LondonMetric chief executive Andrew Jones is predicting robust demand for warehousing in the year ahead, despite sharpening yields.
Jones said that prime yields look set for further compression, noting that they have already been pushed to a record low of 4% as investors “frantically” look to exit legacy assets and “take advantage of the sector’s strong dynamics”, which have been strengthened by the pandemic. This only looks set to continue in the longer term, he added.
“We believe that in a world of zero interest rates, vanishing dividend yields and negligible bond rates, income is effectively a scarce commodity and real estate has a fantastic role to play at that,” Jones told EG.
He said that a long-let property offers a more competitive proposition than a 10-year government gilt, ensuring that industrial and logistics will remain in high demand.
“Why at 3.5% is well-let, structurally supported real estate with an attractive demand dynamic not attractive?” said Jones. “What Covid has done is bought interest rates that were already low back down to zero.
“There is a danger secondary logistics in certain locations that are let to certain retail credits can align themselves a bit too tightly. But a 15-year lease let to Sainsburys, Amazon, Primark – these [properties] will trade in the mid-threes.
“It’s not cheap but we are in a zero-rate interest environment with melting dividends and negligible bond yields. Where else do you get a yield? Office yields with short occupancy, reducing usage, capex issues and at 4% or 5%, look expensive [in comparison].”
The Covid-19 crisis has undeniably sped up structural shifts in consumer demand and shopping patterns. But in the longer term Jones believes the pandemic-driven disruption in the logistics market will dissipate, to be replaced by investors seeking more warehousing as a result of Brexit uncertainty as well as possible disruption in future trade links with China.
He said “just in time” logistics infrastructures will be replaced by “just in case” strategies, in which businesses may expand to certain locations for holding more inventory “just in case”.
“I absolutely see this happening,” said Jones. “That underpins an already relatively attractive supply and demand dynamic for warehousing.”
Jones’s comments come as LondonMetric posted a solid set of results for the six months to September, driven by its focus on the logistics and grocery sectors. Net rental income has risen by 12% to £61.3m year on year, with rent collection at 98% for Q3.
The value of its property portfolio value has risen to £2.4bn, from £2.3bn in March. IFRS net assets have grown by 12% to £1.6bn, while EPRA net tangible assets per share are up by 3% to 175.5p.
The firm has completed 251,000 sq ft of developments, with a further 657,000 sq ft under construction. It is proceeding with a 350,000 sq ft logistics scheme at its Bedford Link Logistics Park and 120,000 sq ft at Tyseley.
The Bedford scheme is expected to be ready for occupation in Q3 next year.
“Despite it being an unprecedented period, [our numbers are] a vindication of our strategy and our takeover of AJ Mucklow, which has been a big contributor,” Jones said.
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