European Logistics’ valuation should be richer

There are a couple of good reasons for this bullishness. The first will be well known to anyone who has found their shopping habits change over the past two decades: the unstoppable rise of e-commerce. Same-day orders and last-mile delivery have all juiced demand for warehouses, fulfilment centres and dark stores. A cluster of listed specialist landlords, led by FTSE 100 constituent Segro (SGRO) and including Tritax Big Box (BBOX), Urban Logistics (SHED) and Warehouse Reit (WHR), has seen this focus vindicated. Over the past three years, shares in each of these have delivered at least 19 per cent annually on a total return basis (where dividends are reinvested). For Segro, this rises to 31 per cent.

The second reason for investors’ confidence is the scarcity of stock. This is particularly true of so-called ‘very large logistics warehouses’, the kind of cavernous, highly-automated sorting centres in which Amazon (US:AMZN) specialises and where workers are currently being offered Christmas sign-on bonuses of up to £3,000. In the UK, these out-of-town fulfilment centres can be as large as 1m million square feet (sq ft), not the sort of site local authority planning departments wave through in a hurry. As a result, supply is curtailed.

When these assets do come to the market, demand from would-be landlords is arguably even more intense than e-commerce tenants. “You can have 15 different groups competing for quality sites now,” says one estate agent specialising in warehouses and logistics, and who describes some recent winning bids as “bonkers”. The allure of strong, long-term tenants occupying an asset that can easily be re-let has led some large institutional or sovereign wealth fund buyers to bid up values, in turn pushing down net initial rental yields.

Even at the smaller end, supply is limited. A recent report by the commercial property consultancy Knight Frank found that vacancy rate for units under 100,000 sq ft in urban areas across the UK is just 3.2 per cent and expected to fall further. In Edinburgh, Birmingham and Manchester, vacancy rates are already below 1 per cent.

None of this is a reason to bet against these UK landlords. On the contrary, rents – which for many logistics occupiers makes up a small proportion of their overheads – are predicted to grow. Industry figures expect industrial assets to perform well over the next two years. But tightening supply-demand dynamics could put a cap on portfolio-growth prospects, diminishing the sub-sector’s capacity to continue its historic outperformance.

Our take is that investors should keep logistics assets on their radar, and simply look beyond the UK.

All of which serves as a roundabout introduction to Aberdeen Standard European Logistics Income (ASLI), a continental Europe-focused landlord specialising in mid-sized warehouse logistics assets. Despite a stutter start since its December 2017 listing, a combination of recent events and management confidence suggests that a rating at a discount to UK peers could narrow in the coming months, as investors catch on to the growth story.

Later adopters

Like its UK peers, ASLI is well geared to growth trends in online shopping. Unlike its UK peers, its core market is a lot further from saturation. Analysts at broker Berenberg believe that, despite last year’s leap in e-commerce penetration from 11 to 15 per cent in western Europe, “the continent remains at least eight years behind the UK’s growth trajectory”, where a “more mature big box market…is dominated by longer-dated, index-linked leases, offering lower growth potential”. For example, in the Netherlands, where 44 per cent of ASLI’s portfolio is located, online sales are expected to climb from 18 to 26 per cent of consumer purchases in the five years to 2025 (see chart).

Little about the trust’s share price chart seems to reflect this strong outlook. Over three years ASLI’s shares have posted a total return of 21.3 per cent, in line with the FTSE All-Share, as investors have digested a series of share placings and waited for funds to be deployed so that rental income can cover dividend payments.

But results for the six months to June suggest the landlord is starting to find its feet. Although earnings were knocked by higher-than-expected direct property expenses and tax, collections hit 99 per cent, with just one invoice – for €258,000 (£218,000) – outstanding for the January rent on a warehouse let to Office Depot France. Although the tenant has entered administration, the rent has continued to be paid, and ASLI will be able to draw down on a three-month rental guarantee once the lease expires and the process of finding a new tenant begins. This also has the potential to lift rental income and reverse a €6.5m short-term valuation reduction.

The warehouse, located in Meung sur Loire, is one of 16 assets which are leased to 44 tenants in a range of sectors (see chart) and spread across Spain, France, Germany, Poland and the Netherlands. Of these, nine are new builds and 10 have been constructed since 2018. Nine are also now fitted with rooftop solar panels, including two warehouses in Ede and Den Hoorn after two roof leases were signed, adding €100,000 in annual income and a €1m valuation uplift. The investment manager has signalled similar schemes across the rest of the €493m portfolio may be implemented.

A vote of confidence

Investors can expect the net asset figure to soon jump, following last month’s £125m equity fundraise at 109p a share. The placing, upgraded from an initial £75m after strong institutional investor interest, will be used to fund the purchase of a large pipeline of pan-European logistics assets. Although the company hasn’t provided much detail on the assets it is targeting, two deals struck this year indicate what might be in the offing. 

The first, a 34,000 square metre warehouse in Lodz with a net initial yield of 5.5 per cent, was acquired in April for €28m. By 30 June, its value had risen 4 per cent. The second, a modern urban logistics warehouse in Barcelona, was bought in July for €18.8m. Although the asset is under-rented – thereby flattering the net reversionary yield of 4.7 per cent – the investment manager believes rental negotiations could lead to a boost in capital value.

Investors can expect some cash drag in the months ahead as the investment manager deploys its proceeds, meaning a medium-term view is required. Since listing ASLI in 2017, the investment manager has proved its ability to source deals, and can point to a wide European office network, local contacts, and experience in managing €17bn of logistics assets to find more. This, together with sub-1 per cent interest rates on ASLI’s debt, good tailwinds and a preference for mid-sized, modern and therefore more liquid assets, helps explain why portfolio manager Evert Castelein describes himself as a “very happy fund manager”.

At 112p, the shares trade just above the latest fundraising price, but sit at a 13 per cent discount to the average of analysts’ forecasts for NAV by December 2022, which looks sufficiently enticing.