Topics in this section: - Covid-19 lockdowns push industrial property value, rent fillip - Expansion lifts shares above net asset value - Structural drivers outweigh cyclical headwinds - Drivers for asset yield tightening gain pace
Covid-19 lockdowns push industrial property value, rent fillip
Lockdowns and shop closings during the pandemic accelerated online-retail penetration by more than 50% compared with 2019, prompting a surge in demand for logistics space that looks set to continue. This may drive rents and values higher for Segro, Londonmetric and Tritax, some of which may already be reflected in share prices.
Expansion lifts shares above net asset value
REITs focused entirely on industrial space are trading as much as 26% above net asset value, indicating continued growth in rental values and investment-demand trends that appear robust, our analysis shows. If the risks hampering retail and office property were to subside, it could trigger some switching out of industrial shares or a reversal of the industrial REITs' outperformance if peers rerate. Merlin Properties' discount reflects its diverse portfolio and 11% industrial exposure by rental income.
The revenue risk to logistics and data-center landlords is low compared with their retail and office peers, since facilities are mission critical, and structural supply constraints may provide scope to replace tenants if all else fails. Evidence supports this, with minimal rent unpaid during 2020.
Structural drivers outweigh cyclical headwinds
Industrial property rent tracks economic vitality, yet despite GDP contraction triggered by Covid-19, the upward trajectory of rent in 1H may continue in 2021 as structural drivers outweigh cyclical ones. Limited supply may add pressure on rent in the short term. This may level industrial with retail rents in some areas, making it cost effective to switch use, especially through urban warehousing. It may also encourage retail landlords to dedicate more space for facilitating click-and-collect services.
We expect urban logistics demand to rise faster than regional facilities unless there's significant repurposing of retail space or innovative distribution mechanisms to smooth delivery. Merlin Properties plans to use car parks for logistics hubs at night, when large trucks can offload into vans for local next-day delivery.
Drivers for asset yield tightening gain pace
The scramble for online-distribution space and data-storage capacity that escalated during pandemic-driven store closings and to support remote working may give industrial space capital values another boost in 2021. Prime distribution facilities across Europe trade at yields under 5%, lower than malls, many of which are valued above 5%, yet the safe-haven status of industrial property and the quest for yield may push yields even lower. As automation and supply chains advance, occupiers are seeking long leases to secure premises, providing investors with long-term income, often on inflation-linked rents.
Segro, Tritax Big Box and LondonMetric have raised equity as well as recycled capital into profitable new development to capitalize on this demand, keep the portfolio fresh, generate new income and create value.
