ii view: Segro flags first hike in UK property values since 2022

First-year results to 30 June

• Net rental income up 7% to £306 million
• Adjusted pre-tax profit up 15% to £227 million
• Adjusted Net Asset Value (NAV) per share down 2% to 891p
• Interim dividend up 4.6% to 9.1p per share
• Total dividend for the year up 5.7% to 27.8p per share
• Net debt down 18% to £4.21 billion

Chief executive David Sleath said: 

“The balance of supply and demand for modern warehouse space remains supportive of further rental growth and development gains in the attractive European markets in which our portfolio is concentrated.

“Competitive advantage of our market-leading operating platform, give us confidence that we will continue to deliver attractive and compounding increases in both earnings and dividends.”

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

ii round-up:

The UK’s biggest property company, or real estate investment trust (REIT) by stock market value Segro (LSE:SGRO) today detailed its first increase in UK property values since 2022.

Net rental income for the first six months to late June rose 7% year-over-year to £306 million, pushing adjusted pre-tax profit up 15% to £227 million. A gain in UK property values was offset by declines in Europe, dragging adjusted net asset value (NAV) down 2% to 891p per share, and hindered by the issue of new shares under a previous £900 million fundraising to pursue growth opportunities.

Shares in the FTSE 100 company fell 2% in UK trading having come into these latest results up 15% over the last year. That’s similar to rival warehouse owner Tritax Big Box Ord (LSE:BBOX) and ahead of the FTSE 100 index, up almost 7%.

Segro owns or manages properties worth close to £21 billion including some data centre buildings. New headline rent commitments signed during the half-year totalled £48 million, up from £44 million in the first half of 2023. 

Development completions added £27 million of potential new headline rent during the period, with a further £49 million of potential rent from development projects still under construction in the offering. 

Segro properties are located in and around major cities and at key transportation hubs in the UK and seven other European countries including France and Germany.

Accompanying management outlook comments noted: “Asset values appear to be at an inflection point in the UK and bottoming out in Continental Europe, and the prospect of interest rate cuts later in the second half should provide support for continued recovery in investment market conditions.” 

A third-quarter trading update is likely mid-to-late October. 

ii view:

Segro is a UK real estate investment trust (REIT) with a stock market listing in both London and Paris. The FTSE 100 company owns and develops urban warehousing and light industrial properties as well as some datacentre buildings. Segro tenants come from a range of different industries including Royal Mail owner International Distribution Services (LSE:IDS), Amazon.com Inc (NASDAQ:AMZN), Federal Express, British Airways owner International Consolidated Airlines Group SA (LSE:IAG) and Tesco (LSE:TSCO).  

For investors, heightened borrowing costs and the uncertain economic outlook continue to overshadow the property sector generally. Values for its European properties have fallen, fellow REITs such as British Land Co (LSE:BLND) have now taken an interest in logistical properties, while the forecast dividend yield of under 4% sits below that of office focused rivals such as Land Securities Group (LSE:LAND) at over 6%.

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• What Labour’s landslide means for investors
• Where to invest in Q3 2024? Four experts have their say

More favourably, the current share price of around 888p sits just below the latest reported adjusted NAV of 891p per share. Structural themes of e-commerce and urbanisation continue to underpin occupier demand. The annual dividend payment has risen for more than eight consecutive years, fuelled by rising rental income, while geographical diversity exists given its properties across Continental Europe.  

In all, and despite continued risks, this giant of the property sector looks to remain worthy of its place in diversified investor portfolios.  

Positives: 

• Diversity of both customer or tenant type and geographical location
• Progressive dividend payment

Negatives:

• Uncertain economic outlook
• Increased competition

The average rating of stock market analysts:

Buy