Are you tempted by high-flying FTSE 100 REIT Segro? Here’s what you need to know

Roland Head reviews the latest numbers from FTSE 100 (INDEXFTSE:UKX) warehouse REIT Segro plc (LON:SGRO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The relentless growth of internet shopping, home delivery and urban living has driven demand for warehouses to new highs.

One company that’s benefited is FTSE 100 real estate investment trust Segro (LSE: SGRO), whose share price has doubled over the last five years.

In a trading update today, the company said that during the nine months to 30 September, it signed contracts for £52m of new rent. That’s 48% ahead of the £36.4m figure reported for the same period last year.

Looking ahead, the company has 891,000 square metres of property approved or under construction. Strong demand means that 71% of this has already been pre-leased.

Too hot to handle?

The logistics property sector is undeniably hot at the moment. One problem is that warehouses are often needed close to major cities, where land and property are in short supply. So when space does become available, it’s snapped up.

As investors, the question we need to ask is whether this situation can continue. I think it’s clear that this boom could still have further to run. But if people keep building, history suggests that at some point there will be too many warehouses. When that happens, the value of these properties will fall and vacancies will rise.

I prefer to invest in property stocks when they’re unloved and trading at a discount to book value. Segro doesn’t meet either of these requirements. Trading at 620p, the shares are priced at a small premium to their last-reported book value of 603p per share.

This strong valuation has pushed the stock’s 2018 forecast dividend yield down to just 2.9%. That’s below the 3% minimum I look for from big-cap stocks.

Although the firm’s finances still look healthy, I think the shares are starting to look quite expensive. I’d rate Segro as no more than a hold.

Studying for a profit

Another area of the property market enjoying strong demand is purpose-built university student accommodation. One of the big players in this sector is FTSE 250 firm Unite Group (LSE: UTG).

Like Segro, Unite’s share price has doubled over the last five years, as the company has reported consistent growth.

Last week, management reported that 98% of the group’s portfolio has been let for the current academic year, with rental growth on target at 3%-3.5%.

Unite’s focus is on “high and mid-ranked universities”, where demand should be most stable. To improve forward visibility on rent and occupancy, around 60% of its 50,000 bedrooms are now let under multi-year agreements with universities.

Should you buy Unite today?

The company plans to increase the size of its portfolio by a further 6,000 beds over the next three years. This seems reasonable to me, and I suspect student demand will remain strong. My only concern is that like Segro, Unite is starting to look expensive.

At the last-seen price of 842p, the shares trade at a 10% premium to their 761p book value. That’s not a problem if property prices keep rising, but it doesn’t provide any room for error if the market should slow, or profit margins fall.

For example, one potential risk is that Brexit could reduce demand from overseas students. Borrowing costs might also increase.

I like this business, but I don’t like the share price. For now, I’m going to leave Unite on my watch list and look for opportunities elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head 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.

More on Investing Articles

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »