A bumper fundraise by Segro (SGRO) and news that Tritax Big Box (BBOX ) is ploughing money into new developments show investor confidence is returning to the logistics property sector after a sharp slowdown caused by rising interest rates in the past two years.

Previously highly-valued logistics and warehouse assets were particularly hard hit by the surge in bond yields and borrowing costs exacerbated by Liz Truss and Kwasi Kwarteng’s ill-judged mini-Budget in 2022.

But investors are returning, attracted by strong rental growth caused by strong tenant demand and a lack of new supply.

Segro, which develops and manages warehouses and industrial properties in the UK and Europe, last week announced an £800m fund raising and then a day later lifted its target to £907m thanks to significant interest from investors.

It placed a total of 110.6 million new shares, equivalent to 9% of its existing share capital, at 820p per share. This represented a 3.4% discount to the closing price before the announcement but a more worrying 10% below net tangible asset (NTA) value of 907p.

Peel Hunt analyst Matthew Saperia played down the effect of raising money below asset value, saying the dilution of shareholder stakes would be around 1% if NTA hit his forecast of 948p per share this year.

Segro said the extra cash would allow it to ‘pursue additional growth opportunities, including new and existing development projects and to take advantage of potential acquisition opportunities which may arise’.

It boasted of a ‘sizeable’ development pipeline that could deliver £440m in extra rents but will require £3.8bn to deliver.

Chief executive David Sleath said the placing reflected the ‘confidence’ investors had in the business. ‘In addition to the profitable growth opportunities within our development pipeline, we expect further exciting opportunities to emerge in the coming months which this additional capital will help us to deliver,’ he said.

Tritax Big Box, the £2.8bn real estate investment trust (Reit) investing in large distribution centres and warehouses that agreed a merger with UK Commercial Property (UKCM ) last month, is also eyeing development opportunities.

Fund manager Colin Godfrey plans to keep making disposals of assets that have ‘achieved their full potential’ and reinvest the proceeds into development opportunities offering a higher return.

The fund started the development of 1.7 million square feet of space in 2023, with the potential to add £15.6m a year in contracted rent at a yield on cost of 7%. Another 900,000 square feet of new planning consents were also secured, increasing the total undeveloped land with consents to 6.3 million square feet.

Chair Aubrey Adams said easing inflation, continuing rental growth, and improving yields on costs ‘all reinforce our conviction in our development programme’.

‘In parallel, by leveraging our close customer relationships, we continue to create value through active management, making progress in capturing the record reversion embedded within our portfolio to further grow rental income,’ he said.

‘The group has very good potential for long-term income and capital growth, supported by enduring structural drivers in the logistics real estate market,’ he added.

All-time high rental reversion

Rental reversion – the change in rent between an expiring lease and the rent in a newly-signed lease – stands at its highest ever level of 23% with the potential to capture more than three-quarters of this uplift in the next three years.

The high levels of rent reversion show just how strong the occupational demand for logistics is, and the trust added £13.6m to passing rents through lease completions last year and another £7.8m of annual contracted rent was added via development lettings. This added to the £4.9m of extra rent from reviews and asset management initiatives. Overall, net rental income was up 7.8% at £222m in the year.

Property valuations continued to stagnate, and the like-for-like value of the assets was down 0.8% at £5.03bn versus £5.06bn a year earlier. However, rent rises helped earnings grow 3.2% to 7.75p per share and allowed the fund to cover a 4.3% increase in dividend to 7.3p per share. At 146.9p the shares stand on a 16% discount and offer a 5.4% yield, according to broker Stifel.

Stifel analyst Denese Newton said although the ‘extraordinary demand for logistics space has slowed’ the growth in rents is ‘evidence that the market remains healthy’ and pointed to a Savills report that said ‘take-up is still in line with pre-Covid averages’.

However, Reit share prices remain controlled by the direction of interest rate cuts, with higher borrowing costs constraining development. ‘We expect this to keep a lid on supply and be supportive of rents,’ she said.