Segro plans rapid growth

David Sleath, the chief executive officer of Segro: Our overall aim is to develop up to 3 mln sqm of space across the entire business in the next five years. That is a lot of space, since today the total portfolio for the group amounts to 6 mln sqm. So our goal would be to grow by 50 pct over the next five years.

Where would this growth take place?

That would be a mix of the UK and continental Europe. But in fact we have a lot more scope to grow on the continent, so I think over 2 mln sqm of space could be in continental Europe.

And how much of this development would be in the CEE region?

Central Europe is today about 30 pct of the continental European business, so I think you could probably work on the assumption that half a million sqm could be in Poland and the Czech Republic, which again is about a 50 pct growth rate.

Would that mostly be organic growth or acquisitions?

What we are seeing now is that asset prices are really quite expensive in most of our markets, partly driven by investors taking a liking to this asset class and partly because of the market fundamentals in a low interest rate environment. Investors are looking at the yields available on logistics properties and comparing them to government bonds, which stand at zero or negative levels, and they are saying that warehouses look very attractive. Therefore there is a lot of money coming into the sector, which is making the asset pricing quite high. So we think that for the next few years that lie ahead of us most of our focus should be on development, which offers a much better return on our capital compared to competing with international investors to buy interesting properties.

Do you have any plans for speculative development?

If you look at our whole approach to development, it is mainly pre-let or partially pre-let. If we build speculatively, it is usually in the urban areas. In terms of out-of-town big boxes, we do very little speculative development. In the previous cycle, lots of people were doing this. We find there is not the need for building speculatively – we are able to construct our facilities quickly for our customers, so we can build when we know there is the customer demand.

There is no demand for speculative development?

There is some, but because the construction time is relatively fast, as long as you have a construction site and a zoning plan and the infrastructure in place, you can build a warehouse in six months. So rather than guess what the occupier will want, if you wait a little while, you may as well carry out a build-to-suit. Then you can deliver exactly what they want. Thus we have – and I think the market also generally has over the last few years – become much more oriented towards build-to-suit or pre-leased development, because there is no real advantage in speculative development. What we will do, however, if we have a build-to-suit, pre-leased contract for 20,000 sqm, is to develop 10,000 sqm on top of that on a speculative basis. But in this case there is always the strong underpin of the pre-lease oontract.

Do you have any plans to sell assets?

Well, we have sold EUR 3 bln of assets over the last four years, because this is part of our strategy to get out of class ‘B’ assets – out of older industrial and out of offices. We have some retail assets, but we decided on a major repositioning strategy, to get the company focused on warehousing – modern, well located warehousing, both big box and in urban areas. Now we have finished that programme and have a much more moderate level of disposal. So we will generate cash every year by recycling some assets to generate funding for new development. This could be some of our more mature assets or, for example, where we own one or two assets isolated on their own. We like to own clusters of assets that are close together. Managing them and maintaining relationships with customers can be done much more efficiently. Therefore the disposal could be of some of the smaller and more isolated assets, but it will definitely involve the more mature assets. Every year we will aim to sell a few hundred million euros of assets – and this would partially help to fund our growth.

Will this strategy also be applied in Poland?

Probably in the future we will sell some assets in Poland. I mean, the great thing about Poland is that most of the assets are new. They are relatively recently developed and in most cases developed by Segro. So we have relatively few assets that we someday want to sell in Poland, but across the business it is good discipline to constantly look at your portfolio and to say, ok, we want to build it up with new projects.