Invest-ability daily 26/10/21: Hot Property

One section of the property industry is enjoying the supply chain crisis

There is a new shortage in town: warehouse space. According to estate agents, the amount of warehouse space available to rent in the UK is at its lowest level since 2009 and could run out within the year as online shopping continues to accelerate, companies tweak their supply chains in response to Covid- and Brexit-related disruption, and materials shortages mean new supply isn’t coming to market quickly enough. In particular, a lack of steel for racking is causing major problems, pushing out the lead time on new logistics facilities and raising the cost.

It’s the same story in the US, where according to the WSJ warehouse availability fell to a record low in the third quarter, and container ships sit outside major ports waiting for a space to unload their cargoes. Companies are said to be storing goods in parking lots and farmers’ fields as a result – and the finger is being squarely pointed at Amazon for cornering the warehouse market in many regions.

I’ve been meaning to write about property for a while, not least because real estate is often seen as a good hedge against inflation. Beyond the very risky strategy of borrowing to the hilt to buy bricks and mortar and hoping inflation whittles your mortgage away, I’m not really sure if there is much evidence for this claim beyond the idea that property values rise steadily over time. And indeed, I suspect we will be hearing the case made for all sorts of asset classes as an inflation hedge should inflation prove sticker than expected.

Of course, one needs look no further than Japan for evidence that property isn’t, in fact, a one-way bet – between 1980 and 1991 Japanese commercial land prices increased five-fold, only to start the new millennium back where they started. At its peak, aggregate Japanese real estate was valued at 4 times that of the US despite being 25 times smaller and housing 200m fewer people.

Or you could look a but closer to home at the owners of shops, and in particular at Intu Properties. The pandemic proved the death knell for the company, but in reality, an ever-evolving retail market – Bluewater across the river, Westfield at Stratford and e-commerce everywhere – had already weakened it. Could the office property market follow suit now that remote working has become the norm?

A lack of confidence in the outlook for both retail and office property is reflected in the discount to NAV at which many like British Land, Land Securities, Derwent or CLS currently trade. Hammerson looks the most reviled of all – its share price currently stands at 40% of NAV, helped down by ongoing news of decimated footfall at its shopping centres, which include Brent Cross and Birmingham’s Bullring – both, I should mention, once seen as state-of-the-art transformations of the retail experience.

Now state of the art means delivered straight to your door, so it’s no surprise that among real estate investors those providing – you guessed it – warehouses are in hot demand, with the likes of Tritax Big Box, Segro, Urban Logistics and Warehouse Reit trading at huge premiums to the value of their book. Some of that can be explained by confidence in major development programmes, as Segro outlined in its recent results. But some of it is almost certainly sentiment-driven – witness Tritax’s significantly oversubscribed placing at the end of September. Yields in the sub-sector have been compressed to the point where they’re well below the current level of inflation – in other words, value is increasingly hard to find.

Perhaps what we are really seeing is sentiment swinging, as it often does, between fear and greed. The reality is that online shopping is unlikely to fully replace the physical, any more than working from home will fully replace the office (I am definitely getting tired of my kitchen table). Supply chain logjams are unlikely to last forever, which means demand for space could moderate. And a battle for good brownfield land between industrials and housing could stymie development plans. There has been talk for some time that the warehousing industry could be in bubble territory, yet so far, the only bubbles have been in the wrapping you’ll find in many of them. But lofty prices mean investors should be careful to protect themselves from any shift in the narrative that might turn sentiment the other way.

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