JANUARY 2024

Focusing on the Essentials - Why we own SHED(s)

Every economic event has economic parents, grandparents and even great grandparents. The inflationary environment today for example:  the Russian invasion of Ukraine and Global Pandemic of 2020. But governments and central banks response to these events were based upon their experiences during the Global Financial Crisis (2008/2009). The invasion of Ukraine could (but not solely) be linked back to the fall of the Soviet Union in 1991. This analogy is not my own, unfortunately, but taken from the US writer Morgan Housal, whose new book “Same as Ever” is on my nightstand currently.

As part of the ongoing ‘Why we own’ series, we thought we would take some time to look at Urban Logistics REIT- which trades under the rather excellent symbol of SHED on the London Stock exchange.

SHED is a £540m* Real Estate Investment Trust. The company’s objective is to purchase, rent and invest into UK urban warehouses. These assets typically sit on ring roads around major conurbations in the UK. They are often used to provide “the last mile” access to the UK consumer – i.e. where packages are unloaded from trucks and placed into delivery vans.

 To follow through with our economic analogy, SHED’s economic parents are global financial crisis and Jeff Bezos of Amazon. After the global financial crisis UK banks faced a wave of new regulation. Banks were forced to categorise loans into different groups and hold more capital (safe assets) against each group of loans. This made Banks think very differently about the loans they made. One area where banks reduced activity dramatically was construction lending. If you wanted to build a warehouse, but you did not have a good quality tenant signed up to buy or rent the asset on day one, there was little chance a bank would lend you the money to build the building.  This led to a shortage of new supply. In 2009/10/11 this did not really matter as there was plenty of empty space from the previous construction boom. But as this space was let and no new assets were built, supply began to get scarce. Shortly after, in 2012, Jeff Bezos gave an interview in Forbes magazine where he famously said, “Your margin is my opportunity”. This was perhaps the clearest ever statement from Amazon about their intentions in retailing. They wanted it all, so every retailer had to get digital and fast, or it would be wiped out. The supply chain you need to service a network of 250 stores in the UK, is very different to one serving the 28 million or so households in the UK. So radical changes were needed and there was (and still is) a shortage of warehouses to meet this changing demand. This is a classic example of a demand and supply imbalance in real estate. Despite a pickup in construction in the past three years there is still a shortage of assets.

This shortage means that occupiers are willing to pay increasing rents to obtain the space they need. Generally, as rents grow so does the value of the buildings. In the past two years as interest rates have risen, Surveyors have been reducing the valuations of the buildings that SHED owns. However consistently over the past two years SHEDs rents have risen, as demand continues to outstrip supply. This is unusual, over the past 19 years of following real estate companies I am not aware of this happening before, usually falling rents cause valuations to fall. Rents fall because companies are unwilling to rent space (usually due to a recession). The current market for warehouses in the UK is very different to this and the reason is because of its economic parentage.  This is why we remain optimistic about the total returns (income + capital appreciation) that they are expected to achieve over the long term.

Today**, SHED can be purchased at a 28% discount to its independently valued assets, and has a pleasing 6.4% yield per annum. This a higher income than one can currently achieve from cash, UK government bonds and most good quality corporate bonds. Importantly we do expect this income stream to grow over time as rents continue to rise.

As ever we are cognisant of the debt the company has, and common to our other real estate holdings SHED has been prudent in its use of borrowings. The company has fixed the interest rate on its debt at circa 4% for the next 6 years.

If you want to discuss your commercial property exposure with your investment manager, please do contact your usual CAM representative.

*Source, https://www.urbanlogisticsreit.com/, 06 December 2023

 **All Data Sourced from Bloomberg 06 December 2023