Segro in profit as property stabilises

Segro, the industrial and distribution property specialist, returned to profit as the value of its properties across Europe stabilised in the first half.

The company, which last year acquired Brixton, its industrial rival, on Thursday reported 1.1 per cent growth in net asset value per share to 366p on a 2.3 per cent increase in the value of its portfolio to £2.6bn.

The value of Segro’s UK properties rose 2.5 per cent, reflecting the modest
recovery in the industrial market, but continental European values fell 1.4 per cent.

Analysts fear that capital growth could remain subdued as the UK enters an uncertain economic period, although the company pointed to encouraging leasing momentum in challenging occupier markets and increasing appetite from tenants for its development space.

Segro swung to a pre-tax profit of £148.9m in the six months to June 30, from a loss of £493.3m in the same period last year, with earnings per share reaching 20.8p, against losses per share of 113.2p. Net rental income increased from £129.7m to £144.3m.

The company’s vacancy rate remained high at 14 per cent, up slightly from 13.5 per cent six months ago as the result of the insolvency of Germany’s Karstadt stores, with management saying that good lettings activity had been offset by the surrender of space by departing tenants.

The vacancy in the former Brixton portfolio fell to 21.5 per cent, from 22.1 per cent at the end of last year. There was particular strength in its core market around London, where there was 2.1 per cent rental growth above December’s estimated rental values. Outside London, the average lettings were at 2.3 per cent below ERV. Segro estimates that it captured 40 per cent of all industrial space let in west London in the first half of 2010.

The group has 11 projects in negotiations in the UK and four pre-lets in Europe, with a total projected rent of £20m a year. The shares closed down 9.2p at 265.8p.

Ian Coull, chief executive, said the economic environment remained uncertain but Segro was well placed. “Underneath the calm surface there has been a lot of paddling. It will be a bumpy ride but we are moving in the right direction,” he said.

● FT Comment

Segro may have dominance in key markets such as Heathrow, but no matter how hard it pushes, it will struggle to lower significantly high vacancy rates as long as economic conditions remain tight. Empty rates on its vacant portfolio remains an anchor on earnings. But there is some value relative to other major Reits.

Segro shares trade at a 25 per cent discount to reported NAV, compared with a sector average of 15 per cent, and yield 5.1 per cent. Potential investors should note that any real growth in earnings and dividend is likely to be delayed until the economy improves.