Developer targets Midlands with £340m war chest

Property investor SEGRO is targeting the Midlands for growth as it looks to use the proceeds of a new rights issue to fund projects in the region.

The £556m (net of expenses) will be used to fund a major acquisition but also develop a war chest for investment into new commercial property projects in the Midlands, the South East and Europe.

The acquisition will see the group spend £215m buying out Aviva Investor’s stake in the Airports Property Partnership (APP), which serves the market around Heathrow and West London.

SEGRO owns 50% of APP through a joint venture with Aviva Investors, which was originally established in 2010. The £215m will see it acquire the outstanding 50% of the business.

The remaining £340m will be used to invest in a series of projects already in the pipeline, together with new schemes in areas such as the Midlands.

At year-end 2016, SEGRO owned a land bank of undeveloped land which its believes is capable of supporting 2.15 million sqm of warehouse development, in addition to undeveloped land associated with the near-term development projects (estimated at 520,000 sqm). Added to this is around 0.7 million sqm of controlled land through option agreements.

The land bank extends to the Midlands, the South East (including London) and Italy.

“The directors believe that the land bank is capable of generating headline rent of £101m per annum at current market rent levels following its development, based on currently estimated capital expenditure of £0.9bn,” SEGRO said in a statement supporting the rights issue.

Of the remaining £341m, the group plans to invest approximately £165m in the current (£34m) and near-term (£131m) projects, with the outstanding £175m being used to fund the land bank projects.

It said that should the longer term development projects fail to materialise, then the balance would be used for the group’s general corporate purposes, which might include potential acquisitions.

Much of the development work is likely to be implemented through the partnership SEGRO established last year Roxhill Development Group.

Creating the partnership, SEGRO said there was the potential to develop more than 10 million sq ft of big box logistics warehousing in the South East and the Midlands over the next decade.

Roxhill has previously worked with SEGRO in 2013 on the Rugby Gateway site.

The new partnership sees Roxhill act as development manager and sites earmarked are at various stages of the planning process.

Should all of the sites become fully developed, the total potential capital expenditure (including land and infrastructure) is estimated to be around £800m over a 10-year period.

The terms of the partnership allow SEGRO significant flexibility over the timing of development and avoids the initial drag of holding non-income producing land on its balance sheet.

Speaking at the announcement of the partnership last year, David Sleath, CEO, SEGRO, said: “Roxhill is a market-leading developer and a partner we know, trust and for whom we have a high regard. This partnership establishes a clear path for us to achieve the scale we desire in the attractive UK big box logistics market.

“We are convinced that this market has very favourable long term prospects given the lack of quality supply and increasing demand from retailers and logistics operators for modern space in the right locations.”