SEGRO Plc (SGRO) Earnings Call Transcript & Summary

Good morning and welcome to the SEGRO Half Year 2021 Results Call. My name is Ruby, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, David Sleath, CEO of SEGRO, to begin. David, please go ahead.

Thank you, Ruby. And good morning, everybody, and welcome to our half year '21 results presentation. Well, 2021 has got off to a terrific start for SEGRO, and the momentum that we saw build through the second half of 2020 has continued into this year. Our markets are roaring ahead with structural tailwinds strengthening and driving both occupational and investor demand for high-quality industrial assets, with no signs of it abating anytime soon. And this backdrop has contributed to the positive news we're sharing with you today, the headlines of which are that we are reporting another set of strong financial results with a GBP 1.3 billion valuation surplus and a 19% increase in adjusted profit. We've been capitalizing on and taking full advantage of the favorable market conditions, securing GBP 38 million of new rental commitments, capturing significant uplifts from rent reviews and renewals, pushing on with our development program and sourcing further opportunities to feed the hopper in the future as well as staying disciplined by selling assets into a strong investment market. We've also made important progress with our Responsible SEGRO focus areas of championing low-carbon growth, investing in our local communities and environments and nurturing talent. And finally, we remain confident in the outlook for our business. We believe that the market will remain supportive and that we have strong competitive advantages that will enable us to continue generating outperformance from our existing asset base whilst also finding profitable new opportunities for development growth. I'm now going to hand you over to Soumen, who will talk you through the results. And he will then pass on to Andy Gulliford to cover the market conditions and how we're capitalizing on them. Then I'll provide a short progress report on Responsible SEGRO. And I'll end the presentation by telling you about our future growth prospects and why it is that we are confident in the outlook for the business. So Soumen, over to you.

Thank you, David. Good morning, everybody. As David has highlighted, the business had a great start to 2021. And I'm going to -- that's been reflected in a very strong set of financial results, which I'll talk you through this morning. Just starting on Slide 4. This slide highlights our key metrics, which were all growing strongly in the period. Adjusted profit before tax is up 19% to GBP 168 million. Adjusted EPS is up 10% to 13.8p. And the interim dividend has been set at 7.4p, a growth rate of just over 7%. You'll recall that our usual approach is to set the interim dividend at 1/3 of the level of last year's full payout. Looking at the last line -- on the bottom line of the table. The portfolio growth has been very positive once again, up 10% in just 6 months, with the portfolio now valued at GBP 14.4 billion. That's led to NAV per share growing 12% to 909p. And the balance sheet continues to be in very good shape with LTV at just 21%. Then to Slide 5, and this is the usual slide that looks at net rental income growth, the key driver of the growth in earnings. Comparing the first half of 2021 to 2020, net rental income grew GBP 31 million to GBP 219 million, an increase of more than 16%. Rent from the standing portfolio, that first gray bar, grew GBP 8 million as we continued to capture rental growth in our passing rents. The like-for-like growth rate was 4.7%, as you can see in the small box at the top, with similar levels of growth in both the U.K. and in the continent. Note that this benefits a little bit from the lower bad debt provision this year when you compare it to last. And as the small Note 1 can explain to the bottom, the growth rate would have been a very healthy 3.7% pre-provision, which may be a better reflection of the underlying trend. In the next gray bar on the graph, development completions have again had a big impact, adding GBP 11 million. And in terms of acquisitions, you'll recall we had a particularly successful 2020 executing some large and strategic acquisitions, particularly in London and in Paris. Those have added a further GBP 10 million to net rent in the first half. And there were no impact from disposals during the period. Looking ahead, we expect rental growth to continue to grow strongly through development program, especially with the completion of -- the volume of completions that we expect in the second half. Tangentially, just while I'm on topic of rent, now that the rent collection has broadly normalized, going forward we won't be putting out stand-alone press releases detailing rent collection each quarter unless there's anything unusual to report. Turning now to the rest of the income statements on Slide 6. You can see on the table here that the top line growth in rental income has fed through the similar growth in profits. Adjusted profit grew 19% to GBP 168 million, in line with the 18% growth in rental income. As I mentioned before, EPS grew 10% to 13.8p, and that lower growth rate is due to the higher number of shares in issue from the equity raising back in June 2020. You can see that in the last line of the table. The cost ratio has fallen once again, now to 19.8%, and excluding the share schemes, it's 17.4p (sic) [ 17.4% ]. Turning next to the portfolio valuation on Page 7. So the portfolio valuation increased GBP 1.3 billion in the first half of 2021, at a rate of over 10%, to GBP 14.4 billion. That's added 111p to NAV per share, accounting for pretty much all of that growth of 12% in that metric. We've seen the continent outperform the U.K. once again, although there's been a strong contribution every country. Below the graph, in the last line, you can see that the held-throughout portfolio grew by 8.5%. The 1.7% difference between that and the whole portfolio return of 10.2% is mainly due to the contribution of our development pipeline. Moving to the next slide, Slide 8. And here you can see some of the drivers of the portfolio growth in some more detail. Yields continue to decrease across the board, down 30 basis points to 4.2% overall. Interestingly, we saw the biggest shifts in those markets that saw the least in 2020, such as Italy, Poland and Spain. The portfolio yield still looks pretty undermining at 4.2% against prime transaction yields of 3% to 4% and super low bond yields. Indeed, we completed a couple of disposals in the past few weeks in Italy and in Spain at very significant premium to December valuation, so we can vouch for the depth and diversity of investment demand for high-quality products. Looking at the middle of the slide and looking at ERVs, we're pleased to see that our letting activities contributed to rental growth of 2.8% across the portfolio, with significant movements both in the U.K. and in the continent. London continues to lead the way, with rental growth outside of Heathrow of 5% to 7%. Our London, Slough and Continental European urban estates together represent 2/3 of our portfolio; and this continues to deliver higher rental growth than big box. Turning to Slide 9. We're sometimes asked how much the performance is cap rate shifts versus rental growth and how much is due to management action versus the market. Now these aren't simple questions to answer because you can't fully disaggregate each component or simply view cap rate shifts as market-driven only. For example, a refurbishment followed by some smart leasing activity will, hopefully, likely lead to higher rents but likely also lead to lower yields, but to try and put some color and some detail on this, on Page 9 we've set out our total property return against our benchmark, which is calculated by MSCI based on their country, industrial and logistics indices weighted by value for comparability to our portfolio. Now despite having a lower-yielding portfolio than the benchmark because it is more prime, you can see on the graphs that we had outperformed every year since 2014. And in 2020 alone, our outperformance was 3.5% ahead of the benchmark. The average outperformance over the last 7 years is 1.7% each year, of which around 2/3 comes from the standing portfolio and the remainder from developments. Our strategic and our thoughtful approach to portfolio management sets the basis for this long-term outperformance. We are continually upgrading the portfolio through profitable development program as well as selective acquisitions and also by selling existing assets, which we believe will not hit our risk-return hurdles on a look-forward basis. And the main driver is the stuff you don't see. These are the hundreds of individual asset management transactions undertaken by experienced team located in local offices across the U.K. and Europe. And these improve rent, extend leases and in aggregate drives the performance of our standing portfolio. Andy and David will touch on some of these in a moment. But on Slide 10 -- just moving to the next slide and turning now to the balance sheet and financing. We continue to have a very strong balance sheet to support our growth plans, with LTV at just 21%. The cost of debt has fallen a little bit further to 1.5%, in part due to our first green bond which was issued in May by SELP under our new Green Finance Framework. The bond raised GBP 0.5 billion of new debt at a coupon of 0.875% with an 8-year tenor. That helps top up our liquidity to GBP 1.2 billion and keeps our debt maturity just shy of 10 years, which I believe is one of the longest in the sector. This provides a great platform to allow us to continue to invest for further growth. We expect to spend GBP 750 million on construction and on infrastructure this year. And we continue to look at opportunities to add to our land bank, which would increase this spend further, as David will touch on later. And as just mentioned, we continue to consider disposals to edit and to trim the portfolio around the edges, as it is good investment discipline. So following some sizable sales for SELP in the first half and also a portfolio of Italian assets sold just after the period end, we're increasing our disposals guidance to around GBP 300 million for the full year. So finally for me on Slide 11 and to sum up on the financial side, I'm very pleased to report strong earnings growth driven by the capture of reversion, a strong leasing performance and development program, a 10% increase in the valuation of our portfolio and a balance sheet that is well positioned to support future growth. And against this strong and positive backdrop, we've increased the interim 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 describe what has made that possible: firstly, favorable market conditions; and secondly, our own activities which ensure we maximize the opportunity and deliver the strong operational performance. Occupier demand is being fueled by a number of long-term trends, which are resulting in strong take-up levels across all of our major markets. One of the strongest drivers is e-commerce penetration, particularly on the continent where online sales are 5 to 10 years behind the U.K. and retailers are having to adapt their supply chains to respond to omnichannel delivery requirements. Even for the U.K., there's significant growth to come, and some researchers are predicting it will hit 50% of retail sales. At the same time, supply is very low. While developers have increased their programs to respond, this is still not sufficient to keep up with the increased demand. Across Europe, vacancy levels have fallen to a record low of below 5%. In our markets, supply is now frequently less than 1 year's worth of take-up, and much lower than that in urban locations. The last 12 months has also seen very strong appetite for industrial assets from a wide range of investors. This has fueled a record level of investment into logistics, helping to drive market-wide yield compression. Our teams are working hard to respond to the opportunity that these dynamics create and to position ourselves well to fully benefit. Moving to Slide 14. We signed GBP 38 million of new rental commitments during the period in a mix of existing space and new pre-let projects. An example of an existing space letting is at our Origin scheme in West London. A unit was returned to us at the start of the pandemic due to insolvency. It's now been taken by Ocado, an existing customer on the estate, who are expanding their business to respond to increased online food grocery sales in the U.K. We're also seeing occupier demand from new sectors such, as quick or q-commerce and creative industries, particularly in our urban warehouse portfolio. Recent lettings in these sectors include rapid-delivery grocers Gorillas and Getir; home food delivery company Deliveroo; and just past the half year, to a leading content provider for studio space. In Germany, we've almost leased the speculative space we're developing in Berlin, Cologne and Düsseldorf, which isn't due to complete until later in the year. Our new French urban logistics schemes are also seeing strong interest in lettings. We're increasingly seeing e-commerce-related demand in our urban space on the continent, for example, from online electronics retailer Coolblue, food retailer REWE and various major parcel delivery operators. New pre-lets contributed GBP 21 million to our total. They included a new multilevel data center on the Slough Trading Estate; and pre-lets for online retailers; and third-party logistics providers across Europe, an example being XPO. Our operating metrics continue to be strong through the active management of our portfolio. Our retention rate remains very high at 83%, and vacancy is still at the lower end of our 4% to 6% target range at 4.3%. Having a reasonable amount of space available is a good thing. It offers the opportunity to set new rental levels and capture reversionary potential. On that, we secured a healthy 12% average uplift on rent reviews and lease renewals in the period, with 16% in the U.K. and 2% on the continent, where we're really starting to see market rental growth outpace accumulated indexation. Our portfolio is now under-rented in both the U.K. and Europe. And we have GBP 36 million of reversionary potential, up from GBP 28 million at year-end. And just a reminder that the 2019 and '20 numbers include the uplift on the Heathrow peppercorn lease re-gears that are all completed. On Slide 16. Our investment activity during the period has continued to focus on our development pipeline. We sourced GBP 92 million of land acquisitions across many of our key markets and spent GBP 364 million on development. In terms of asset recycling, we sold a portfolio of Italian big box warehouses to our joint venture SELP, completed the sale of a warehouse that we developed on a freehold basis in our East London portfolio and disposed off a car showroom in Reading. Since the end of June and not included in the GBP 154 million of disposals, we also sold a portfolio of our urban warehouses in Italy. We developed this portfolio to help one of our largest customers, a global online retailer, with their expansion plans. They're great assets but not in the micro locations where we want to hold long term, so we took advantage of the strong investment market and disposed of them for EUR 128 million, materially ahead of our year-end valuation. We'll be recycling this capital into a number of other projects that we have under development or about to start in Italy. As a result of this transaction, we now expect to dispose of around GBP 300 million of assets in 2021. Turning now to our development program on Slide 17. As you'll see from the chart on the left, we're on track to complete a record level of development this year, with the majority of completions weighted towards the second half. Our current development pipeline has grown yet again and now consists of over 1.1 million square meters of space, equating to GBP 74 million worth of potential headline rent. 72% of this has already been secured, which substantially derisks our development program. Some of this space will be delivered in '21, with the remainder in 2022. And just a reminder that we target BREEAM 'Excellent or Very Good for our developments. On Slide 18, you can see some recent examples of projects and customers. Across the group, the list includes 4 developments at our big box park East Midlands Gateway, which means the scheme is 75% complete; a number of developments in London, including Hayes in the West and Tottenham in the North; a series of exciting projects in Italy, including our biggest-ever group-wide pre-let of nearly 200,000 square meters with a major online retailer just west of Milan; further phases and new schemes to continue our successful continental urban warehouse program, including in Amsterdam, Berlin, Frankfurt, Munich, Paris, Lyon and Warsaw; and various pre-lets for leading global online retailers, third-party logistics providers and parcel delivery companies across the continent as distribution networks respond to increased levels of e-commerce. On the slide, we featured Barcelona and Poznan. So as you can see, there's a lot going on and our teams are extremely active. And with that, I'll hand you back to David.

Well, thanks, Andy. I'm now on Slide 19. Alongside the management of our property portfolio, we've also been working hard on the Responsible SEGRO focus areas that we shared with you earlier in the year. As a reminder, these are championing low-carbon growth; investing in our local communities and environments; and thirdly, nurturing talent, creating a truly inclusive culture and a more diverse workforce. We've made good progress already in 2021. Under-championing low-carbon growth, we've set ourselves a target of being net carbon 0 across our entire business, including scope 3 emissions by our occupiers, by 2030. To help us reduce the embedded carbon generated by our development program, we're now undertaking BIM modeling; and full life cycle carbon assessments for all our projects greater than 5,000 square meters, which is pretty much everything. This allows us to fully understand each building's footprint and to then target the highest-impact areas to reduce carbon. Often, we find this is linked to the concrete and steel elements, so we're continuing to introduce new ideas and techniques into our construction programs such as using recycled concrete and timber beams in the frames. The second part of the carbon journey is to take out operational carbon generated through the use of the buildings. Now one of our biggest challenges here is the visibility of data because for large parts of our portfolio, the occupiers source their own energy, so we're now actively engaging with them and with our customers to persuade them to share their data with us. Through the work of our frontline teams, we've already made some good progress. And we have moved visibility from over 40% which was at the end of last year and expect it to be well over 50% by the end of this year. The next step after that, of course, is then to influence our customers' actual usage and sources of supply, encouraging them to switch to renewable tariffs and working with them to reduce their engine usage. This is where our investments in features such as solar panels, LED lighting, building sensors, et cetera, not to mention our direct customer relationships, can help us enormously in taking our customers on a win-win journey. Poland has been a big success for us this year because it's one of the few countries where we actually procure the energy on behalf of our customers. And we've now managed to switch our suppliers there to an entirely renewable energy tariff. That's very important because Poland is actually still a coal-based economy, and the emissions there contributed to almost half of our reported total carbon emissions for 2020. Investing in local communities and environments is about creating employment opportunities for people living in our communities; supporting local businesses in our supply chains; and improving the physical environment, including biodiversity. We set ourselves the target of creating Community Investment Plans in support of these ambitions for every key market by 2025. And we made a good start, setting up the internal framework and the organization with CIP champions appointed across all areas of the business who are now working with our central teams to put local plans in place tailored to the specific needs of each market. We're now preparing to launch the first 8 of our CIPs later this year, supported by the SEGRO Centenary Fund, which provides some of the funding needed to support various initiatives. The fund itself has now committed its third and fourth rounds of funding, sponsoring 23 different projects and supporting over 3,000 individuals, with a particular focus on employability and skills training. And then finally, we're using 2021 to really understand where we are when it comes to nurturing talent. This will help us to prioritize the areas that we focus on over the longer term. So we've undertaken a comprehensive audit of our policies and practices by the National Equality Standard. And we participated in the social mobility index for the first time. We've also carried out workshops to deep dive into some of the areas identified in last year's all-employee engagement survey. And the reason we undertake these assessments is they give us a benchmark against which to compare ourselves, but more importantly, they help us then to map out the areas where we can improve in order to achieve our goals within this nurturing talent strategy. Overall, we've made good progress so far with Responsible SEGRO. And frankly, we're absolutely delighted with the response we've had from our staff, our customers and our other business partners. And we'll be providing a fuller update on our progress in all of these areas with our full year results. So let's now move into the final section of the presentation, the outlook for the business and why we have great confidence in our ability to continue performing well. As shown on Slide 23, there are now -- there are a number of long-term structural trends that have been benefiting our sector for some considerable time. We've talked about them in the past and I don't intend to go through them in detail now. But what I would say is this, the digitalization of our economies is having a profound impact on occupier demand for our space, be it as a result of increased demand for data and therefore resulting in the need for more data center space or from e-commerce growth and consumers' expectations to have goods and services delivered to their homes faster than ever before. Everyone knows that online sales saw rapid growth during lockdown -- the lockdowns implemented last year. And of course, understandably, Internet sales penetration levels have since dropped back somewhat as physical retail has reopened, but cultural barriers to using e-commerce have been overcome. Habits have changed during the last 18 months. New e-commerce offerings have been developed. And as a result, the long-term trend towards increased online shopping has been amplified and accelerated by the pandemic and this has given a new impetus to the demand for space. Coupled with that, many customers and logistics suppliers are placing renewed emphasis on supply chain resilience, nearshoring and local sourcing; improved customer service or better inventory management, which are also fueling increased demand for modern, well-located warehouses both in the urban markets and big boxes. And as Andy said, the supply of space to meet that demand is struggling to keep up. Meanwhile, sustainability concerns are becoming an ever more important feature of conversations we're having with our customers and with real estate investors. SEGRO is very well placed to respond to these challenges and to take advantage of the opportunities they present. And in the next couple slides, I want to explain why we believe that's the case. So moving to Slide 24. Firstly, we have a fantastic super prime portfolio of very modern assets in key European cities and logistics hubs. 2/3 of the portfolio is in urban warehouses. These are located in and around the edge of major urban conurbations in densely populated cities like London, Paris, Frankfurt and so on. In many of these cities, there is a structural supply shortage. Industrial land is frequently being turned over to other uses, particularly residential; and that limits the supply response at the same time that population growth and digitalization create extra demand for industrial space. The increasing demand and the limited supply create a unique tension that is driving rental growth, and you've seen that coming through in our numbers, is creating the stimulation -- the stimulus for innovation in terms of multistorey and mixed-use development. And it's placing a premium on the connectivity attributes of individual sites in terms of digital, and power, and access to public transport infrastructure as well as, of course, to arterial roads. And our portfolio is brilliantly positioned to face these challenges and the opportunities they offer. Many of these attributes also increasingly apply to the very best out-of-town big box logistics locations because the available land is being rapidly used up and gaining planning consents and bringing in the digital capacity and the power for new schemes in an incredibly arduous and slow process. Our second source of competitive advantage is a terrific operating platform which has helped to create this portfolio and continues to drive performance from it. We've got 14 offices across the U.K. and Europe staffed with some 350 people with local expertise in all of the key disciplines. Having this capability on the ground in all the key markets gives us an advantage in terms of our relationships with customers and the local business community and the insights that they bring us; our knowledge of local planning regimes and our understanding of the priorities of local authorities; our ability to source new opportunities, whether land or investment acquisitions; and our ability to identify and deliver opportunities to redevelop, intensify or repurpose existing assets in areas of extreme supply shortage. Moving on to Slide 25. Although the majority of our portfolio is now modern space and relatively recently developed, we do have multiple opportunities to create value through redevelopment and the intensification of land. And a good example is shown here on the Slough Trading Estate. You can see that this site on Ajax Avenue was formerly a row of low-level 1960s multi-let terraced warehouses that were, frankly, nearing the end of their useful lives. During the first half of the year, we negotiated a series of deals to relocate existing customers elsewhere on the estate; and convert these older warehouses into 3 new multilevel data centers which are going to be built over the next several months, increasing the lettable floor space from around 70,000 square feet to over 400,000 square feet and significantly increasing the average rent per square foot at the same time. Clearly it's a specific example relating to the fact that Slough has become such a mecca for data center operators. There will be plenty of other opportunities here and elsewhere in our tightest urban markets, particularly London, I would say, in the South East, both for data centers and for other value-enhancing intensified uses. The main point being that the locational strength of our existing portfolio and our operating platform are becoming even more valuable sources of growth. On Slide 26, you can see that, in addition to the existing portfolio, we have a fantastic land bank which provides significant potential for further profitable new development. Earlier in the presentation, Andy mentioned that the GBP 74 million of potential rent from the current development pipeline is under construction. And we also, you can see here, have GBP 22 million of potential rent in the near-term pre-lets that are now just awaiting their final customer signature or a planning consent in order to commence construction. On top of this, we have our anticipated future projects planned for land on the balance sheet which have the potential to add over GBP 120 million of annual rent. And then finally, we hold land options which could generate a further GBP 66 million of rent when fully built out. Our average development yields on our existing land bank and options continue to range between 6% and 7%, or more than 10% if you look at the yield on the remaining capital spend, which means it's incredibly profitable when compared with the current investment yields. Now as we look to keep adding to the hopper of future opportunities, it's fair to say that in most cases land prices in prime locations have risen in response to investment asset pricing, so that against prime investment yields of, say, 3.5% to 4.5%, development yields on new land purchases are unlikely to average much smaller than 5% to 6%, which we think is fine because it can still be very profitable if you're buying the right land with what is a 150 basis point development yield premium over the investment yield. And in our case, we also believe we have the platform and the network to be able to continue sourcing new opportunities in off market and in more creative ways, so we do remain confident in our ability to keep adding to the development hopper in very profitable ways. So pulling all that data together and moving on to Slide 27. Here is the usual income bridge that we present every 6 months or so. You can see that, without allowing for rental growth, further land purchases or uplifts from the future redevelopment and intensification of existing assets, nor factoring in any further disposals, we have the capability to grow our cash passing rent by 80% to GBP 850 million. Every 6 months, we present this chart. And for those long-term followers of SEGRO, you'll know that, over a 4- or 5-year period, the right-hand side we predict becomes a reality on the left and the bar on the right-hand side keeps growing. And I'm confident that will continue to be the case as we look ahead. So to summarize and conclude on Slide 28. Our confidence in the outlook for the business stems from several elements: the structural tailwinds which continue to drive occupier and investor demand; the restricted land availability, which means the supply response is limited; the prime portfolio of assets we already own which should produce sustainable rental growth and offer profitable redevelopment and repositioning opportunities; an exceptional land bank that allows us to continue to develop with an attractive yield on costs; our highly able and motivated team and our strong operating platform across 14 offices, which gives us confidence in our ability to both deliver outperformance from existing assets as well as sourcing and bringing through new opportunities; our strong balance sheet which gives us significant capacity for further investment; and finally, our commitment to Responsible SEGRO, which is being centrally led and coordinated but increasingly now embedded in every aspect of our business. All of these things combine to form a unique competitive advantage that means we're as confident as ever about our prospects going forward. So thank you for your attention. We'll now move on to questions. As the operator said, you can ask questions either through the web platform or over the telephone. So Ruby, I'm going to pass it back to you to kick off the Q&A. Thank you.

[Operator Instructions] Our first question is from Colm Lauder of Goodbody.

Congratulations on another very strong valuation outturn. I just have a question on construction costs and construction cost inflation. Obviously, I know a significant proportion of your development pipeline is on fixed-price contracts. So obviously that mediates somewhat the increases, but when we hear that, we can say, the panels, et cetera are increasing at double-digit rates over the course of the last 6 months, I'd be interested to see what implications that had -- has had on some of your development costs and projections. And also, perhaps as a second point related to that, just to get a bit of an understanding as well on the progression of the yield on costs for your developments, just checking back to the H1 last year. You were over 7%, around -- on the completed developments around 7.2% yield on cost; 0.7% yield on cost this year. So it would be good to understand in terms of the drivers of that, and obviously, under the first point then, on how you're experiencing the changes in construction costs?

Yes, sure. Okay, Colm. Thank you. Thanks for the questions. Andy, do you want to pick up the -- some comments on what we're seeing in terms of construction costs across the markets?

Yes, sure. Well, we are seeing some increase in construction costs. It's patchy, but certain elements, in particular steel, cladding, are contributing to enhanced construction costs. As you said in the question, the current pipeline is unaffected by that because we've got fixed prices already agreed with major contractors. So we're protected, in that sense, with those situations. And we work very closely with main contractors who have both availability and purchasing power to make sure that we have availability at the very best prices. Going forward, as I say, we work with the right contractors. We are likely to see some inflation, but given the demand and supply dynamics that we see in the market and the rental growth that is clearly coming through, we actually probably see that inflation as an additional element, if you like, to rental growth. And we'll probably be passing that through to customers on pre-lets. So we're watching the situation closely but at the moment don't have any concerns over the existing pipeline in either costs or time, and going forward, anticipate that we will be able to pass on inflationary increases through the deals that we're doing.

Yes. And on the sort of the development yield on costs, you can see in the data. I mean, if you look back over several periods, it does ebb and flow. I mean there's clearly been a trend over several years for development yields to edge down a little bit, but that's hardly surprising when you see what's happened to prime investment yields. In fact, it's quite remarkable that we've been able to still have a book of business nearly 5 million square meters of space and 2.8 billion of capital to spend, still throwing off on average 6% to 7% development yield given where current pricing is. And that reflects the fact that we've sourced our land well over several years, some of it held under option, some of it on balance sheet. The particular development yield metrics between current, near-term pre-lets, future pipeline each period, of course, varies a little bit according to what's actually in the hopper and particularly the stuff that's under development in the near term. It'll vary according to which particular projects, which geographies because clearly they vary a little bit between different markets, the nature of the projects. If we're going to be doing a long let -- lease to a major global hot fund retailer in somewhere like Germany or the U.K., it's going to be at a relatively tight DY. And in others it will be bigger. So it's just -- it's always just a mix factor, but I think overall, Colm, we're pretty pleased that we've still got that 6% to 7% average in the development pipeline.

Our next question is from Paul May of Barclays.

Just 2 or 3 questions from me. You mentioned development and -- land is harder to come by, yet your development potential continues to increase despite completions over the first half. So obviously a credit to your expertise, but I just wondered how to sort of reconcile a harder market and your development potentially increasing? Secondly, rental growth in Europe now starting to show reversionary potential, reletting uplifts coming through, which I believe is the first time that has been evident in terms of both of those things coming through, do you see this continuing? And is there a case where, similarly to what we saw in the U.K. a number of years ago, when you get that change in the market, the valuers are actually quite a bit behind where the market is in terms of the rents that you're actually achieving? So I wonder whether there's further potential for catch-up in terms of those valuations coming through. And then just on the Italy disposal. I appreciate you've obviously got a very significant premium to book values. I'm assuming greater than the valuation uplift that you achieved in the first half. Otherwise, arguably, you wouldn't have sold. So I'm assuming possibly up towards 20%, but it really was -- from my understanding, it was a market where you were probably a bit subscale previously. Costs were probably a bit high relative to the group, so I just wondered how you sort of reconcile that cost structure with the disposals. As I say, I appreciate, obviously, a very good sale. And then just finally, a more sort of broad one: What is it that concerns you? And what do you think had stifled tenant demand? Because sort of supply is unlikely to be the thing that changes the market. As you say, supply is actually getting more difficult, there's going to be a change in demand, so just wondered what it is that you feel could affect that.

Gosh, there's a whole presentation in there already, Paul, but thanks for your questions. I'm going to go touching on some of these, and then Andy or Soumen could any other -- add any other color that they want to. I think, on the first one, in terms of development land, the amount of development we're doing is -- it does look like this year is going to be a record year for completions. And that's a testament to the operational teams across the group that have got the land and have got the capacity. And they've gone out and signed the pre-lets and have the -- have been forward planning, particularly in the context of this sort of slightly tighter environment for materials availability and pricing in a difficult -- doing a lot of good forward planning to make sure that we can line all the ducks up to keep on delivering. Now we're still going to do the projects and there's a lot scheduled for the second half of the year, but I think it's a testament to the teams, that they've done it. And it's a reflection of the facts of -- the factors that I've talked about in the presentation in terms of having that platform and the local expertise and being able to not only find the pre-lets to develop the existing land but also to sniff out new opportunities to keep adding sensible additions to the development hopper for the future in terms of further land purchases. Rent growth on the continent. You're right. It is the first time, I think, we've sort of gone into proper positive territory in terms of reversion on the continent. And it's been something that's -- clearly rental growth is slower, has been slower. Andy might want to comment, but I think it's all moving in the right direction and is a reflection of the market fundamentals that are very, very strong from a demand perspective. And there is, of course, more land on the continent, particularly in the big box market, but it's not getting out of kilter with the demand side. So we are in a positive territory, but I think it will always be a little bit slow and a bit further back from the U.K., which is always a much more constrained market and a much more transparent market when it comes to the valuation, but it's all moving in the right direction there. Italy. I mean it's a good question to ask. Why are we selling in Italy when we haven't got that much? Well, we've actually got GBP 1.6 billion of AUM in Italy now. We've -- if you remember, back in 2015 when we did the deal to acquire Vailog, I think we were less than GBP 100 million. So we've grown that very significantly. So we do have scale now. We have a very good operating platform and a good team. And we're now in a position where we have such a strong position in Italy that we're very keen to work with our customers and to support them when they want us to help them out with their platform, but it doesn't mean we have to hold everything. We're very happy to sell some assets, particularly if they're not in -- I mean, they are all in perfectly good locations, but they're not super prime where we want to be. And we've got enough scale there that we can afford to let some of those go and concentrate on the really prime markets. And you're right, yes, the assets were sold at a good, decent premium to the June valuation as well, so a bit more uplift to come through there. What concerns us on the demand side? Again Andy might want to add his perspective on this. I mean I think we're obviously mindful of the fact that we are still not out of this pandemic. There are all kinds of macro things going on, geopolitical risks out there, but as we've said in the presentation, we really do feel that there are -- the structural tailwinds have been amplified by the pandemic. And that's given a real impetus to the market that we think is going to take quite a long term to play out, so from a customer demand and a occupational side, we think it's really well set for quite some time to come. And as Andy said in the presentation, we've been really interested to see, as we have been for a long time but some new sectors coming and growing in places like London and Paris and in Germany, some of these q-commerce offerings, quite an interesting new set of sources of occupational demand. And it never ceases to surprise me, some of the business models that suddenly pop up that need space in and around [ Jimmy pops ] and people's homes and businesses to support customer demand. So hopefully, that, in less than a half-hour presentation, has addressed most of them. Andy or Soumen, anything you want to add?

Not particularly, David. I think you've covered it. Just on the sort of rental growth on the continent, definitely in urban, Paul. And I've been really pleased to see in some of our big box stock in those tighter markets, the kind of Barcelonas, the Lyons and Munichs rents moving forward there too, so I do think there's more to come. We're certainly rent setting on the continent. That's a sure thing. That's the approach from the local teams to try and keep moving rents through, yes, in development but also on existing space by taking space back and moving it up and quite significantly up as we go through. So hopefully, that's going to be a continuing theme that you'll see in subsequent presentations.

Our next question is from Max Nimmo of Kempen & Co.

Just wanted to pick up on one point that you've mentioned a couple times there in terms of the 5% to 6% yield on costs on new development land. Just to be clear, you're not lowering your IRR hurdles here because you think, over time, you're going to capture that back through the rental growth. Is that correct? And the second question is...

That is correct.

That is correct. Okay, good, okay good. And...

That is correct. I mean the point I'm making is that with -- if you can get a 150 basis point development yield premium relative to the equivalent valuation yield on a finished product, that still makes it a very profitable transaction. And of course, we're typically investing and developing on a 10-year appraisal. And we'll be looking at the rental growth prospects as well, so from an IRR perspective, on a "build and hold it for 10 years" perspective, we're absolutely not dropping our IRR hurdles.

Okay, great. That's very clear. And then just secondly, I guess, around the LTV side of things. You're obviously in a very strong position now at 21%. You've obviously got a lot of development CapEx to come through with the pipeline, but just in terms of where you're kind of comfortable with that sitting. Would you be happy if LTV goes below 20% and keep going down? Or where it feels comfortable for you?

We keep trying to push up the LTV, but Soumen can tell you what the answer is to that.

No, of course. Look, what we've talked about previously is operating in an area sort of 25% to 30% and so really sort of pivoting around 30%. Because, as David said, look, we've got very big expenditure plans. When we raised the equity back in June last year, we set out plans to spend just over GBP 1 billion. Well, actually if you look back over 12 months, we've spent over GBP 1.5 billion. So the L, we're doing -- as David said, we're doing our bit to push it up in that side, but obviously what we've always said you can't control is the V. So we're not going to sort of take action one way or other just to sort of push LTV up, but I think our general view is obviously, given that we are below our kind of operating area of 25% to 30%, you'd expect to be funding -- that GBP 750 million worth of CapEx for this year and the near-term pipeline and into next year, you'd expect to fund that through debt rather than equity so that the -- therefore, that -- prior to NAV changes, we should start to bring the LTV back up again towards the 25% area.

Great...

And Max, just going back on your earlier question around the 5% to 6% development yield on new land, I just want to emphasize a point I made in the presentation. That's kind of buying land in prime locations in the sort of semi -- on-market or semi on-market bidding situations, we're not limited to that. As I said in the presentation, we've got our platform on the ground. We're looking for, frankly, off market and more creative ways, repurposing assets, all sorts of situations, so you will see us doing a lot better than that in a number of our land purchases, a lot better. So I wouldn't want you to think that every piece of land we buy from here on is going to just throw off a 5% development yield. We'll be doing a blend of things. In some markets, that may -- might be the case, but overall I think we're very confident we've got the ability to keep delivering some pretty fantastic development profits.

We have several webcast questions. [Operator Instructions] Our first webcast question is from Frederic from Kepler Cheuvreux. "Would it be possible to explain the like-for-like growth in the continent? Is it mainly -- is it coming mainly from urban warehouses? Is there any impact from vacancy? Are there any locations outperforming?"

I don't know -- Andy or Soumen may want to add any color. I'll say, I mean, the good news is, it's pretty good in most of our markets. The main contributors in this period would have been Germany -- or the continent. I mean overall it's Thames Valley and Greater London, I mean, the big contributors; Germany up there as well, and France and Spain, but as always -- and the other continental market is basically flat. As always, there's a myriad of smaller bits and pieces. I don't think there's any one particular thing or a big vacancy move or anything in there, but it's the main markets Germany, France, Spain on the continent; and the 2 urban markets in the U.K.

Our next question is from Thomas from Clearance Capital. "It looks like your U.K. big box developments are detracting some valuation performance from the portfolio held throughout. Can you comment, please?"

Should I take that? That's -- I'm guessing you're referring to the difference between the whole portfolio and the standing assets on the valuation side that I talked to. The reality is, you've got to remember that there's quite a mix of things going on when -- as we're moving standing assets to the whole portfolio. The reality is our -- the actual completed developments in our pipeline are incredibly profitable and that completions are up 24% in the period and the pipeline is up 36%. What's actually just pulled it back a little bit is the land for our big box was actually revalued by only 3.8%, I'd say, only. And what is -- and really what's -- and that's been driven by the fact we spent GBP 42 million on infrastructure on those 2 big new sites at Northampton and at Coventry in the 6 months, which are not being fully revalued. Now if you think about the sort of the life cycle of these large-scale plots, this year is really about getting those plots into -- those big land plots into play through the infrastructure so that they are ready for development next year and beyond. So you'll start to see the development profits come through as, hopefully, we start to get some pre-lets on that land in 2022 and beyond. So what you've got is sort of a mix in all of that, which is why the -- that you've got that difference between the standing portfolio and the whole portfolio, but the development pipeline itself for big box, let's say, is incredibly profitable, as you might expect.

Our next question is from Matthew Saperia from Peel Hunt. "Have you looked at the potential to deliver space for life sciences occupiers across the estate? Could this be an opportunity to generate further value in certain locations?"

Andy, do you want to comment on that?

Yes, sure. We actually do have already some existing customers, particularly on the trading estate, in that grouping, so it's an area that is known to us. And yes, it is something that we're looking at. We haven't done too much specifically in the life science arena, a new campus or something like that, but it's definitely an interesting growth area for us along with other growth areas, as David mentioned, so the creative industry side. So this is sort of content producers, particularly for studio space. Our facilities work extremely well for that kind of activity as well. So I think there's a number of new themes, trends, strands that we can bring to our occupier base to keep broadening that demand for our portfolio and our development program.

The final question we have time for today is from Aaron Guy from Citi. "Combining your views on long-term demand, long-term supply, your understanding of tenant profitability, site intensification and increased need for yard space and brand-charging facilities, on-demand delivery and delivery automation over time, what rent, as a best guess, could tenants need to pay to secure an urban site in particular in, say, 10 years time as a multiple to today's rent in both U.K. and Europe?"

Well, it's great -- that is a great question. I'm sure I wouldn't pluck a number out of the air, but it -- but let me give you an example, I mean. And frankly, we've given previously rental guidance. We've said in urban markets we can see 2% to 5% per-annum rental growth and probably closer to 2% on the continent and close to the 5% in London South East. And if you look back over the last 4 or 5 years that we've been -- what we've been reporting, you'll see that's exactly what we've been achieving. So you can work out the maths from where we are today to get there, but to give you a live example, we bought a very prime asset in Canning Town last year. I think the in-place rents there were GBP 14 or GBP 15. The ERVs were a little over GBP 20, and our 10-year model saw them getting to above GBP 30. So that's the kind of growth we think is quite possible in some of these locations. In fact, there's only one vacant unit on that estate. We haven't leased it yet, but we are already in negotiations with some occupiers. And it will be very close to GBP 30 that we'll secure in that unit already well ahead of business plan. So yes. I mean I think we just believe that because of the variety, the diversity of occupiers that are constantly looking for space close to those last-mile locations, the really uber-prime locations -- they don't necessarily all need a huge amount of space, but they do need the space and they're willing to pay what it takes, and they can afford to because of the model they're running.

Thank you. That is our final question, so I will hand back to our hosts.

Okay, well, thank you all very much for joining us. Thank you, Ruby, for running that Q&A. If we didn't get to answer your question in the time available, then please do get in touch with us and we will happily speak to you off-line, but thanks so much indeed for joining us. And have a great day.