SEGRO Plc (SGRO) Earnings Call Transcript & Summary

Well, good morning, everybody, and welcome to our full year results presentation for 2020. I'd rather hope by now, we'd be able to do this in person, but suddenly, it looks like it's going to be a little longer before we're able to be in the room again. Well, 2020 was an extraordinary year with a huge amount of disruption caused by the COVID-19 pandemic. It's fundamentally changed the way we live and work, of course. And although some kind of normality will hopefully resume once the vaccine rollout has progressed. Some of our behaviors and our habits have changed in a more permanent way, be that great propensity to shop online, more flexible working practices or more reliance on data and the cloud. Whilst also become increasingly apparent to most people during the last 12 months is the vital importance of modern resilient supply chains to ensure that businesses can meet these changing requirements and respond to increased demand from their consumers. We're still in the very early days of this process of adaptation, but we've already seen a significant increase in demand for modern, well-located warehouses, both from occupiers planning for the future and from investors eager to gain exposure to the positive trends. And this is what's contributed to the positive news we're sharing with you today. I'm pleased to announce that for the full year 2020, we're reporting, firstly, strong financial results with a 16% uplift in NAV and a further increase in profits, earnings per share and dividends. Secondly, record operating metrics, including our highest ever lettings performance, driven both by capturing reversion on the existing portfolio and by a very strong pipeline of pre-let developments. Thirdly, GBP 1.3 billion of new investment in our business, another record as we seek to capitalize on the favorable trends and drive further growth in the coming years. And fourthly, a confident outlook for our business with encouraging momentum going into 2021. We'll come back to all of this in more detail throughout the presentation. But 2020 was an extraordinary year in many ways. I'm proud that my colleagues at SEGRO rose to the challenges it presented. They coped with the difficulties of working remotely, they supported each other, and they were more engaged than ever. They stayed close to the customers and they reached out to provide support to those who needed assistance. They worked closely with our construction partners to adapt to the changing environment and ensure the safe, mostly on-time delivery of a very large development program. And they supported many disadvantaged members of our local communities, who were particularly badly impacted by the effects of the pandemic. Early in the pandemic, we accelerated the launch of our new Centenary Fund, and I am pleased to report that so far, it's provided almost GBP 1 million of cash funding to over 100 projects and helped more than 70,000 individuals. This included projects to provide emergency relief in the early months of the pandemic by providing food, medicines and household essentials to communities that needed them as well as donations of PPE to frontline workers when it was in scarce supply. Later rounds of funding focused on training and development projects to help back into work those who face barriers to employment or have lost their jobs due to the pandemic. We also provided GBP 541,000 worth of noncash support in the form of free or reduced rent accommodation to a number of charities, including many food banks to enable them to help keep up with the rapidly expanding demand for their services. Making a positive impact on the local community beyond simply the buildings we create and the economic benefits that flow from there is something that we've been doing for many years, as has a focus on the environment and on development of our people. But we've used 2020 to stand back and challenge ourselves as to whether we're doing enough, whether we're focused on the right things and whether we've set bold enough targets. We've talked to our key stakeholders. We've looked at what's important to them, and we've thought about which issues of importance to them and to ourselves can we have the biggest impact on in terms of economic, environmental and social contribution. The result of that is that we have reset, and today, we are relaunching our Responsible SEGRO Framework, with more ambitious goals focused on 3 key priority areas. They are: one, championing low carbon growth. And within this, we've set ourselves a target of being net zero carbon across our entire business by 2030. We'll achieve this by reducing the embodied carbon associated with our development activities, reducing and hopefully, eliminating the carbon associated with the Uslar buildings; and finally, by absorbing any residual carbon. Two, investing in our local communities and the environment. We are targeting the creation of community investment plans for each of our key markets by 2025. This will leverage the SEGRO Centenary Fund, enabling us to expand and intensify the great work we're already doing in some areas of the business, where we're working with our customers and our local partners to provide skills training for local residents. It's also about improving the biodiversity in the physical environment around our buildings and estates. And then, thirdly, nurturing talent. This is about providing a healthy working environment, supporting our people to develop fulfilling and rewarding careers. And we aim to create a truly inclusive culture and a more diverse workforce, which at all levels and in all areas is representative of society at large. Today, we're publishing a separate document, which provides more details on Responsible SEGRO and the initial targets we've set against which we'll report progress. And we look forward to sharing more with you over the coming months of the year as we progress towards those ambitious goals. This is how we will remain a business that's fit for the future, one that helps our customers grow, our communities to flourish and our people to thrive. So now I'm going to hand you over to Soumen, who will talk you through the financials, and then he'll pass on to Andy Gulliford, our COO, who will talk about the operational performance. Then they'll come back to me to wrap up and tell you about what we're doing about the future and our outlook for that period. So Soumen, over to you.

Thanks very much, David. Good morning, everybody. As David has highlighted, the business performed really well in 2020, and that's reflected in a really strong set of financial results. Starting on Slide 6. This slide highlights the key metrics, which are all really positive. Adjusted profit before tax is up 10% to GBP 297 million. Adjusted EPS is up 4.1% to 25.4p. The full year dividend is 22.1p, a growth rate of just under 7%, reflecting a payout ratio of 90% on profits. One more eye-catching numbers in this set of results is the portfolio value, up 10% to GBP 13 billion, which will then end to NAV per share growing 16% to 814p. And the balance sheet continues to be in great shape with LTV at just 24%. So whilst the business has performed very strongly in 2020, it's really important to recognize that SEGRO has delivered very consistent performance over the last few years. This slide shows you how some of our key metrics have grown since 2016, really reflecting the success of our development led growth strategy. Passing rent is up 60%, a CAGR of 12.5%. NAV per share has grown 14% on average over the past 5 years as the sectors we rated, and we've created value through asset management and development gains. Earnings per share and dividend per share have grown 8% and 9%, respectively, over the past 5 years. And you can see the compounding effect of this consistent growth year upon year is a very powerful driver of long-term returns that have outperformance. Moving back now just to focus on the 2020 numbers. This slide looks at net rental income in more detail, which is the key driver of the growth in earnings. Net rent grew by GBP 33 million to GBP 395 million, an increase of 9%. Rents from outstanding portfolio grew GBP 6.7 million, with a positive performance in both the U.K. and on the continent, as we continue to capture rental growth in our passing rent. The like-for-like growth rate was 2.9% or 2.1%, taking into account the GBP 4 million provision that we've taken in respect to potential bad debt related to rent build, but unpaid. Now just to put that in context, that's just 1% of the rent roll. We've collected 98% of all the rent that we were due in 2020, and we expect that number to move up during the course of this year based on the payment plans we've agreed with certain customers. The collection level in Q1 2021 is very good so far at 93%. Moving on to the next bar on the graph. The big increase in rental income has again come on development completions, which added GBP 31 million, reflecting scale and success of our development program. This was offset a little bit by our investment activity, a net negative GBP 3.5 million. Looking ahead, we expect rental income to continue to grow strongly through our development program. Turning now to the rest of the income statement. So you can see in the table here, the top line growth in rental income has led to a growth in profits. Adjusted profit before tax grew 11% to GBP 296.5 million. Our cost ratio has reduced slightly to 21.1%, and excluding the share schemes, is 18.8%. Turning next to NAV. We've adopted EPRA net tangible assets on our definition for adjusted NAV. The main difference in the old and the new is the incorporation of 50% of the deferred tax liability, which is small as you expect for a REIT. The 2019 number that you see on the left has been restated from 708p to 700p. Using the new definition, adjusted NAV per shares rose 16%, that's 114p to 814p over the year. The bar in the middle shows the valuation gains increased NAV by GBP 1, 75% of which was from the standing assets and a very strong uplift on development. Turning now to the valuation in more detail on Slide 11. The portfolio valuation increased GBP 1.2 billion in 2020, a rise of 10.3% to GBP 13 billion. We've seen the continent outperform the U.K. again, continuing the acceleration that we highlighted a year ago. You'll be aware that most of this movement has occurred in the second half of the year after a broadly flat first half. We've seen a strong contribution from virtually every country within the portfolio with a notable 18% uplift in Germany and 10% up in France, the U.K. and in Spain, where the business is reaching critical mass. Here on Slide 12, you can see that the portfolio growth of 10% is driven by a mix of yield shift, asset management and rental growth. We've seen yields tighten across the board, reflecting a very positive and active investment market. The valuation yield is just -- is now 4.5%, which still looks undemanding against prime transaction yields of 3.5% to 4%, and risk-free rates that are either 0 or negative. Pleasingly, our letting activities contributed to ERV growth of 2.5%, with significant movement in both the U.K. and on the continent. Turning now to our financing activity. So we've taken advantage of the strong sentiment towards us in the capital markets by raising over GBP 1 billion of new finance to support the growth of our business. This slide summarize the activity with the key highlights being the GBP 680 million equity placing in June and 820p per share. That's a premium even to the NAV that we're reporting today, and the EUR 450 million U.S. private placement a 17-year money that we undertook in July. Our proactive balance sheet management means that we continue to benefit from a low cost of debt of 1.6% and a low loan-to-value of 24%, as you can see on the graph, a long debt maturity of 10 years, and very liquid balance sheet with GBP 1.2 billion of cash and available facilities. We have significant headroom to all of our financial covenants, and we have no material debt maturities at the SEGRO level before 2027. Our robust and our liquid balance sheet provides a great platform to continue to allow us to invest for growth. We expect to spend in excess of GBP 700 million of construction and on infrastructure this year, and we continue to look at opportunities to top up our land bank, which will increase this spend further, as Dave will touch on it shortly. Now despite our modern and our prime portfolio, we continue to look at disposals to edit and to trim the portfolio around the edges as we believe it is really good investment discipline. We'd expect disposals to be around GBP 200 million this year. So to sum up on the financial side, I'm very pleased to report strong earnings growth driven by a record level of lettings in our development program, a 10% increase in the valuation of our portfolio, and over GBP 1 billion of new financing to provide the firepower for continued investment. Against a strong and this positive backdrop, we've increased the full year dividend by 7%. And with that, I'll hand you over to Andy.

Thank you, Soumen, and good morning, everyone. Soumen has outlined the strong financial results that we've produced. I'm now going to move on to the underlying operating performance, which has made that possible. This performance has been driven by a combination of our own activities, particularly our customer relationships, and an acceleration of the structural themes that are by now well understood. Digitalization of our economies has been a theme for some time. The pandemic has accelerated e-commerce penetration, particularly within grocery and on the continent, which has taken a massive step forward. Digital services and devices of much rent with homeworking, schooling and leisure. Increasingly, businesses are taking their IT systems into the cloud to facilitate remote working. This is driving huge demand for data center space across Europe with the market expected to almost triple in size over the next 5 years. Supply chains have come into sharp focus during the pandemic, resulting in our customers looking at resilience. They want their inventory available on a just-in-case rather than just-in-time basis. This necessarily requires more warehouse space closer to markets. The same trend could well extend new shoring of manufacturing and create additional demand for both industrial and warehouse space. Some have questioned whether the pandemic has reversed urbanization. Major cities like London and Paris may not be functioning as normal at present. But once the pandemic has passed, we firmly believe they will return to being centers of commerce, culture and innovation that will continue to attract people who want to live and work in them. National and local government is certainly continuing to push the housing agenda, which will continue to put pressure on land availability as well as increasing demand for goods and services, which require a network of warehousing and industrial properties to fulfill. Finally, we're seeing more and more of our customers focusing on sustainability. High levels of environmental specification are becoming a standard requirement, in part to support their own sustainability ambitions and in part to reduce costs of operation. Energy efficiency is a good example, diminishing usage to reduce both carbon footprint and cost. This focus on sustainability is also likely to support the trend for localization as customers seek to source closer to their end markets to reduce transportation emissions, more locally based warehouse space will be required. We've developed strong, long-standing relationships with our customers. Understanding how these structural drivers are impacting their businesses helps us anticipate their future requirements. We manage the vast majority of our portfolio internally, which is a great advantage. It means we stay close to our customers and build knowledge of the different businesses that occupy our space. We pride ourselves in providing excellent customer service. 87% of our customers rate their experience of working with us as very good or excellent, and 99% would recommend us to others. We've built strategic cross-border relationships. Almost 60% of our rent comes from customers with whom we have multiple leases, 91% of our current pre-let program is a repeat business. We have dedicated cross-border, key account management teams for our major customers. This enables us to share information and offer a consistent service. It creates opportunities to work with them in new regions. Our simple customer app allows us to share efficiently and to use data analytics to provide real-time news and information on how key customer businesses are performing. A regular futures forum with a dozen or so senior representatives from different customers is important in gathering insight on longer term trends that could impact everyone's businesses. It is these strong customer relationships that help us deliver impressive operating metrics. Not least, in my view, our rent collection of 98% through such a difficult period. Our retention rate remains very high at 86% and vacancy has decreased since last year to 3.9% despite a very active urban warehouse speculative development program. This is at the bottom end of our 4% to 6% target range. Having a reasonable amount of space available is a good thing as it offers the opportunity to set new rent levels and capture reversion rate potential. On that, we secured a healthy 19% average uplift on rent reviews and lease renewals in the period, with 28% in the U.K., helped by our last re-gear of peppercorn leases at Heathrow. Pleasingly, rents agreed on renewal on the continent were positive for the first time at 0.5% as market rental growth outpaced accumulated indexation. And we contracted a record GBP 78 million of new headline rent, with GBP 41 million coming from 38 pre-lets across all major markets. Moving on, you can see that it was also a record year for development, with GBP 47 million of potential headline rent coming from completions. It was a challenging year for construction with shut downs of sites in Italy, Spain and France at the start of the pandemic. Our teams worked diligently in close collaboration with our construction partners to establish safe, socially distance working practices. Ultimately, we completed projects on time and to budget, even early in some cases, to ensure our customers can respond to increased demand for their goods. In total, we completed 47 projects in the period, producing almost 840,000 square meters of new space. Here, you can see some examples of projects that we completed. 29 were pre lets, including our largest London pre-let for Ocado, 2 further data centers in Slough, and buildings across the group for Amazon, Porsche, Geodis, Leroy Merlin, Metro and Garmin. Roughly 1/5 of the space was speculatively developed, including urban warehouse schemes in London, Frankfurt, Düsseldorf, Paris and Amsterdam. Inquiry levels have been very strong with many units already let. Our development pipeline continues to grow with a further 838,000 square meters of space under construction that will generate GBP 54 million of new rent. 66% of this pipeline is pre-leased, which substantially derisks the program. Projects include 2 further developments at our big box Park East Midlands Gateway, which means the scheme is almost two-thirds full; a number of developments in London at Rainham, Hayes and Dublin; 3 new data centers on Slough Trading Estate, taking our total to 32; and our largest ever big box pre-let in Germany at Leipzig for online homewares retailer, Relaxdays, a new customer for SEGRO. Despite the pandemic, we've made good progress with our environmental sustainability goals. Now we have our target of being net zero carbon by 2030, we'll be stepping up our efforts. This BREEAM Excellent scheme at Amsterdam is a good example. It incorporates photovoltaic array, ground source heat pumps, highly energy-efficient heating and lighting, and biodiversity aimed native floor and former. However, if we're to meet our climate change objective, we must also improve the sustainability of our existing buildings. We've recently refurbished a unit of Perivale Park, one of our prime urban warehouse estates located in West London. We installed LED lighting, switched to air source heat pumps and fitted solar panels on the roof. Bird and back boxes improve biodiversity. The use of recycled products reduce embodied carbon. The combination of these measures also helped us to achieve BREEAM Excellence. And to give one final example, SEGRO Park Tottenham shows how our development pipeline can contribute to our wider responsible SEGRO focus areas and goals. The scheme on a brownfield direct site will champion low carbon growth. The buildings have been designed to be net zero carbon in operation. It will contribute to our goal of investing in our local communities. It will create approximately 250 jobs. We will be running a skills and training program, including apprenticeships for residents and a supply chain initiative to make awards to local businesses. And with that, I'll hand you back to David.

Great. Thanks, Andy. So I'm now on Slide 24. Soumen and Andy have explained the detail of our strong financial results, the record operating performance underpinning those figures and the favorable structural themes that drove them. We believe that these structural drivers have been enhanced by the pandemic. They're accelerating, and they'll continue to drive occupied demand for some considerable time to come. That's why we're continuing to invest in anticipation of more growth, investing in land, in new buildings, in our digital capabilities and through our responsible SEGRO strategy that I described earlier in carbon reduction, our local communities and in our people. In fact, in terms of real estate, 2020 was another record year with over GBP 1.3 billion of net investment. This included GBP 603 million of asset acquisitions and GBP 1,817 million of development-related CapEx, being GBP 531 million of construction expenditure and GBP 286 million on land. Our disposal activity in 2020 was relatively modest, given the high quality of the portfolio and the high volume of divestments we've made over the past 5 years. We exited the Austrian market, sold a couple of older assets in London and Paris, and crystallized development gains on some big box assets in Italy by selling them into ourself joint venture. On the investment acquisitions, as you know, we haven't acquired many built assets in what has been becoming an increasingly competitive market due to the weight of capital looking to gain exposure to the sector. Instead, more recently, we focused on development, which generally offers us better risk-adjusted returns. But we are always looking out for investment opportunities where we can add value and where we have a competitive advantage. And we're waiting to act quickly and decisively when suitable opportunities do arise. And for a variety of reasons, 2020 gave rise to 3 fantastic opportunities. The first 2 shown here are a couple of very rare beasts, indeed, sizable and attractive urban warehouse states in London. Perivale Park in the West is a relatively old state, nestled midway between our existing holdings in Park Royal and Greenford. The passing rents are low, and it has development land with plenty of opportunity to drive value. SEGRO Park Canning Town, which is formerly known as Electra Park, is a much newer state in the East, very near Canary Wharf and London City airport. In fact, it's our closest asset to the city, and it complements nicely our existing East Plus portfolio running along the A13 Arterial Road. It's also let on relatively low passing rents with significant reversion potential already. Development land in these types of location just doesn't exist because most of it has been or is being developed for residential use. And we believe that the population density and the growth in these types of locations means that demand for goods and services will rise and industrial rents are, therefore, bound to follow. The third one is Parc d'Activités des Petits Carreaux in Paris. This is the principal asset of Sofibus, the company we had a stake in since early 2018 and of which we now own 95%, having bought another 75% just before Christmas. This park is also a rare asset of some scale, and it's very well-located in Southeastern Paris. Think of it as a smaller version of the Slough Trading Estate about 10 years ago. There's also 17 hectares of development land, which offers the potential for a further 50,000 square meters of space to be built. And then, finally, turning to land. I mentioned that we had invested GBP 286 million in total as we seek to replenish the land bank and create further capacity to expand the top line. This included a terrific portfolio of well-located sites near Barcelona and Madrid, which was well negotiated during the first lockdown period with a vendor that needed speed and certainty. There are about 15 smaller site purchases across the business, across the group, mainly for bolt-on developments next to existing SEGRO Holdings. But most significant investments were the 2 sites for big box development in the Midlands that you can see here, which were products of the original Roxhill partnership. One is near Northampton, one near Coventry, and combined, they will enable us to create over 800,000 square meters of space with a gross development value of over GBP 1 billion. We're now cracking on with a very significant infrastructure program on both of these sites, and yet we've already received a high level of occupier interest even though it will be another 12 months before we can start construction on the first buildings. So we're continuing to invest for growth, and we're looking ahead with confidence about the prospects of the business. And there are several reasons for that. Firstly, we're the proud owners of this super prime portfolio of assets in key European cities and logistics hubs. Supporting the portfolio and driving performance from it, we have a well-established operating platform of 14 offices staffed with some 350 people who are experts in their respective fields. Having this expertise on the ground in key markets gives us a competitive advantage in terms of our relationships with customers and the local business community and the intelligence and the insights that they bring us in terms of our knowledge of local planning regimes and understanding of the priorities of local authorities and in our ability to source new opportunities, whether land or investment acquisitions. Next, we have a fantastic land bank, which offers significant potential for further profitable development. In addition to the GBP 54 million of potential rent from the current development program that Andy referred to, you'll see here that we have another GBP 27 million of potential rent in the near term pre-lets that are awaiting final signature or planning approval before we can start on site. On top of this, we have our anticipated future pipeline, which has grown significantly due to the large land acquisitions in 2020, which now has the potential to add GBP 130 million of annualized rent. And then finally, we hold land options, which could generate a further GBP 62 million of rent when fully built out. It's fair to say that over the past couple of years, in particular, market pricing for new land has been heading in the same upwards direction as investment properties, and development yields, likewise, are following the same trajectory of investment yields. But the premium of 150 basis points or more to the completed -- to the yield on completed let assets remains intact. So we think it still makes sense for us to acquire new land, provided, of course, we remain selective and disciplined, and that's exactly what we intend to do. And indeed, what we did in 2020. But of course, you need to bear in mind that our existing land bank has been bought very well over quite a number of years, and therefore, it represents a very valuable source of potential value creation. So pulling all that data together and looking at Slide 31, you'll see the usual income bridge that we present every 6 months. And you can see that without allowing for any more rental growth or indeed factoring any further disposals, we've got the capability to grow our cash passing rents by 80% to over GBP 800 million. Next then, we believe that the supportive structure drivers of demand, combined with relatively constrained supply, will continue to generate rental growth in our existing portfolio. You've already heard Andy talk about the demand side. The supply side has also become tighter in 2020 with strong take-up and moderate speculative development causing vacancy rates to drop across many of our markets. For most would be developers, landed urban locations remains incredibly difficult to source due to the competing other asset classes, particularly residential. But even out of town big box markets, land with the necessary planning approvals, infrastructure, power supply, all vital ingredients are becoming increasingly difficult to secure. You have seen the ERV growth by market in Soumen's earlier slide. And here, we've given you the historic 3-year averages alongside our ongoing future expectations, which haven't changed. Of course, these are broad averages and there are significant geographical variations according to local market demand and supply dynamics. But it gives you a flavor of the sustainable level of growth we believe is possible and which has been bought out by our history. As we've previously stated, we do expect more rental growth in the U.K. than on the continent and more in urban markets than in big boxes, which is why we like the approximate two-thirds weighting we have to urban within our portfolio. So to summarize and conclude, our confidence in the outlook for our business stems from several elements. The structural trends, which continue to be supportive and which accelerate both occupier and investor demand for our types of properties. The restricted land availability in our key markets, which means that the supply response is limited. The prime portfolio of sustainable assets we already have, which should be able to generate further sustainable rental growth. Fourth, an exceptional land bank that allows us to continue to develop an attractive yield on cost. Fifth, as Soumen demonstrated, our strong balance sheet that gives us significant capacity for further investment. And six, our highly motivated team and our strong operating platform across 14 offices. But perhaps most important of all, we've reset and relaunched our Responsible SEGRO Framework with 3 clear focus areas and ambitious targets, which we believe will truly position us to deliver on our purpose of creating the space that enables extraordinary things to happen for all our stakeholders. We are, of course, aware that there is still much near term uncertainty in the world around us, and we remain alert to the risks associated with the ongoing pandemic. But we started 2021 in great shape, and we're as confident as ever about our prospects for further growth. So thank you for your attention. We'll now move to questions. You can ask questions either through the web platform or over the telephone. As we usually do, we'll first take any live questions from the telephone, and then we'll move to the web platform. So operator, can you please open up the line for questions. Did you get that operator? Is the line opened for questions? I can't hear any questions. So let's look and see if you've got any coming through on the web platform. Sorry for the pause, folks. Sure, there are some questions.

David, we have a question from Paul at Barclays.

Okay. Yes, okay. Pop it up. Paul, yes, thanks, Paul. The Polish portfolio materially underperforming in terms of valuation growth. Does the recent disposal by EuroBox in Poland at a premium of 15% to book value and a 4.95% yield change this for H2 given your Polish portfolio was valued at 5.7% in 2020. Look, we think we've got a fantastic portfolio in Poland. And as with the rest of the portfolio, we are constantly looking and reviewing every single asset to work out whether it justifies and deserves its place in the portfolio. We've known for a long time that rental growth, and we've been saying that rental growth is lowest across our business in Poland. There basically is very little rental growth there. But we think that's compensated for by the higher yields. So as a kind of total return model business, we're happy with our exposure to Poland. But we wouldn't discount the possibility of selling individual assets from Poland and indeed, elsewhere. But nothing specific to say beyond that, I would say. Andy or Soumen, do you want to add anything? Okay. We've got a question from Peter at Green Street. Can you speak to your expectations of average re-leasing spreads for 2021 and 2022? Should we expect better prints than those prior to 2019? So what are we going to see in terms of uplift on rent reviews and renewals. I don't know, Andy, whether you want to comment on that.

Yes, sure. I think, given our expectation of rental growth and the reversion that we have in our U.K. portfolio, we should, hopefully, seeing things move forward. That would be my expectation. I think it ties absolutely with the lack of supply, high demand, rental growth into lease events, renewals, reviews, et cetera. And we've shown we've been picking those up over the last couple of years pretty substantially. So I'd anticipate that, that would continue.

Yes. I mean it's probably worth mentioning the last 2 years have actually both have a little bit of a boost from the re-gears of some of the old peppercorn rents at Heathrow. So whether better than the last year or 2 or a continuation, we certainly think there's plenty of opportunity to keep capturing that higher rental growth. Another one from Thomas at Clearance Capital referring to Slide 12. Can you give some additional color on the underperformance of ERV growth in Italy and France? I think, Soumen, it's on one of your slides. But I don't know whether you want to comment on it or pass to Andy?

I'm happy to start. Look, I think David showed you, let's go to the slide with our expectations for rental growth. And those, as David said, have not changed at all. So we talk about [Technical Difficulty]. And urban, we should get 2% to 5%. And that's really a function whilst the demand is extremely strong. The land supply is tightest in those urban areas. And therefore, that's where we feel the greatest rent growth come through big box. And therefore, you're highlighting Italy and Poland, which are big box markets for us. Once demand is clearly there, the land supply as we've shown in our chart is moderate. And that, therefore, does quell the absolute level of rent growth that we'll achieve there.

Yes. Those are 2 of the most competitive markets, where there is just more land available. So as in every product and asset class in the world, it's all about supply and demand. We talked about the strong demand pretty much everywhere. The real swing factor in terms of rental growth is just how much supply is there, either in existing or latent supply. It's always impossible to create new supply in some of the most dense urban centers. It's a bit easier to create new supply in some of those big box markets and particularly in parts of Poland and in some cases in Italy.

Okay. Just where do we go next? I'll just pick this. A question from Christian. Is like-for-like rental growth in Europe all driven by occupancy growth? So is it vacancy reduction? Or is it driven by rental growth improvements? Okay, Soumen, yes?

The simple answer, Christian, is look, the like-for-like growth is obviously a function of net rental income growth. So it's not the gross rent that we're getting, it's the rental uplift less any changes in cost. You're absolutely right that the really strong growth we've seen in Europe was a function of a lot of some occupancy growth we've seen that particularly in Germany and particularly in Poland, and that's really pushed that like-for-like growth up to levels that you see.

We're really, really pleased with our vacancy position in Europe. When you look at Spain, we've got no vacancy. When you look at Poland, we're at least 200 basis points below the market level France did. So we're really pleased with the way our letting program is gone for sure.

Okay. Thank you. Miranda from Panmure has come in. Lord Wilson suggesting yesterday a 50% increase in rates for distribution space. If changes are made to the rate systems, do you think this will temper rental growth prospects? I'm sure most people would have picked that up. That was in the U.K. news yesterday. And I think I have a lot of sympathy with certain aspects of what Lord Wilson was saying because, frankly, the rate system is hopelessly unfit for purpose. We all know that the rates should move up and down according to how rental values move, and they're not -- and the system does not allow that to happen on a timely, sufficiently rapid basis, and that's a fundamental issue. His suggestions that a big rates reduction is given for retail property, and it's added to the warehouse again if the rating system were nimble and that's an agile enough, that should happen, but it's not. Now there's a fundamental review of the whole rate system going on because probably, there's a recognition in government as well, but it's a much bigger issue. In terms of what's the impact on us, I mean, I think a couple of points we'd make is, one, we'll be saying to the government or anybody else who wants to listen, you've got to remember that warehousing is not just about giant Amazon e-fulfillment centers. There's a very wide range of different customers and occupiers who use those buildings, some of whom are SMEs and some of whom are bigger businesses. But frankly, they enable -- warehousing enables the whole economy to operate, not just online. So we'd be urging portion around taking any draconian steps that damage the really important supply chains that we have that support many, many different industries. But in terms of the specific question, it just -- does a fundamental change in the rate system credit temporary rental growth prospects in our sector. Well, again, Miranda, it comes down to supply and demand. Is it going to impact the supply? Maybe. Because if you're a developer and you're facing the risk of empty rates, you might and expect a bill, you might not want to develop as much. Is it going to affect the demand? I don't think it will. I mean, the reason why people are spending so much more on online shopping, it's because they love it. I mean, consumers love it. And we're doing a lot more because new people have been introduced to online retail during the pandemic. It works. It's efficient. The range is incredible. And so I don't think a change in rating system or digital sales tax is going to fundamentally change the fact that online is going to keep growing. How all that plays out in terms of rental growth, we can work out in time, but I'm not too concerned about that right now. But really, we're watching -- we will watch and we will engage with government as they complete their fundamental review. We've got one from, where we are now from -- given the surge in valuations and the decline in retail park valuations, is just from us, how far off are we from a crossover retail part or similar locations being change of use to urban warehousing, Andy, have a go at that one, please?

Okay. We're not far off, although I have to say, probably of all aspects of the retail sector, the out of town retail warehousing side is probably the best performer, which is, as you all have seen in the marketplace, recently led to some trading of those parks, largely because the -- I guess, the pandemic with the kind of large footprint carbon almost sort of outside nature of those parks has been more attractive to shoppers. So although sort of falling rents and yields, not quite so much in that sector. You've really got to look at the very valuable areas, I think. So for example, in the U.K., that will be London for industrial rents and yields to make up the difference of conversion costs. And to be honest, probably the biggest practical difficulty is the kind of landlord and tenant situation, so actually getting vacant possession to redevelop. We tended to find, when we've looked at some, we have looked at some and we continue to do so, is that the better occupiers are in dispersed with not so good occupiers, but to actually get a sensible phasing the concession is quite hard, and planning too isn't always easy. So there's an opportunity. We don't think there's [Technical Difficulty] of retail parks turning into urban logistics. We're keeping our eye on things. We're certainly looking. Some have already bought some. We've seen Amazon, for example, by one in North London, which is instructive and interesting. So it's something we keep our eyes on, but not the obvious crossover that you might expect. And I just think high street and shopping center, probably just too tricky with accessibility and the construction and structure to really make a massive inroad into urban logistics. There will be some pick and collect, pickup points, et cetera. Some consolidation, perhaps large consolidation centers in shopping centers, but nothing major.