Segro Conquered The World. Now The Man Running It Is Trying To Work Out How Cities Will Change
If you need a stat to sum up just how thoroughly Segro dominates the UK real estate landscape, try this: The listed industrial company’s £17B market capitalisation is more than that of Landsec, British Land, Derwent and Great Portland Estates, combined.
There used to be clear blue water between Landsec and the rest of UK property when it came to company valuation. But such has been the change in the way goods and services are purchased, and the parallel rise in the logistics sector, that Segro is now an ocean apart, nearly twice as large as the next biggest European company, Unibail-Rodamco-Westfield.
Overseeing this rise for the last decade has been David Sleath, who moved from company finance director to CEO in April 2011. He’s modest enough to point out that Segro was very much in the right place at the right time to benefit from the explosion of e-commerce.
“I’d love to say that we predicted all the changes that have come about,” he told Bisnow in an interview. “In reality, we are trying to respond to whatever society or our customers need.”
It wasn’t just blind luck that put Segro where it is today, with a portfolio valued at £14B and rental income of more than £340M a year. Sleath, who received an OBE in the new year’s honours list for services to charity and business, narrowed the company’s focus.
He sold out of regional offices and reinvested the money in the company’s logistics development pipeline. He got out of smaller markets to focus on what he calls the big cities, places where delivery is most difficult, or those logistics hotspots that service huge areas of the UK and Europe.
And now, having put Segro at the top of the pile, there is an evolving challenge. The digitalisation of society has changed how we live our lives, and it is changing the physical nature of our cities and our environment, too. As more of the world moves online, an ever-growing amount of space will be needed to deliver goods or house the data centres that manage the digital universe.
At the same time, the old cliché remains true: They’re not making any more land. How Segro grows, where it builds and how it repurposes old properties offers insight into how cities of the future will evolve.
“We’ve got a growing urban population that we need to service and land is in scarce supply,” Sleath said.
That doesn’t just mean service in terms of the delivery of goods — it means jobs, too. The Greater London Authority is one of many big-city municipal governments that have recently pondered the fact that as urban populations grow, more land is needed to build houses. But if employment space like industrial assets is converted to housing, it has the potential to remove jobs.
“Not everyone is a banker or a tech entrepreneur,” Sleath said. “We need to provide a range of jobs and employment opportunities.”
When it comes to squaring the circle of making it economically viable to build logistics and industrial property on scarce urban land, Segro is one of many investors and developers that has been exploring options that seem obvious, but are actually surprisingly difficult — going up, and going down.
While multi-storey industrial property is common in Asia, that is not the case in the UK and Europe. It is particularly tricky when it comes to pure logistics space, because getting large delivery vehicles up ramps is no mean feat.
Even so, Segro is building a six-storey, 135K SF light-industrial unit on a 1.7-acre site in Brent in north London, which will be targeted at the kind of occupiers that would traditionally take space at low-rise, less dense industrial parks, ranging from small manufacturers to micro-breweries to 3D printing specialists.
Another unusual-for-the-UK element of this particular development is that it will be incorporated into a larger 22-acre mixed-use site to include about 3,350 homes. Industrial and residential are never usually part of the same scheme, for fear that industrial uses will drive down house prices. In this case, Segro co-owns the larger site with housebuilder Berkeley Group.
The ground and first floors will be utilised to provide over 100 parking spaces, with electric vehicle charging points also being incorporated. The flexible industrial space is arranged over four upper levels that can be configured as up to 20 individual units offering a range of sizes.
Elsewhere, Segro is building down rather than up to provide space for the delivery of goods in dense capital cities. It teamed up with French property company Icade to buy a site near the Gobelins train station in southeast Paris.
Icade will build 151K SF of offices plus sports facilities and a communal garden above ground, while Segro will build an 807K SF underground last-mile delivery facility, with the space to be used by companies using electric vehicles and delivery tricycles.
“We’re going to have to look at the best way of serving customers and society, and that will require more and different uses of land,” Sleath said. “The locality and topography of what we build will change. There is quite a lot of existing building capacity, and can that be turned into some sort of fulfilment centre?”
When it comes to converting existing assets like inner city car parks or office buildings to distribution assets, there is a lot to ponder, Sleath said. For one, it might require more space than initially thought. As more cities introduce clean air zones, as has happened in London, urban logistics will increasingly need to use electric vehicles. As such, distribution sites will need space not only for goods to be stored and loaded, but for these vehicles to be charged.
And the conversion of existing assets to new uses will take other forms than just conversion to distribution space, as highlighted by a significant purchase Segro completed just before Christmas.
In January 2016, Segro sold a 958K SF office portfolio in Slough, to the west of London, to AEW for £325M. Now it has bought the portfolio back, paying £425M, because demand from customers like data centre operators, film studios looking for content creation space and life sciences companies looking for lab space makes the portfolio a good bet for potential repurposing.
Then there is the environment in the broader sense, with logistics having an interesting impact on global carbon emissions. Segro is working with tenants to reduce the emissions its portfolio creates while it is in operation, going so far as to procure energy for tenants in countries like Poland to ensure that the power being used by its properties is green.
Its development pipeline, which stands at about 11M SF, is more complex. Up to 75% of the carbon emitted from a property is created during its construction and demolition phase, yet demand for logistics space is so high, the sector simply needs to build.
“We are looking at things like reduced carbon concrete,” Sleath said of the company’s efforts to reduce the embodied carbon created by development. “It makes the development process more complicated because it takes longer to cure, but we are looking at ways to adapt our processes to make sure we can do this.”
Of course, there is the market and money to think of as well. Segro was never the only player in logistics, but in 2011, when Sleath took over, it was a much less crowded field. Today, with industrial consistently outperforming most other property sectors when it comes to returns and little sign of the market slowing, no investor would be seen dead without a "sheds and beds" strategy, and competition is fierce. How to stay ahead of the pack?
Sleath pointed to the company’s scale, which gave it access to off-market deals and allowed it to become a partner of choice for big global logistics tenants like Amazon or DHL.
That also gave the company an insight into rental growth in various locations, he said, which allowed it to pick its acquisitions more forensically.
“Because of the scale we have, there will be assets or locations where we have seen rents go from £10/SF to £20/SF in the space of five years, and we can analyse where the same process might happen again,” he said.
“We aren’t just going to be one of 30 bidders and win an auction because we factor in the highest rental growth.”