Continuing our countdown to Christmas, Colin Godfrey considers the potential of large logistics facilities when investing for income in the present low-yield environment.
It seems that the world is becoming less predictable. Brexit and the US presidential election results prove the point. The FTSE 100 delivered capital growth of just over 4.6% in the last three and a half years. Investors have concentrated on capital preservation and there has been a thirst for income. Bank deposits are a real wasting asset and some European bonds remain negative-yielding.
Tritax Big Box is dedicated to investing in very large modern and versatile distribution warehouses in the UK, let to some of the strongest international companies and brands for up to 16 years. We apply a core strategy, modest leverage - greater than 40% of value - and current dividend yield of approximately 4.8% per year with transparent growth potential from upward-only rent reviews (a combination of fixed, inflation and market rental linked).
E-commerce sales fulfilled by large warehouses were up nearly 27% over the year to October 2016, yet this represents only around 15% of UK retail spending. Occupiers are upscaling - for example, Marks & Spencer has moved from more than 50 smaller distribution buildings into two facilities of over 900,000 sq ft. Such facilities can provide significant cost savings and efficiencies.
Income growth
Income growth is underpinned by an acute imbalance between supply and demand for very large warehouses, with zero availability of new or modern stock over 500,000 sq ft in the UK, compared with very strong demand for efficient buildings that are capable of delivering more quickly and efficiently for both store replenishment and directly to consumers.
Increased speed and reliability require automation, the cost of which can be up to hundreds of millions of pounds. This level of financial commitment by occupiers, combined with an understanding of the strategic importance of location-to-market, has caused occupiers to desire longer lease commitments of up to 30 years.
2017 outlook
So what is the outlook for 2017? With the devaluation of the pound, imports are more expensive. It is likely this cost increase will be shared between the supplier, the retailer and the consumer.
Efficiencies and cost savings possible from these buildings will, therefore, be important in soaking up some of the cost increase. In 2016 yields softened for high street retail and offices but held up for industrials. We expect this to continue, with yields underpinned by unabated rental growth and the expectation this will continue through 2017 and beyond.
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The views and opinions contained herein does not constitute advice. This has been created for financial adviser use only, and is not intended for use by individual investors. Past performance is not a guide to future performance. The value of an investment can fall as well as rise and is not guaranteed which means your clients could get back less than they invest.
