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Tritax Big Box is the only Real Estate Investment Trust dedicated to investing in and funding the pre-let development of very large logistics facilities in the UK.
We invest in and actively manage existing built investments, land suitable for Big Box development and pre-let forward funded developments. We have constructed a portfolio that includes some of the most sought after Big Boxes in the UK.
We aim to provide an attractive, secure and growing income for our Shareholders, together with capital appreciation. Our ambition is to be the pre-eminent owner of Big Boxes in the UK and a leading low-risk, income-focused REIT.
Total return measures the ultimate outcome of our strategy, which is to deliver value to our Shareholders through our portfolio and to deliver a secure and growing income stream.
During 2016, Tritax Big Box achieved a total return of 9.6% compared to our medium-target of 9% pa.
For the first six-months of 2017, our total return was 5.8%, compared to the FTSE EPRA/NAREIT UK REITs Index total return of 4.09%.
Such strong financial results reflected the successful implementation of our investment policy and the growth in our portfolio, as well as robust cost management.
The EPRA NAV reflects our ability to grow the portfolio and to add value to it throughout the life cycle of our assets.
During the first half of 2017 the EPRA net asset value per share grew by 4.30 pence or 3.3% to 133.00 pence (31 December 2016: 129.00 pence). This was driven by a combination of purchasing well and achieving gains across each of the three assets acquired in the period, an income stream growing organically through rent reviews, gains following asset management activity at our site in Bognor let to Rolls-Royce and further yield compression across the portfolio.
Since our IPO in December 2013, we have built an outstanding portfolio of 38 selectively acquired Big Boxes. Our portfolio is well diversified by size, geography and tenant. The assets are typically modern, in prime locations and fully let on long leases to institutional-grade tenants with upward only rent reviews.
We believe these factors give us one of the highest-quality portfolios in the UK quoted real estate sector and underpin our objective of delivering low-risk and growing income.
A total £142.7 million was invested during the first half of 2017 across 3 assets. As at 30 June 2017 our portfolio, consisting of 38* assets, was independently valued at £2.10 billion, including all forward funded development commitments.
* All properties included as at 30 June 2017, but excludes £101.8 million conditional commitment to development of two distribution warehouses at Warth Park, Raunds, both pre-let to Howdens, for a combined price of £101.8 million. These two assets are not included in the above.
All our assets are either let or pre-let and income producing. During the first half of 2017 the portfolio’s contracted rental income increased to £108.65 million per annum across 38 assets (31 December 2016: £99.66 million), including all forward funded development commitments.
The timing of rent review events over the next few years supports the Group’s ambition to deliver income growth, thereby underpinning our progressive dividend policy. In 2017, 21.8% of our rental income was subject to review. Through careful selection we have ensured a balance in the timing of our rent reviews which provides the opportunity to grow our rental income each year.
Our diversified, long and growing rental income stream is underpinned by high 31 calibre tenants, of which 82% are major quoted indices and include some of the UK’s strongest omni-channel retailers.
As at the 30 June 2017 the Group had total long-term bank borrowing commitments of £781.5 million, of which £681.5 million had been drawn with debt available to draw down of £100.00 million.
This resulted in an LTV ratio of 27.0% (31 December 2016: 30.0%). The Group continues to operate within an LTV target of up to 40%, which we believe is appropriate given the quality of the Group’s properties and tenants, the long WAULT and the portfolio’s low-risk nature.
The Group expects to be operating at an LTV level of approximately 35% for the time being, on a fully invested basis, after taking into account forward funded development commitments.
Big Boxes are larger format industrial logistics facilities that often have characteristics not found in the rest of the sector and should be differentiated from smaller older buildings. These properties are modern, strategically located, highly efficient distribution centres and logistics hubs that hold finished goods for distribution to other parts of the supply chain or directly to consumers.
These properties are strategically important to tenants as their scale, location and sophisticated automation provide previously unavailable flexibility, economies of scale and low cost of use.
Perhaps the most distinguishing feature of this asset type is their sheer scale – everything about Big Boxes is vast. Situated on sites of up to 50 acres, Big Boxes typically boast floorplates of between 300k sq ft and 1 million sq ft.
In terms of height, their eaves are usually between 12 and 25 metres. More specifically, low-bay buildings are typically used for food distribution, but general merchandise distribution (non-food) use taller buildings of up to 25 metres which allows for the installation of racking or mezzanine floors to increase the useable space. This additional volume which is highly attractive to tenants as rents are generally only paid on the ground floor area, as opposed to the building’s total volume.
Occupiers are up-scaling, centralising dispersed distribution facilities into fewer, larger Big Box facilities to capitalise from the previously unavailable flexibility, economies of scale and low cost of use that these assets provide.
The location of Big Boxes is critical for efficient market coverage. Traditionally, the ‘Golden Triangle’ in the Midlands has been regarded as a prime logistics location as it offers tenants access to 85% of the UK market in 4.5hrs driving time.
Big Boxes are strategically located in areas with strong transport connections. Access to major roads or motorway junctions is a must, but alternative transportation routes via airports, sea ports or rail are increasingly important for efficient goods inwards stocking and downstream distribution.
Increasingly, of equal importance to occupiers are locations that are close to large employment pools, ensuring their ability source suitably qualified employees in sufficient numbers from an area immediately surrounding a site.
Big Boxes are a relatively new phenomenon. This large-scale format did not exist in the UK before the early 1990s, therefore most high-quality Big Boxes are modern facilities constructed within the past 15 years.
Big Boxes have evolved into technologically advanced buildings. The specification will usually include ground floor loading upwards of 50kN/m², with laser level floated floors and loading doors which are designed to accommodate the latest truck specifications.
Increasingly these facilities will have high power supplies, sometimes dual power supplies or on-site standby generators. High speed internet access is a must for e-commerce. Non-food buildings are getting taller, now up to 25 metres, which provides for the possibility of high level racking and multiple mezzanine floors to double or even triple the floor space available inside the building.
Furthermore, such modern designs ensure the building is energy efficient and include impressive environmental credentials with solar panels, wind turbines and rain water harvesting etc.
These assets have evolved significantly from the simple ‘sheds’ we knew of old; today’s modern Big Boxes are smart and becoming smarter. Such sophisticated, innovative and technologically advanced warehousing can provide distribution solutions that help our tenants reduce costs and maintain their competitive edge.
Occupiers want to automatically stock and retrieve products, use state of the art robotics to efficiently pack complex deliveries, and meet customer demand for quicker deliveries. Big Boxes are the perfect setting for this automation, with the scale necessary to accommodate the high-level racking and mezzanine floors that maximise use of the space.
Technologically, no part of the property market is evolving faster than logistics. Whether it is ground-breaking drone deliveries or the rapid advancement of robotics applications, the technology that is being tried and tested today will shape the future – the positive influence of Big Boxes is still at an early stage of development.
Boxes are sought after by institutional-grade high-calibre tenants including conventional and online retailers, third-party logistics companies (“3PLs”), and other companies such as manufacturers. These organisations are responding to structural changes in their markets, such as the relentless rise of e-commerce, weaker economic growth and increased competition, which means that improving operational efficiency can be a key factor in determining profits.
Big Boxes offer previously unavailable flexibility, economies of scale and low cost of use. They are often the nucleus for distribution at a national level and increasingly at a regional level and can be the most important component of an occupier’s supply chain. Many companies use Big Boxes to centralise previously dispersed distribution into fewer, larger facilities, helping to optimise staff and stock management and expand product ranges. This allows retailers to match store or online offerings in a single warehouse, which is not possible with smaller buildings. 3PLs are also focusing on Big Box assets to centralise multiple contracts, providing flexibility and allowing them to tender more competitively.
Big Boxes are in demand from institutional-grade high-calibre tenants who recognise the strategic and operational importance of these assets to their business. Big Boxes offer previously unavailable flexibility, economies of scale and low cost of use. They are often the nucleus for distribution and can be the most important component of an occupier’s supply chain. This increasing occupational demand however is against a backdrop of very limited supply.
Secondly, to further drive efficiency occupiers often make a significant capital investment in racking, mechanisation and automated systems within Big Boxes, the cost of which often eclipsing the construction cost of the building or value of the investment.
For the above reasons, occupiers are often willing to sign long leases of 20 years or more, with regular upward-only rent reviews, which is rarely seen elsewhere in the UK commercial property market. This is to ensure that they initially secure and then retain use of the asset over the long term, thus benefiting from the increasing efficiency the assets provide, as well as their own substantial investment within the building.
We believe these properties, known as Big Boxes, are one of the most exciting and highest-performing asset classes in the UK real estate market. These properties are strategically important to tenants, as they offer efficiency savings and are essential to fulfilling e-commerce sales.
Strong tenant demand, coupled with limited supply and significant inward investment from tenants, make Big Boxes attractive assets.
The growing demand for Big Boxes
Demand for Big Boxes comes from three main sources: conventional and online retailers, third-party logistics companies (“3PLs”), and other companies such as manufacturers.
These organisations are responding to structural changes in their markets, such as the relentless rise of e-commerce (see below), weaker economic growth and increased competition, which means that improving operational efficiency can be a key factor in determining profits.
Big Boxes offer previously unavailable flexibility, economies of scale and low cost of use. They are often the nucleus for distribution at a national level and increasingly at a regional level and can be the most important component of an occupier’s supply chain. Many companies use Big Boxes to centralise previously dispersed distribution into fewer, larger facilities, helping to optimise staff and stock management and expand product ranges.
All these characteristics mean that Big Boxes are both strategically and operationally integral to their occupiers. Retailers, 3PLs and manufacturers who want to remain commercially viable regard Big Boxes as a strategic necessity.
To drive efficiency, tenants increasingly invest in advanced systems that allow them to stock automatically and rapidly retrieve products. The tenant will typically own the fit-out. This capital investment in racking and automated systems within Big Boxes can be substantial, sometimes eclipsing the construction cost of the building or value of the investment. Such levels of commitment to a location often go hand-in-hand with either an initial long-term lease commitment or lease extension. This can be value enhancing and so such tenant investment is highly attractive to owners.
Big Boxes are the new shops
Big Boxes are integral to the rapid growth of e-commerce distribution. While the impact of Brexit on the UK economy remains uncertain, industry analysts expect that e-commerce will continue to grow, even if the retail sector as a whole remains flat, as e-commerce has resilient characteristics. Forecasters are predicting that by 2020 e-commerce will account for 22.6% of total retail sales in the UK, up from 13.0% in 2014.
To remain competitive in this environment, retailers need to have large, highly efficient distribution facilities that can fulfil orders quickly and accurately. This need is only becoming more acute as customers demand ever-shorter delivery times. The importance of data to successful e-commerce operations means that Big Boxes dedicated to e-commerce increasingly also house the retailer’s data and intelligence centres.
In addition to pure online retailers, growth is being driven by the expansion of omni-channel retailing. Omni-channel retailers can therefore have physical, online and mobile stores, apps and telephone sales, all requiring fulfilment capabilities. As the complexities of multi-channel retail grow, retailers are combining the control point for these functions, along with store replenishment, within Big Boxes.
The constrained supply of Big Boxes
The building a new Big Box is relatively quick. Once detailed planning consent has been obtained, and from the point where the site is serviced with suitable infrastructure construction of a new Big Box typically takes 6-12 months. Tenant fit-out can then take a further three to 18 months, depending on the extent and complexity.
However, the supply is likely to remain constrained in the medium term as there is a significant lag in the supply of new Big Boxes.
Firstly, suitable land which can accommodate Big Boxes is scarce in key locations, which may not be zoned for employment use, let alone planning for distribution which can take years to secure. The scale of Big Boxes and the extent of traffic movements they generate can present planning challenges. In addition, Big Boxes require a pool of suitable workers in the local area and have substantial power and infrastructure requirements, adding further complexity to site identification and delivery
Furthermore, following the recession, competition for alternative land uses particularly housing has heighted. This has resulted in increased land prices as well as the cost of importing building materials and labour.
Secondly, despite the attractions of Big Boxes as an asset class, the amount of capital a developer would have to invest deters speculative development. While there is some speculative development of smaller buildings, developers remain reluctant to speculatively built (i.e. without a tenant pre-letting) properties of over 500,000 sq ft. The level of occupier demand means developers can de-risk their development upfront by agreeing a pre-let with a tenant, rather than going down the speculative route.
The overall result is that supply remains constrained, new sites are being brought forward in a controlled way, with new Big Box logistics assets being built to meet demand rather than exceed it. Currently there is only one1 used and no new buildings of more than 500,000 sq ft that are vacant and available to let in the UK.
1 Excluding the Company’s property at Chesterfield
Our compelling market fundamentals
Strong demand and limited supply, both occupationally and for investment stock, make Big Box logistics one of the most exciting asset classes in the UK real estate market.
Rising rents and driving investment values
The combination of strong occupier demand and a shortage of supply has resulted in robust rental growth in recent years, which we believe will continue for some time to come. In addition, build costs for Big Boxes have increased in 2016, as a result of increased imported material costs, exacerbated by the fall in Sterling in the second half of the year.
While the demand-supply imbalance has been the main driver of rental growth to date, it is clear that cost inflation has begun to feed through to rising rents and we expect this to continue in 2017/18.
The increased importance of Big Boxes to tenants and evidence of rental growth have heightened investment demand, compressing yields.
Historically, prime retail yields of around 4% were the norm. This low yield reflected limited property fabric obsolescence and reliable rental growth from strong occupational demand. Industrial property attracted yields of 6.5% or more, due to higher perceived obsolescence and abundant land supply, which suppressed rental growth. More recently, for larger logistics buildings, land supply has become constrained.
As high street retail has come under pressure and demand for prime logistics has grown, prime yields in the two sectors have converged (see graph opposite). We believe that this reflects a structural long-term yield repositioning.
Although yields have hardened for logistics, investors are still able to source attractive opportunities. In a low interest rate environment, property yields remain well above the cost of debt, maintaining a positive yield gap and a considerable premium to 10 Year Gilts.
Colin Godfrey Partner, Fund Manager Tritax Group Manager
Gary Gould Stuart Klein Jefferies International Limited Joint Financial Adviser and Corporate Broker
Anthony Richardson Tom Frost Akur Limited Joint Financial Adviser
James Benjamin Alex Shilov Lydia Thompson Newgate Communications Financial PR