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Logistics boom leading investors to buy assets with 'warts,' says SEGRO CEO

The boom in the logistics property sector is leading some investors to pay full price for substandard assets, according to David Sleath, CEO of logistics developer and landlord SEGRO PLC.

Speaking at the 2020 EPRA Insight event in London, the boss of the U.K.'s largest listed property company said his company is very selective about acquisition opportunities, and that there are issues with the quality of much of the stock on the market.

Investment in European logistics property was down 16% in the first half of 2019, according to an August report by BNP Paribas, partly due to a shortage of supply in the market failing to meet active demand, it said. But 2019 saw several major deals transacted for European logistics portfolios. Among them was The Blackstone Group Inc.'s $5.7 billion purchase in December of Colony Capital Inc.'s light industrial logistics assets and its affiliated operating platform.

"For us, the way to differentiate ourselves and to create value is to keep an eye out for acquisition opportunities, but the quality of stock being sold is generally ... there's something we don't like about it," said Sleath. "It's one thing paying full price, it's another thing paying full price for something that's got a wart on it. And we'd rather stick our money into buying a piece of land and developing it on a mostly pre-let basis."

SEGRO has made significant investment in its development pipeline in recent years. The company, whose operations span much of Western Europe, was on course to invest £600 million in development in 2019, according to a Q3 trading update. As of the end of September 2019, it had 644,000 square meters of space under construction, which is set to provide future headline rent of £46 million, it said.

"The reality is, we decided a while ago that we were better off directing our firepower at the development channel," Sleath said. "For every one developer, there are 10 or 20 investors who can write checks to buy built assets. So we felt that the competitive tension is less in the development market; it's still strong, but we've got a great land bank, [and] a great team that are spread across Europe."

Sleath said he is unsure whether the result of the U.K.'s December general election, in which the Conservative Party secured an 80-seat parliamentary majority, has dispelled uncertainty around the U.K.'s departure from the European Union. The U.K. is set to officially leave the EU on Jan. 31, but will enter a transition period during which it remains in the bloc's Single Market and Customs Union.

Shortly after the election, Prime Minister Boris Johnson's government placed a Dec. 31 deadline on the upcoming negotiations with the EU to determine their future trading relationship. Senior EU officials have said that the December deadline leaves insufficient time to complete a comprehensive trade deal, raising the likelihood that the U.K. will exit the transition period with no deal in place, an outcome many observers believe will severely damage the U.K. economy.

Whatever the outcome of the trade negotiations, SEGRO's business might well emerge unscathed, said Sleath. "I like to think there's a hedge either way," he said. "If we have a frictionless set of borders going forward, that's going to encourage more investment by businesses and more capital flows. If we have more friction on our borders, it means that global supply chains are going to need to manage that risk of things getting stuck at the border, and therefore they're going to need warehouses both sides of the English channel."