In its 10-year history, Tritax Big Box REIT and its management have been unlucky enough to encounter not one, but two "once in a lifetime" events, Brexit and the COVID-19 pandemic; both leading to abrupt changes in the behavior of businesses using warehouses.
Despite having to navigate these complex waters where it has been tricky to predict the right course, Tritax Big Box has been buoyant, with the real estate investment trust growing to own what it calls the UK’s largest logistics-focused development platform.
CoStar News sat down with Tritax Big Box REIT CEO Colin Godfrey to discuss the group's original predictions about the growth of industrial-logistics sector thanks to the e-commerce explosion, the biggest internal event in the company's decade of trade, and the advantage of its large land portfolio.
The Hypothesis
“In some ways we predicted some of this and in other ways we got lucky, but the fundamentals of the market remain strong for the foreseeable future,” says Godfrey. “Now of course, the numbers were higher last year, but we reach this point with a portfolio of over £5 billion.”
Thinking back to the early 2010s, he says the Tritax Big Box business came out of the wider group’s ambition to expand further into mainstream commercial property investments and allow institutional investors to provide financial backing in a “more scalable way”.
The business’s formation also came after a change in the law around REITs around the same time to encourage new investment into the real estate sector. But Godfrey says there were challenges; the market was still “shaking itself free” from the memory of the global financial crisis, with a certain “nervousness” around the City.
He suggests the need to come up with a strong offering helped the group to decide what it wanted to do as a REIT off the back of lots of “hypothesising” about what the real estate market, particularly retail and industrial, would do in the future.
“We hypothesised that the advent of the internet and e-commerce would give rise to a shrinking high street and would have a significant impact on shopping centres. Of course, we didn't predict that we were going to get COVID-19, and that everyone was going to start working from home and affect the office sector.
“But we did absolutely call the retail impact and that what would happen as a consequence of that was that more companies would want bigger logistics buildings to enable them to consolidate and meet the increasing demand of consumers to need things quicker – giving rise to the need for speed and reliability.”
Quite simply, Godfrey and Tritax predicted that retail and industrial would to some extent swap places, with companies and investors eventually having to expose themselves more to the industrial logistics property that would become the 21st century shop cupboard.
With this prediction, the group set out to “create something that didn’t really exist at the time”; high-quality warehouse real estate, capable of attracting the “highest-calibre customer line-up” to serve international companies.
‘Some People Sad We Were Mad'
The idea of retail and industrial switching didn’t make sense to everyone, Godfrey explains, but the group worked with investment bank Jefferies to refine its pitch and successfully launched on the London Stock Exchange Market in December 2013. Tritax Big Box raised an initial £200 million.
“Some people said we were mad, actually a fair few people said we were mad, but that’s exactly what happened. We absolutely called it. It wasn't just a hunch, it was built on a whole series of very clearly defined pieces of research that we'd done to plot the path.
“And then we started out acquiring these investments, the market liked what we were doing, the yields were compressing, but a little bit under the radar because industrial logistics was still a relatively unloved sector at the time.”
Within the first 12 months, the REIT’s portfolio had grown to 14 assets, while the deals continued to flow thick and fast in the preceding months. “At one point in the early life of the business we were acquiring one asset per month, it was really, really full on,” Godfrey says.
“We were also doing quite a few forward funded developments, where we were working with third-party developers, getting the yield arbitrage and, as a consequence, utilising our expertise and history of development in Tritax of old to deliver brand new buildings, with long leases and great customers.”
A total of 11 equity raises have followed in the decade, making Tritax Big Box one of the fastest growing properties in the UK, while delivering returns for its shareholders. The REIT owns 79 properties, with its sheds let to some of the most high-profile UK logistics tenants in the country.
For example, Amazon lets a 2.3 million-square-foot logistics buildings from Tritax Big Box at Littlebrook in Dartford and a 2 million-square-foot shed in Durham, while food distributor Ocado leases a circa 560,000-square-foot property from the business in Erith, London.
Specialist Success
Talking about what separates the firm from others and how it has built its reputation across the last 10 years, Godfrey says Tritax Big Box's focus on high-quality, industrial warehouses, usually of significant size, gives the market the confidence it needs to opt for its properties. He also stresses the importance of “specialism” in today’s market.
“When you consider everything that's happening in terms of listed property space, and also with the open-ended funds and the multisectoral investment funds in commercial property that have been invested in over decades and decades.
“They're all shrinking, customers and investors want specialism, they want to know that they're dealing with the best-in-class team and that you’re not spreading yourself too thinly. You can't be a master of all those sectors.”
Its strong list of tenants and success means the business continues to grow. In October, Tritax Big Box agreed a £500 million sustainability-linked unsecured revolving credit facility with a syndicate of its existing banks and new lenders. It extended the average debt maturity across the company’s loan arrangements to 5.4 years from 4.6 years.
It is also active disposing properties to optimise its portfolio, having sold almost 3 million square feet of properties for a total of £327 million so far in its 2023 financial year, and looking to recycle returns. But Godfrey points out that the group’s future growth could be led by its acquisition of the DB Symmetry business in 2019, what he calls the most significant internal event in the group’s history.
The deal brought together what Godfrey terms the UK’s largest portfolio of big-box logistics assets and what the business called at the time “an unmatched portfolio of land and development opportunities”. It provided Tritax Big Box phased access to over 3,100 acres, representing more than 9.2 million square feet of B8 logistics space, with potential for a further 36.6 million square feet. The move, however, was not universally popular, according to Godfrey.
“We came to the conclusion that we needed to have in our armoury, the ability to develop in-house, rather than rely on third-party developers and essentially give them a large part of the profit. And so that is why we did the DB Symmetry deal.
“We came under some criticism at the time. There were suggestions that, in the short term, it would manifest in a softening of our earnings growth and, of course, it had to mathematically – we don't deny that. But it was a decision we made that was in the longer-term interest of shareholders.”
Godfrey adds that the group had, once again, looked to figure out where the market was going and come to the conclusion that yield compression had to stop before reaching 1%. While the business could continue to drive returns from the buying and selling of properties and through asset management, he says it needed another method to “maximise” its income growth.
“When we did the deal with DB Symmetry, we could only do that at a point in the life cycle of the business when we [had] reached a certain critical mass in size, and at a point where we very carefully managed our bilateral loan framework and our secured loans,” he adds.
Two Tier Re-Rating
Despite the reaction at the time, the decision now looks vindicated, with the continued growth of e-commerce, with almost a quarter (24%) of all retail purchases expected to take place online by 2026, according to Forbes Advisor.
Brexit and COVID are two other factors which have played into the hands of UK developers. Due to supply chain disruption during both events, retailers and other types of companies leasing industrial real estate are onshoring and reshoring, meaning they are taking more space at home.
Godfrey predicts that the REIT’s development arm and logistics-focused land platform will help to “turbocharge” Tritax Big Box in the medium to longer term, when the time comes to restart development amid higher construction costs and interest rates.
“Companies that have that type of thing within their armoury, which you just cannot buy right now, they are going to be rated at a very, very different level in my view.
"What we are going to see is a re-rating in the market, a two-tier re-rating between those companies which are probably languishing in the slow lane, and those companies which are being seen to be much more dynamic and have the ability to drive value growth in the longer-term for shareholders."
He adds: “And of course, it is highly flexible, so we can turn that tap off or accelerate subject to what is going on in terms of macroeconomics, occupier demand and where rental growth is. It's also a brilliant model that feeds in and produces new high-quality investment product and allows that process of renewal for our investment portfolio.”
Speaking about other ways that Tritax Big Box is looking to get ahead, Godfrey says he may not have a crystal ball but does have “antennae” that he will use to continue to guide the company along the right path. He says the business is keen to provide customers with a “full suite offer”, suggesting that it will continue to push into the urban logistics sector.
The business has already shown that it is willing to flex muscle in this type of investment, having acquired major Birmingham urban logistics park Junction 6 Industrial Park for £58.5 million (a 4.6% net yield) in May.
“You should see us operating opportunistically in that space moving forward to complement our existing portfolio. It's not that we prefer one to the other, it's a complementary offer and we have a very, very good understanding right the way through the supply chain framework, top to bottom.
“But also we want to be able to offer our customers a full suite offer, right the way through from the UK's largest, tallest, multi-decked buildings that have fully automated platforms, to small, last-mile, urban buildings because our customers have been asking us.”
As the Tritax boss discusses trials of drone deliveries and autonomous vehicles at industrial sites, talk turns to other challenges facing the future of the industry, including the environment. Godfrey insists that the industrial sector will have an increasing role in UK and wider efforts to reduce emissions and generate clean energy.
“We can make a very, very significant impact in industrial logistics – much, much, much more than any other commercial property sector can. Why? Because we have the biggest roof spaces in the country. We can put masses of solar on the roofs. You can't stick a massive turbine on the roof of a massive office building in central London. Guess what? We can on our sites.
“You've got rainwater harvesting, you've got massive spaces for LED lightening, automated function control and insulation improvement you can make in these buildings. The list is relatively endless in terms of the contribution we can make, so that's a really positive thing for our sector in terms of commercial property contribution.”
In last month’s autumn statement, chancellor Jeremy Hunt pledged to reform the planning system to speed up applications and cut troublesome bureaucracy, an issue which has been at the forefront of many of the industry’s frustrations around getting new projects off the ground.
Hunt said he would look to remove “unnecessary planning constraints” by accelerating the expansion of electric vehicle charging infrastructure. Godfrey says planning, which he describes as “not an efficient system”, must be reworked to allow warehouse developers to respond to demand from occupiers as and when they need accommodation.
“I think it needs to be driven from the top in this country to ensure that we have an efficient system that is capable of delivery what the government wants to deliver.
"We know from conversations with the government that they are increasingly recognising the importance of what logistics buildings and the supply chain deliver for this nation, and how crucial it is for this nation and future jobs delivery. It is a much, much bigger component part than it has ever been before, so they really need to get this right. At the moment it is properly behind the curve.”
Industrial Looks 'Value for Money'
Godfrey refers back to current deals and trends and predicts more consolidation in the market. An example of this is increasing industrial subleasing availability, with CoStar data showing that space of this type has almost doubled in the past 12 months and is at its highest level in almost a decade, 14.6 million square feet.
But he stresses the fundamentals of industrial-logistics remain “really, really positive”, and has the capacity to outstrip inflation in the medium to long term, once rates stabilise, making it attractive to investors. Godfrey says the market is waiting on the right conditions.
“There is a lot of money out there waiting to get into industrial logistics. The UK is a fantastic market, it is seen as being politically stable compared to other parts of the world, it is politically stable. You have a fantastic legal system, it is a very strong investment market, so there is a lot of overseas capital looking to get into industrial logistics.
“I think as a consequence of that we could see some yield compression over the course of the next couple of years once the market stabilises. But, once those boxes start getting ticked, we could see a relatively flood of capital coming into the market quite quickly because everyone is sitting on their hands at the moment.”
He adds: “There is still a rotation to take place out of some of those sectors, where institutions are kind of stuck and want to reduce their exposure to those sectors, and still want more industrial logistics. But they haven't been able to do that to date and, of course, prior to the recent value correction, industrial logistics was relatively, in their view, expensive. Today, I think it looks really good value for money.”