Is the party over for warehouse and logistics REITs?

Amazon is slowing investment in its logistics network, prompting investors to re-evaluate warehouse stocks.

Warehouses have been one of the big success stories of the pandemic. As booming e-commerce sales fed demand for logistics space, shares in real estate investment trusts (REITs) in the sector soared and dividends rose. 

The big four trusts are Tritax Big Box, Urban Logistics, Warehouse Reit and Segro. Shares have risen 37%, 43%, 54% and 117% respectively over the past five years. Yields range from 4% for Urban Logistics and 2% for Segro.

However, return to offices and the cost-of-living crunch is causing companies to cut back on warehouse space, prompting investors to take a closer look at the sector.

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Amazon revealed this month that it wants to shed at least 10 million square feet of warehouse space in America, saying it had over-invested during the pandemic. It previously told investors that growth in online sales was slowing. Shares have fallen 26% this year.

The announcement from the e-commerce giant in late April sent UK warehouse REITs tumbling between 10% and 20% overnight, and shares are yet to materially recover. With storms gathering over the sector, is it time to remove this “alternative income” provider from a balanced portfolio?

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Priyesh Parmar, associate director at stockbroker Numis, does not believe it is. He argues that the boom is not over for the sector, despite the warning sign from Amazon. Part of his conviction comes from Warehouse REIT’s  annual results. Released in May, they showed 33% net asset value growth over the past financial year.

He said: “Warehouse REIT’s’ latest results were very positive, showing that the accelerated penetration of e-commerce during the pandemic coupled with an evolution of supply chains from ‘just-in-time’ to ‘just-in-case’ continues to drive occupier demand.

“Against the backdrop of constricted supply and ever-decreasing vacancy rates across the market, this is helping to drive rents higher.”

While higher share prices have reduced yields, Parmar argues that rising rental income still make the shares attractive.

Berenberg, the stockbroker, is also extremely positive on the sector. It recently hosted a round-table discussion with the management of Segro, Urban Logistics REIT and Tritax EuroBox, and said it left the event “bullish”.

Its analysts said: “While the risk to growth for the sector has increased in the face of slowing online sales, a higher inflation environment and slowing yield compression means there is still a significant opportunity.

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“Indeed, e-commerce tailwinds are far from complete. Structural under-supply is expected to persist and highly affordable rents on flexible industrial space remain conducive to further occupier demand and rental growth.”

Berenberg says that these factors make the sector significantly more resilient and defensive than in the past and the recent pullback in share prices was an attractive buying opportunity.

However, the sector is not without risks, it noted, saying: “Many investors remain concerned about the longevity of this cycle, which has increased share prices and reduced yields.

“A number of additional factors have provided ammunition to the bears in recent weeks – slowing online sales, negative commentary from Amazon, rising build-cost inflation, supply chain disruption, and heightened geopolitical risk.”

Despite this, it said that the structural growth trend for warehouse trusts would offset near-term headwinds. It expects online sales in the UK to hit 30% of consumer sales in the “medium term”, with online shopping offering a convenient and effective way to find deals in light of the cost-of-living crisis.

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Supply of warehouses is also at a record low, Berenberg notes. It said: “As the first quarter of 2022, there is only 16.8m square feet available, the lowest ever in the UK and 46% below the same point last year. This equates to roughly five months’ worth of supply based on the five-year average in take-up.”

Some customers of interactive investor have been attempting to ‘buy the dip’ in the case of Tritax Big Box REIT, which entered our top 10 most-bought trust table in May.

Over the past month, the trust’s hefty premium has fallen, which some investors have been taking advantage of. Data from Winterflood, the investment trust analyst, shows that prior to Amazon’s announcement the trust was trading on a premium of 28%. Its premium now stands at 3.8%. Its shares are down 18% since Amazon’s announcement in late April.