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Tritax Big Box REIT plc – Tritax Big Box Bonanza – Property Week

21 February 2014

With the establishment of a new REIT, Tritax is heading all guns blazing into what it believes to be the growing market of megasheds. Property Week talks investment and strategy goals with Colin Godfrey.

Tritax partner Colin Godfrey could certainly be described as bullish about the future of newly formed Tritax Big Box REIT, which has the satisfying ticker BBOX: “We want to be a market leader that redefines REITs in the UK.”

This is an institution that has set its sights on not only conquering the sheds market in the UK, but setting new benchmarks for REITs. Outlining an ambitious acquisition plan, along with intentions for a further fundraising later this year, Godfrey is clearly passionate about its ambitions for “the most exciting time of my career”.

Tritax’s REIT was established in November 2013, and by December had raised £200m to invest in its specific target market: sheds and warehouses sized from 500,000 sq ft up to 1m sq ft. BBOX’s first purchase was of Marks & Spencer’s environmentally excellent 900,000 sq ft megashed in Castle Donington for £82.6m, representing a yield of 5.2%, closely followed by the acquisition of a 585,000 sq ft shed for £48.75m, let to Sainsbury’s with an unexpired lease term of at least 13 years, representing a yield of 6.65%. Godfrey says that another offer is currently in the pipeline, with the aim for up to five more to complete in the next four months.

Setting up the REIT was a logical step for Tritax, explains Godfrey. Since being established in 1996, the company has acquired and developed more than £2.1bn of property assets , and its current portfolio has an acquisition value of around £1.2bn. Over the years Tritax has moved towards larger assets.

“It was a natural evolution for Tritax to move into the institutional marketplace, and the REIT was a natural solution to that,” says Godfrey. “We started the process about two years ago, and we’ve been peddling the bike since then. We’ve been fortunate in the timing of bringing our offer to market, as the city has been a lot more buoyant.

“In some ways the market wasn’t ready to listen when we launched, however, but we knew the timing was right for us. We felt that the market for big-box distribution was mispriced and saw an opportunity to springboard from our expertise in the sector and take advantage of the seismic change going on in the UK economy and in the way we shop.”

This seismic change, as Godfrey describes it, is the bedrock of the REIT’s philosophy. The focus on sheds alone stems from a belief that distribution networks are fundamentally changing as e-tail continues to grow, and that yields as they stand today do not reflect the big opportunity megasheds present. And Godfrey has a convincing argument for the growth of this segment.

“Retail is morphing through the back door into megasheds,” he observes. “They’re the quasi shops of the future, of today. Everything stems from megasheds.”

Statistics surrounding the growth of e-commerce and “click and collect” back up Godfrey’s belief that the amount of stock passing through warehouses towards smaller distribution hubs is only heading one way. Online sales now account for 10%-13% of total retail sales in the UK and are set to increase to 20%-25% by 2020. As a result, sheds are growing in size as retailers and distributors need more eave height to house the technology required for sorting and picking stock, as well as to cope with stock moving in and out ever faster as next-day and even same-day delivery become the norm.

Godfrey also argues that the UK is the perfect country to cope with these changes in logistics. Unlike in Europe, where distances between locations are often much greater leading to high fuel and staff costs, the UK has a mature infrastructure. “To some degree, same-day delivery is only deliverable because of the peculiarity of the UK and the density of the framework,” he says.

Equally convincing is Godfrey’s argument for why rent and yields can only improve for the sector. “The traditional understanding for the relationship between the main property sectors and yields is based on a preconceived understanding of the drivers that affect them.”

Godfrey compares yields in different sectors; for high street retail, the value of a shop is vested in its exclusive position, which drives rental growth year on year and is why retail yields are 4%. Retail shops have little obsolescence, and do not degrade over time. Offices, on the other hand, have a high level of obsolescence in their fabric, so yields are higher and rental growth is not so high. Industrial yields have been high because there has so far been a plentiful supply of land and few planning constraints. As businesses have outgrown space and do not want an older building, they have paid for a building nearby to be developed. This has held back rental growth, which is reflected in the yield.

“We believe this has been turned on its head,” says Godfrey. “The obsolescence factor for megasheds is now much less, because they are harder to come by. The supply and demand factor will keep up demand, so we see strong prospects for rental growth moving forward. Our belief is that the industrial megabox has and will continue to see yield compression. This is not a short-term seismic shift, but a long term structural change in the economy. This is a change for years to come.”

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