Why the UK MLI sector is a good place to be
It’s no accident that Industrials Reit emerged as one of the JSE’s topperforming property stocks in 2021. The UK-focused counter, which has its primary listing on the LSE, delivered a total return of more than 60% last year after making impressive headway in transforming its portfolio over the past few years.
Under its previous guise as Stenprop, it owned a rather curious mixed bag of assets. However, the company is now well on its way to becoming a major player in the UK purpose-built multilet industrial (MLI) space — essentially, large business parks that offer multiple warehouse units of about 350m². Industrials Reit has a diverse base of about 1,500 tenants, most of them small or medium enterprises and including a growing tally of manufacturers that have brought their operations onshore following Brexit.
Year to date the share price has come under pressure, in line with a dip in global real estate investment trust indices fuelled by concern over higher inflation and waning consumer spending.
Current share price weakness aside, is there still some longer-term upside? It certainly seems so, given the solid set of results released by Industrials Reit earlier this month for the year to endMarch.
The company achieved like-for-like rental growth of 4.4% and like-for-like valuation growth of 20.8% across its MLI portfolio, resulting in a total accounting return for the year of a hefty 25%. CEO Paul Arenson says despite economic and geopolitical uncertainty, the strong fundamentals of the UK MLI sector should enable management to continue to achieve its targets of 4%-5% a year rental growth and 10%plus annual total accounting return over the next few years.
He also plans to continue bulking up the portfolio and is targeting annual acquisitions of £125m (R2.44bn) over the next four years.
European investment bank Berenberg’s equity research team recently confirmed a “buy” recommendation on Industrials Reit. Berenberg says despite concerns around inflationary pressures and dampened consumer sentiment, demand for MLI space in the UK remains strong. The equity note reads: “We believe Industrials Reit continues to demonstrate strong acquisition and asset management capabilities, and is well placed to capitalise on structural growth in occupier demand as it nears its target of becoming a 100%-focused
MLI operator.”
Brendon Hubbard, portfolio manager at Joburg-based ClucasGray, says the economic drivers that buoyed demand for MLI space in the UK last year, specifically among SMEs, remain intact. He cites global supply chain disruptions following the pandemic, and more recently the Russian-Ukraine war, which have prompted many companies and suppliers of goods to increase stock levels.
Then there’s the added complexity of Brexit-related supply chain delays at newly re-established borders. Says Hubbard: “This has benefited UK industrial-focused property companies as tenants need to hold larger inventories, which requires more space.”
Industrial assets will likely also prove defensive in the higher inflation environment, given that they require lower capital expenditure than offices and shopping centres. The latter are usually expensive to modernise and upgrade. As Hubbard points out: “Industrial assets typically only require a lick of paint as location is more important than appearance.”
Industrial assets will likely also prove defensive in the higher inflation environment, given that they require lower capital expenditure than offices and shopping centres
Industrial assets typically only require a lick of paint as location is more important than appearance
Industrials Reit is currently trading at a premium to NAV of about 10% vs the SA listed property sector’s average 20% discount. So the stock isn’t cheap. However, if demand for MLI space, coupled with limited supply and rising building costs, continues to translate into higher rentals, the company’s property values and NAV will also rise, which in turn should support further share price growth.
In addition, the company is expected to enter several UK and European real estate indices later this year, which will mandate more index funds to buy the counter.