Segro has played down concerns about the government's plans to ban upward-only rent reviews for commercial leases after recording strong like-for-like net rental income growth during the first half of its financial year.
In results for the six months ended 30 June 2025, the industrial-focused REIT registered 7.8% like-for-like net rental income growth from its existing portfolio, which it said was driven by a 55% uplift from its UK rent reviews and renewals.
Segro published the figures exactly three weeks after the government announced controversial plans to scrap upward-only rent reviews for commercial leases in England and Wales, which "sent shockwaves through the commercial property sector".
But the industrial powerhouse moved to reassure shareholders in its half-year update by arguing that its top properties were unlikely to be affected by the incoming changes laid out in the English Devolution and Community Empowerment Bill.
The group said in its results: "UK and European take-up remains close to long-term averages, supported by good demand for modern assets in the most strategic locations, and vacancy rates are stable which is supporting further rental growth.
"These dynamics are also supporting the capture of the mark-to-market rent reversion in our portfolio as we complete on rent reviews and renewals that include the strong market rental growth that was experienced during the pandemic era, particularly in our UK portfolio where lease structures typically allow uplifts to be captured on a five-yearly basis.
"We do not believe our prime portfolio, with significant reversion and our expectation of continued rental growth, will be affected by the proposed changes to the UK lease structure and potential removal of the upward-only rent review."
'Storm in a teacup'
Speaking to CoStar News this afternoon, Segro Chief Financial Officer Soumen Das described the upward-only rent review announcement as a "storm in a teacup", arguing prime properties in areas of short supply would continue to perform well.
He said: "I think the upward-only rent review provides false comfort. The reality is that, if rents have fallen, then holding your occupier to a figure that is not market, doesn't really get you very far.
"Frankly, the last 15 years that has gone on in the world of retail is evidence [of that] and, in reality, people find a way to reset the rent. All that has happened is that we have made an entire army of insolvency practitioners very, very rich by coming up with ever more exotic forms of pre-pack [administrations]."
He added: "It feels like a storm in a teacup to me, if you have the right assets in the right locations that you ultimately believe are going to have rental growth, then how you capture that growth, whether it is through indexation or whether you have it through some sort of rent or rent review clause that captures it on a delay basis, either which way you capture the growth."
Despite the REIT's confidence around the future performance of its prime portfolio, the group's results showed that headline rent fell year-on-year to £31 million from £48 million, which it said reflected "a lower level of big-box prelet signings" and occupiers delaying decisions.
As a result, the group revealed that it was now expecting to invest circa £400 million on development capital expenditure in 2025, down from the £500 million it had expected to spend at the start of the year.
"Slower occupier decision making has resulted in us pushing back the start date of some anticipated projects as we continue to negotiate the prelets," the group said.
But Das explained to CoStar News that the capital expenditure would not get lost, but rather pushed back for when projects were ready to get off the ground.
He said: "It's a timing issue, not an absolute issue. When we guided £500 million in February, that was based on where we could see the deal pipeline starting to build in terms of development, and we were hopeful we would get those deals signed and be on site during the course of the year.
"The reality is, particularly with the hiatus of 'Liberation Day', that decision making by companies has been slower than what we might want. The near-term pipeline, or the deals we are confident about, they may have already signed... that has grown strongly from £5 million to £16 million in the first half, but the absolute level of prelet signings has been lower.
"Practically, as we go through the year, there is less time to spend the capital in 2025, so the move from £500 million to £400 million is just a practical consequence of the fact that there are fewer months left in the year."
£1 billion data centre plans
One area where the group is looking to increase its activities is data centres, with the REIT forming a 50:50 joint venture with Oaktree-owned data centre specialist Pure DC in March to develop its first fully-fitted data centre project on land it owns at Park Royal in west London.
Segro said it was on track to submit planning for the £1 billion development in the second half of this year, with the group aiming to secure a prelet to a hyperscaler next year.
It said: "We expect the project to generate very attractive returns on our capital invested and deliver a significant amount of value over the development time horizon."
Segro's portfolio also increased to £18.5 billion during the period, supported by "healthy investor appetite for the attractive fundamentals of the asset class". This was despite transaction volumes remaining lower due to wider macroeconomic uncertainty, it highlighted.
Segro, which owns or manages 116 million square feet of properties, added that transport and logistics companies continued to be its largest takers of space. But it said manufacturers followed closely, looking to secure units that prioritised "efficiency, resilience and sustainability".
Its occupancy rate also increased slightly to 94.3%, up from 94% in December 2024, while its adjusted NAV per share rose for the first time since mid-2022, increasing to 910 pence from 907 pence.
Segro recorded a loan to value of 31% and £1.9 billion of cash and undrawn committed facilities, which it said positioned the group to "pursue further growth opportunities". Its interim dividend increased by 6.6% to 9.7 pence, up from 9.1 pence in 2024.
Development pipeline
Segro chief executive David Sleath said in a statement: "Our modern, sustainable portfolio, located in Europe’s most attractive and supply-constrained markets, has continued to perform well through the first half of the year, driven by leasing, asset management and the capture of reversion.
"We have a further £172 million of rent available through rent reviews, renewals and the lease up of vacant space, which will continue to support attractive underlying earnings growth.
"Our high quality, well-located land bank and options provide further opportunity to create value and grow income through development, with over £500 million of potential rent.
"Whilst occupier decision making remains protracted, we are encouraged by the pick-up in our near-term pre-let development pipeline and the active conversations that we are having with customers.
"Segro has consistently delivered attractive and compounding increases in both earnings and dividends through the cycle. We are confident in our ability to continue to do this due to the embedded growth potential of our existing portfolio, combined with the potential rent from building out our development pipeline.
"Our ability to develop fully fitted data centres offers significant additional value creation upside beyond this."