AIM-listed Warehouse Reit (WHR ) is planning a move to the main market after hitting a £1bn valuation as the ‘acute imbalance’ between supply and demand for warehouse space continues to fuel the trust.

The real estate investment trust (Reit) nearly doubled during the pandemic to £800m and has now crossed another milestone, hitting a £1bn valuation thanks to another year of outperformance. The EPRA net tangible assets of the trust jumped 28.6% in the year to end of March thanks to a revaluation that suggests the popularity of logistics and distribution warehouse investing shows no sign of waning.  

Crossing the £1bn threshold just four-and-a-half-years after launching means the Reit, which was listed on the (AIM) for smaller companies, is now planning a move onto the main market of the London Stock Exchange.

Neil Kirton, chairman of Warehouse Reit, said the fund now owed 91 estates and is at such a size that ‘the board believes that a main market listing is the most effective platform to enable us to further grow and diversify our shareholder register and asset portfolio.’

UK warehousing experienced a pandemic boon as companies began onshoring stock in order to prevent supply chain disruption from aboard and consumers turned to online shopping during lockdowns, necessitating the need for more parcel distribution hubs – trends that have continued post-pandemic.

Andrew Bird, manager of the Reit, said market conditions had been ‘unprecedented, with continued growth in occupier demand and highly constrained supply resulting in material rental growth.’

‘We continue to capture this growth through active asset management, while progressing our plans to develop new space in areas of high demand,’ he said.

‘With new supply unable to keep pace with demand, we expect continued rental growth and strong returns.’

The ‘acute shortage of stock’ and inflationary pressures could see the development of sites brought forward.  

‘We think we will bring more developments forward,’ he said, adding that he currently has three pre-let developments in planning ‘with a view to moving in this year.’

‘Those rents in aggregate from the three properties is £400,000 to £500,000 a year and will increase the Wault (weighted average unexpired lease term),’ he said.

Bird remains unconcerned about the pressure of inflation on businesses and the portfolio, and said rents for the trust’s tenants remain ‘very affordable’.

He said the contracted rent that tenants currently pay is about £5.60 per square foot but the estimated rental value (ERV) – effectively, the rent valuers would put on the same space if it all became vacant and was re-let today – is £6.20 per square foot, meaning there is a further £7.5m of value in the current rents.

Bird was unconcerned that just 15% of the his rents are inflation-linked despite the cost of living soaring.

‘When people say their rent is index-linked you have to ask what the cap and collar is,’ he said. ‘Most have a floor of 1% and a cap of 3-4% so if inflation rips for a period of time those rents will not keep pace, so I’d much rather price to market on the majority of the portfolio.’

So far Warehouse Reit has not seen any signs of inflation pressure on tenants, with ‘strong rent collection’ that had reached 98.7% as of 19 May 2022.

‘People are paying their rent because space is important and continues to be in high demand,’ said Bird. ‘We see no inflation pressure at the moment. We are providing a service against a backdrop of acute shortage of space and tenants are aware of that.’

He said current vacancy rates of 2.3% are the lowest he has seen and tenants are not looking for shorter leases or break clauses, but signing longer leases.

Over three years, Warehouse Reit has delivered an 86.2% return for shareholders.

Amazon puts pressure on big box investors

While Warehouse Reit’s focus on smaller companies continues to fuel outperformance, ‘big box’ logistics plays have been feeling the heat.

The share price of Tritax Eurobox (EBOX ), the £775m portfolio of large-scale logistics assets in continental Europe, has fallen nearly 20% this year after e-commerce behemoth Amazon announced it had excess capacity after significantly expanding its logistics footprint during the pandemic. Amazon accounted for 9% of Tritax Eurobox’s annual rental income at the end of March.

Winterflood analyst Emma Bird said this ‘coupled with general macroeconomic uncertainty, has led to concerns over the outlook for the industry.’

She noted the fund’s ‘impressive’ half-year results to the end of March, with an European Public Real Estate Association (EPRA) net tangible asset total return of 12.4%.

‘While we acknowledge that the world has changed since the period-end, we think that the outlook for the fund remains positive, supported by structural sector growth drivers and the team’s ability to add value through asset management initiatives,’ she said.

‘Having said this, we would not expect future returns to be as strong as in this latest period due to the limited prospects for further yield compression.’