Property agents Cushman & Wakefield have made a dramatic prediction. According to them, the UK could run out of warehouse space in less than a year, as per a recent report by the Financial Times. No prizes for guessing why that is. Online spending rose fast last year as the lockdowns forced us to stay indoors. And it seems that it will never go back to where it was pre-pandemic, as is evident from growth in online sales of FTSE 100 companies from Next to Just Eat Takeaway. Consumers have adapted and so have sellers.
Warehouse spaces in demand
This means that for now at least warehouse spaces are at a premium, till more capacity comes in. Companies best poised to benefit from this trend are existing warehousers like the FTSE 100 real estate investment trust (REIT) Segro (LSE: SGRO). In fact, this trend of a booming warehousing market is evident in its latest trading update as well.
Company CEO David Sleath says, “We head into the final months of 2021 with confidence in our ability to drive further sustainable growth in rental income, earnings and dividends.” This of course is based on the strong growth witnessed in the year so far. In the third quarter of the year, the new headline rent increased by 62.5% from last year. Headline rent refers to the rent payable after any free-rent period or any other incentive has expired. For the first nine months of the year, the rent has also increased at a healthy rate of 28%.
Further, vacancy rates have also declined to 3.2%, down from the end of the second quarter when they were 4.3%, reflecting strong demand for properties. Segro has also completed £25m of new developments, of which 93% have been let. This too indicates that the company’s demand levels are strong and it is capitalising on the opportunity presented by growing its business as well. This is likely to continue adding to its financial strength.
FTSE 100 stock’s price touches all-time highs
Unsurprisingly, the FTSE 100 stock’s price touched all-time highs in September and is still trading at around those levels. That does not make it an expensive stock, though. Its price-to-earnings (P/E) ratio is a mere 6.1 times, which is quite low compared to many other FTSE 100 stocks in favour.
I reckon there is still a fair bit of upside to the stock. The big risk to it is an over-estimation of how much online spending can grow in the future. It could happen that as the world normalises even more from the pandemic, online shopping may stop growing as fast. Or even if it does, I suspect that there could be greater competition for this fast-growing sector. This could reduce rentals as well as Segro’s potential profits. But we will know that only over time. For now, I maintain that the stock looks like a good one for me to buy.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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