First World War, today Segro owns or manages almost 85 million sq ft of space valued at £11.7 billion across Britain and the Continent.
It differs from rivals in that as well as owning sites in the regions, most of its warehouses are close to town and city centres, which cater to the so-called last-mile delivery network and can generate higher rents. Segro’s tenants include Royal Mail, DHL, Ocado, Lidl and Amazon.
Unlike British Land and Landsec, its property-owning listed peers, which invest in retail property and office buildings, Segro has continued to make higher profits. It said last month that its adjusted pre-tax profits had grown by a fifth in the first half of the year to £132 million. The net asset value of its properties rose by 4 per cent to 665p per share. Like-for-like net rental income across its portfolio was up by 3.7 per cent to £136.5 million. Shareholders were rewarded with a 14 per cent increase in the dividend to a little over 6¼p per share.
Segro’s management is predicting that the impact of any economic slowdown will be limited as a result of strong tenant demand driven by technological change. Those trends, which have been evident in Britain for some time, are now accelerating in continental Europe, where Segro is starting to report higher rental growth and asset values.
In the event of a recession, it is strongly placed, given its low financial gearing, high occupancy rates and limited exposure to land. It has 7.5 million sq ft of development under construction or in advanced negotiation, most of which has had the risk removed through pre-let agreements. This pipeline should allow it to increase its net rental income, driving dividend growth.
When this column recommended buying the stock in April, the price stood at 684½p. It is now at 734¼p and has the capacity to rise higher, provided that Segro continues to deliver its development pipeline.
ADVICE Buy
WHY Strong underlying demand for warehouse space provides a secure ground for future rental growth in a late-cycle environment
Aberforth Smaller Companies Trust
Managers of the Aberforth Smaller Companies Trust have described the first half of 2019 as being the toughest start to a calendar year since it began trading (Greig Cameron writes). With that in mind, an 8.3 per cent rise in the trust’s net asset value and a 5 per cent increase in the interim dividend — to 10p — doesn’t look too bad.
As suggested by its name, the trust, run by the Edinburgh-based Aberforth Partners, focuses on smaller businesses, albeit in this case that being ones worth less than £1.3 billion. The trust follows a value style, trying to find companies that it feels are undervalued, and typically holds about 80 stocks in its portfolio. Founded in 1990, it invests exclusively in UK companies and aims to outperform the Numis Smaller Companies Index over the long term. Alas it lagged the benchmark, which delivered a 10.5 per cent return, in the first half of 2019.
Tempus last looked at the trust in January and gave it an “avoid” rating as a result of its exposure to the British economy. With a no-deal Brexit looking a likely outcome in October, those concerns still stand. Many of the stocks in Aberforth Smaller Companies do trade overseas, but there are several that may be affected negatively if the domestic economy suffers.
Urban & Civic, the property investor and developer, Mitchells & Butler, the hospitality operator, Future, the publisher, and First Group, the travel business, are among its ten largest holdings. It is overweight in the consumer services and industrial sectors when compared with its benchmark.
However, the trust does have healthy dividend cover and a progressive policy to reward shareholders, with the full-year payout for 2018 rising 7 per cent to 38p.
The shares fell below 900p after the European Union referendum in 2016, but recovered to more than £14 by June last year. The sell-off in markets towards the end of 2018 wiped out much of those gains and in recent days the stock, which goes ex-dividend this week, has been changing hands for less than £12.
ADVICE Avoid
WHY Dividend is attractive but there may be tough times ahead in a no-deal Brexit
