Performance of the UK MLI sector
The imbalance between supply and demand in the MLI sector continues to deliver inflation-beating rental growth. During the year we entered into 78 new leases. The average increase in rents on these was 13.4% compared with previous passing rent on this space. In addition, we extended or renewed 48 leases and the average increase in rents on these leases was 21.7% compared with previous passing rent. As most of our leases are renewed or re-let every three years, this performance indicates an underlying rental growth of approximately 4%–5% per annum.
We believe that this imbalance is likely to continue for the foreseeable future. On the supply side it is still not economically feasible to build new MLI units at the current prevailing rents and sale prices. We are still able to buy existing MLI estates at around 50% of estimated replacement cost. On the demand side we continue to see a wider range of tenants needing MLI space, enabled by e-commerce and communications technology.
We are confident that, in addition to the above fundamental growth, we can drive earnings growth through operating efficiencies on our platform. This will happen naturally as we scale the portfolio. It will also arise from technology efficiencies and management initiatives such as the roll-out of our three page ‘smart lease’. These initiatives are designed to appeal to customer needs and to make it easier and cheaper to commit to leases, which helps to minimise void periods. We also plan to roll out additional products to our customers which will, in due course, enhance earnings.
We encourage investors to log on to our tenant facing website at www.industrials.co.uk to get a feel for the customer experience of renting space from Stenprop.
A focused MLI business
Our decision to become a focused UK MLI business means that we need to be very disciplined in what we buy. In general, we only buy purpose-built MLI property situated in and around economically sustainable, densely populated towns and cities across the UK.
Our strategy is to hold these assets for the long term. As such, new opportunities need to also meet our five-year average earnings model criteria. At present we are still seeing good opportunities which fit our criteria and we are confident in achieving our purchase targets. Most of our purchases are at values equal to approximately 50% of estimated replacement cost.
The MLI market is currently very fragmented with no dominant holders. We believe that, with our long-term capital structure, focused approach and the emphasis we are placing on building a scalable efficient management platform, Stenprop can become the leading listed MLI business in the UK.
Investors in listed property shares are tending to favour companies that specialise in specific growth markets. The industrial sector in general is popular with investors, being seen to benefit from the e-commerce and communications technology revolution. Just as “big box” distribution units are in demand, smaller multi-let space is seeing an ever-widening array of potential tenants, enabled by technology and e-commerce. Traditional occupiers who tended to manufacture items or service equipment are increasingly having to compete for MLI space with new technology-enabled logistics businesses established to serve local markets.
Platform businesses are also becoming increasingly attractive to investors, as additional earnings can be achieved through operational application. This has been experienced in the student accommodation, self-storage, hotel and serviced office sectors, where management platforms have evolved and matured over the past 10 years, causing a rerating of those asset classes which were previously very difficult to access. We believe the MLI sector lends itself to this and Stenprop is uniquely placed to become a leader in building a platform business in this sector.
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