4 July 2019
By Danielle Sheppard, senior investment director, Barwood Capital
Imagine you have £50 million to invest and you wish to target real estate, specifically industrial and logistics property. Where should you be investing, and why? Oh, and you have just five minutes to convince an audience that your investment strategy is the best.
Well, on a panel of fellow fund managers at a recent industry conference, that was the question posed to me.
My approach aims to turn the £50 million into £75 million while delivering a 5% annual income return.
But how? You might expect me to suggest that the unmissable online rush, growth in e-commerce, and rise in giant grocery and distribution warehouses should be the focus. Well, while this is a very active market, that’s not my strategy.
Where are the hidden gems?
My focus is on the hidden gems that are multi-let industrial sites, those usually found on the edge of towns and cities, along with proactive asset management of income-producing assets in strong regional UK locations.
Why? Due to the relative economic and political uncertainty for the next couple of years, I believe that the MLI is far more resilient to economic fluctuations thanks to the specific underlying asset characteristics: real prospects for income growth, constrained supply of available product, and importantly, resilience to market and economic volatility due to the sector spread of tenants.
The estates targeted will be in core locations but in need of improvements, either through the deployment of capital expenditure to refurbish the properties, or through active asset management, or both. This will further enhance capital value but also attract institutional interest at exit.
Prospects for rental growth
Over the last 20 years, rents on MLI have not increased in line with inflation, with average rents still below £6 per sq ft.
Had they increased in line with inflation, they would currently be more than £8 psf. This demonstrates current affordability and supports prospects for future rental growth.
Vacancy levels nationally are currently less than 5%, the equivalent of full employment, so occupiers have limited choices on expiry and renewal.
This leads to the second characteristic of the market which is constrained supply. MLI stock is diminishing with land being lost to higher value uses such as residential.
The relative low rents and higher build costs, in comparison to large industrial, further limit supply due to lack of new development.
The latest LSH Industrial and Logistics report shows that in 2016, speculative development of units of sub-10,000 sq ft was only 3.3% of the total and 4.4% in 2017.
This constrained supply further boosts growth prospects.
The lack of supply is driving higher retention rates and falling vacancy rates. Since 2009, the proportion of expiries that lead to a vacant unit have fallen from 22% to just over 10%.
The Gerald Eve Multi-let Industrial Guide reports that the lease length and the time to lease first breaks have been trending upwards since 2010.
The diversification and number of tenants improve the resilience of income streams. With a spread of occupiers across the portfolio, should market conditions weaken, these assets are far more resilient.
How do you achieve returns?
Returns will be achieved through active asset management and targeted capital expenditure to drive up rents. The target assets are lot sizes between £2m to £7m in key regional locations with good occupational demand and five-mile availability of stock of less than 6%. Capital value per sq ft being below replacement cost is vital.
This diversified approach to locations, tenants, quality of assets and income profiles will achieve targeted returns of a 5% p.a. income and a total 8% IRR p.a. Gearing for this product is readily available and will boost returns with an average gearing of 30%.
In summary, using the £50 million to accumulate multi-let assets to create a portfolio of core income producing stock and attract keenly priced institutional capital at exit, is my strategy.
Well, I’m proud to say my proposal won! And in fact, it’s a clear endorsement of our strategy to invest in precisely this type of asset with a significant element of our 2017 Property Fund.
My five minutes are up. Hopefully you’re now convinced.
If you’re interested in investing with us in the industrial sector, please click here to contact our Investor Relations Manager, Joy Gordon.