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Questor: shortage of supply gives this property fund the whip hand – good news for our income
Questor Income Portfolio: Urban Logistics Reit can pick and choose its tenants, so our income derives from retailers such as Amazon
Nothing is more reassuring to an investor than seeing a business with a clear, sensible strategy stick to that strategy.
This is what Questor saw earlier this week from Urban Logistics Reit, a holding in our Income Portfolio.
The property fund had appealed to us in the first place thanks to its focus on medium-sized warehouses needed to meet the demands of online shopping and its determination to let each property only to a single high-quality tenant. On Wednesday it announced the acquisition of three new properties that matched that strategy perfectly.
The Reit said it had paid £10.9m for a warehouse in Fareham, Hants, let to Amazon until 2025. The yield is 6pc. When the lease expires we can expect Urban Logistics, if it sticks to its normal approach, to negotiate a rent increase with Amazon or refurbish the vacated building to make it more attractive to new tenants.
A second warehouse, close to the M1 in Northampton, is currently let to TransGlobal, a logistics firm, until 2030 at an initial yield of 5.8pc, although a rent review is due in 2025. The Reit paid £5.2m for the property.
The third acquired site, in Huntingdon, was bought for £2.1m but is undergoing a “complete refurbishment” at a cost of £4.6m. Thereafter the property will be let to “a multinational delivery services company” on a 15-year inflation-linked lease. Improving sites with a view to being able to charge a higher rent is a key part of the Reit’s approach.
In fact, as its boss, Richard Moffitt, told Questor recently, updating its properties to the most modern standards is part of its strategy to attract the best tenants. “When we upgrade one of our buildings we will often install low-energy LED lights and charging points for electric vehicles,” he said.
“We care about our ESG [environmental, social and governance] credentials and we want tenants that care about theirs too.”
Everyone knows that the pandemic has provided a huge boost to e-commerce and Mr Moffitt acknowledged that such growth was the key driver of demand for the kind of warehouse his fund owns. But he mentioned a second way in which the virus was benefiting the warehouse sector – one that this column for one had never heard of.
“A huge amount of warehouse space is now being devoted to storing PPE,” he said. Mr Moffitt put the amount of space needed at about 15m sq ft, compared with just 5-8m sq ft currently used for PPE storage.
“No future government will want to be caught out by a lack of PPE again,” Mr Moffitt said. “But this huge demand for storage space has pushed the market into a place where there is literally no supply.” Although his fund does not compete directly in this area, as PPE can be stored in unmodernised warehouses, such property is no longer available for conversion to hi-tech logistics hubs.
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This can only help increase demand for the type of warehouse that Urban Logistics does own.
“The acceleration in e-commerce brought about by the pandemic has made it clear that buffers in the logistics system were inadequate,” Mr Moffitt said. “The supply-demand imbalance has been made even more acute – and it was already at its greatest at the smaller end, where we are, because most pension fund investors wanted ‘big boxes’.”
As a result, he said he didn’t expect any problems in getting tenants for his warehouses. “The increase in inquiries has been quite noticeable,” he said.
Some inquirers are likely to be disappointed, however, thanks to the Reit’s insistence on high-quality occupants. “We won’t have a fashion retailer as a tenant,” Mr Moffitt said.
His ability to pick and choose speaks volumes about where negotiating power lies in his industry and hence about the sustainability of his income – and ours.
Questor says: hold
Ticker: SHED
Share price at close: 143p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.