Warehouse and logistics Reits emerged as one of the clear winners of the pandemic as lockdown restrictions sent the already-growing ecommerce market into hyperdrive.
As online sales soared, space to store items to be sold online became more in demand, making trusts which specialise in warehouses a hot commodity.
The trio of trusts in the AIC Property – UK Logistics sector saw their shares soar. Tritax Big Box, the largest, was trading close to a 30% premium last year.
But a recent profit warning from Amazon has rattled the sector and sent shares crashing down to earth.
The ecommerce giant was not able to sustain the momentum in online sales it saw during the pandemic in the first quarter and admitted it had overestimated the amount of warehouse space it would need.
Tritax Big Box sees shares fall over 20%
Amazon leased 24% of the UK’s entire volume of logistics space in 2021, and investors are nervous the warehouse Reits are overly reliant on its growth and expansion plans.
Tritax Big Box, which counts Amazon as one of its biggest tenants, lost 8% off its share price in the immediate aftermath, as did Segro, another London-listed Reit. Year-to-date both have lost a fifth of their value.
Urban Logistics and Warehouse, which also sit in the Property – UK Logistics sector, have held up slightly better, with shares down 5% and 9%, respectively.
More aggressive rate hiking from central banks to rein in inflation has also created an additional headwind for property assets generally and has dampened investor enthusiasm.
Rate hikes could cause short-term weakness
Chelsea Financial Services senior research analyst James Yardley says the warehouse/logistics space “overheated” during the pandemic, so it was only a matter of time before there was a correction.
“There wasn’t a big dividend to support the share price,” he says, noting that even after the fall, Tritax Eurobox, Big Box’s European-focused sister strategy, is still only yielding 3.28%. Its shares have also fallen over 20% to 94p.
However, he isn’t reading too much into the recent volatility. “We like the space long term. It’s just a normal investment cycle of investors getting over excited and now being brought back down to earth by reality.”
Killik head of managed portfolio services Mick Gilligan also doesn’t expect to see any short-term reversal in demand.
“According to CBRE, at the end of last year, just 17.2 million square feet of space was available, representing a drop of vacancy rate from 4.1% at the end of 2020 to 1.6%,” Gilligan notes.
“I think there may be some further short-term weakness if rates continue to rise. However, I think the longer-term supply and demand picture, coupled with rental contracts that typically rise over time means the longer-term picture remains attractive.”
See also: Uncertain future for UK property funds as LTAF rule change looms
‘More to the UK logistics market than Amazon’
Despite Amazon seeing a slowdown in sales, demand for UK big box assets was “record-breaking” at 10.4 million sq ft of take-up in the first quarter and an “acute shortage” with 1.6% vacancy, Jefferies analyst Mike Prew points out.
It is also coming from a “broad range of occupiers”, with Amazon only accounting for 3% of take-up over the period, according to Savills.
Ryan Hughes, head of active portfolios at AJ Bell, agrees: “There is much more to the logistics market than Amazon. Demand for space continues to be high and it comes from a broader base than just retail.
“Tritax Big Box’s most recent statement indicated very strong demand while Urban Logistics also pointed to recent rent increases of over 20%.”
The fact Big Box is now trading at a 5.9% discount but still has a large pipeline of development opportunities and is yielding over 3% “may tempt some to take a fresh look”, he adds.
“On a long-term basis, the trends that have pushed logistics assets forward do not seem likely to disappear and while there may be some bumps in the road in the short term, looking further ahead, this does look like one of the more appealing parts of the property market.”
See also: Raven Property to de-list after Russian sanctions make it ‘impracticable’ to carry on
