More SEGRO disposals; weakening secondary trend affects valuation

Segro this week announced a further £159m of disposals, including two large, non-strategic assets – the Thales campus in Crawley for £80m, which was sold earlier this month to a large UK institutional investor; and the MPM site in Munich for £53m to a private German investor, on which sale completion is expected in March.

The Thales campus is fully let, and comprises about 35,000 sq m of lettable office space and industrial property to let. The MPM site is a 155,000 sq m engineering and manufacturing facility, which Segro acquired under a sale and leaseback deal with Krauss Maffei in 2007.

The group has also sold a portfolio of non-core regional assets – four regional UK industrial estates, in Runcorn, Lymedale, Pucklechurch and at East Midlands Airport. These were sold in December to a joint venture between two UK/Swedish pension funds, for £26m. They total 84,000 sq m of industrial property and had a vacancy rate of 8.1% as of 30 September.

The total sale proceeds of these disposals are 2.4% below book value as of 30 June, net of rental top-ups. Segro has also committed to spend about £6m on refurbishing the roof at the MPM property. Based on the disposal prices, the combined net initial yield of the sales is 8.0%, or 8.2% including rental top-ups. Segro said it now has around £610m of non-core assets remaining.

The group has also issued a valuation update, in which it says the value of its portfolio has been affected by a weakening of demand for secondary industrial and office assets, particularly those with shorter leases, in the UK and in Continental Europe. While investment market demand for prime industrial property in the strongest markets has remained robust, this weaker secondary trend means that the overall value of Segro’s property portfolio is expected to have fallen by about £180m in the second half of 2012. “Approximately £75m of this reduction relates to South East UK suburban offices, approximately £50m relates to the Pegasus Park and Vimercate office campuses in Continental Europe and approximately £25m relates to other non-core assets,” the group added. The full-year movement in the value of its South East UK suburban offices is broadly consistent with the expected movement in the overall market for office space in the South East, according to CBRE estimates.

Segro said its core industrial, logistics and data centre properties, which make up about 76% of its total portfolio by value, were expected to have remained resilient in terms of value, with a fall of about £30m during H2 2012, or down 1% on a like-for-like basis. This compares with the UK All Industrial index, which declined by 2.0% between 1 July and 30 November, it noted.

Earnings per share for the year are forecast to come in close to the top end of analysts’ estimates, Segro said. Group vacancy levels at the end of 2012 are expected to be below 8.5%, compared with 9.1% at the end of June. Segro is due to publish its full annual results on 27 February.

CEO David Sleath said: “Our operational performance remains strong, with development activity healthy and our vacancy rates continuing to improve. Although challenging investment market conditions have meant a decline in the value of our remaining non-core and suburban office assets, the valuation of our core industrial, logistics and data centre properties has remained resilient. We expect 2013 to be another year of progress, both operationally and with the reshaping of our portfolio.”