In a hard-hit sector, industrial property company Segro shines. It collected 98 per cent of its rents last year. Valuations and pre-tax profits rose by over a tenth. It has been one of the standout winners in the ecommerce boom. Now the losers, traditional retailers, are calling for tax changes that could slow its growth.

Next’s Lord Simon Wolfson has suggested that business rates rise by half on warehouses to help fund cuts for retail. He is right to say they are out of line. While business rates typically add 50 per cent to rental costs, it is less for most warehouse occupiers. That is because rates are tied to 2015 rental values. Since then, they have soared by an average 28 per cent for big sheds, says advisory firm Colliers. 

Pushing up business rates would squeeze rents. Economists at the IFS and elsewhere say that for every pound business rates are raised, rents would ultimately be almost a pound lower. But in the short run, raising business rates would hit occupiers. It would be hard for politicians to make successful etailers pay more without also clobbering manufacturers.

It is therefore too soon for investors to fret about business rate reform. The more pressing question is valuation. Segro shares trade at a 22 per cent premium to reported net asset value and have underperformed the FTSE EPRA Global Real Estate Index by 4 per cent in the value-driven rally that followed November’s positive vaccine news.

Still, Segro will maintain its strong position after the pandemic has waned. Even after a 30 basis point compression in investment property yields to 4.5 per cent last year, there is a wide yield gap with bonds. The company has financial muscle and a strong development pipeline.

The supply of suitable land is also limited, particularly for “last mile” distribution in cities in urban sites. Demand is strong, not only from a permanent shift towards ecommerce but manufacturers introducing more flexibility into their supply chains. Just in case, not just in time, is the new mantra. Segro is riding some powerful trends.

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