For a brief moment last week, Landsec was dethroned. When the markets closed on 19 July, SEGRO’s market cap stood at £6.87bn – just ahead of Landsec’s £6.85bn.
SEGRO had toppled the largest UK-listed property company. Had England won the World Cup, I’m sure there would have been some kind of tenuous parallel that could have been drawn out.
As it happens, England didn’t win, but the tussle between SEGRO and Landsec rages on – at the time of writing, Landsec has inched ahead and SEGRO’s shares have traded sideways. But the back-and-forth between the two giants is a temporary stalemate in a battle that SEGRO will in all likelihood win very soon.
If not SEGRO then who?
Share price performance since January shows a stark difference between SEGRO and Landsec. SEGRO’s share price has surged by more than 15%. Landsec’s is down by nearly 8%.
The two companies performed roughly in line with each other throughout the first five or six weeks of the year, but SEGRO pulled ahead when it released its full-year results in February. A solid 13.6% rise in the value of its portfolio combined with an EPRA NAV increase of 16.3% gave investors yet another reason to back the warehouse specialist.
Meanwhile, Landsec’s NAV fell marginally and – in a wholly unsurprising statement – chief executive Rob Noel said demand from retail occupiers was weaker than expected. True, Landsec’s retail assets outperformed the IPD average (1.9%, against 1.5% among shopping centres) in the year to March, but with close to 40% of its portfolio weighted toward shopping centres and shops, combined portfolio performance was just 4.3% compared to the IPD average of 10.1%.
The problem for the FTSE 350 property market is that it seems to have more in common with Landsec than with SEGRO, down an average 1.1% since the start of the year. Office and retail rental growth rates are subdued compared with the industrial sector, leases tend to be shorter and unless you’re someone like Safestore, offering an alternative product, investors are wary.
Great – but will SEGRO’s growth continue?
Analysts continue to be bullish over SEGRO’s prospects, but growth can’t go on forever. If you were to back SEGRO or Landsec today, would you make a decent return? After all, SEGRO is trading at a 9.5% premium to its latest reported NAV, while Landsec is trading at about 33% below its
value. Despite reporting strong results in its half-year update, this week SEGRO’s shares were mostly flat.
Its NAV was up by 8.5% and its portfolio valuation was up by 5.9% in just six months. The market has priced in industrial yield compression and is used to this kind of growth from SEGRO.
Some might argue that’s a reason to back Landsec instead.
SEGRO does have the fundamentals for further growth: it is reliant on secure income on long leases in a sector where rents continue to rise and yields continue to fall. It seems as if every time SEGRO releases a new report, its development pipeline grows – as does occupancy.
Expecting the same level of market growth that has been seen in recent years might be optimistic.
Dreams and dangers
And while trading at a premium is the absolute dream, the danger, however slim, is that the premium will disappear the second the market sniffs out a fall in industrial values.
In the battle for the top, SEGRO is in a stronger position than Landsec. Its share price is likely to keep growing even if it’s not at the same rate, and given the premium to NAV, SEGRO can issue new equity and fund new acquisitions in a way Landsec is constrained from doing.
Given SEGRO’s direct focus on development and growth, which it reaffirmed its results this week, that option could look very attractive going forward.
That puts SEGRO in a position where its premium is not too much of a concern for investors jumping on the industrial gravy train.
It seems the market is saying: when it comes to SEGRO, you might not like the price, but you know what you’re buying. That’s the kind of security the company wanted to give its shareholders in its half-year results, and it’s the kind of security that will eventually propel it to the top.
To send feedback, e-mail karl.tomusk@egi.co.uk or tweet @ktomusk or @estatesgazette
