David Sleath, chief executive of industrial property group Segro, has a tough sell.
The former accountant knows the warehouses the 100-year-old company builds are viewed as boring, ugly spaces that were long associated with the “dirty” business of a declining UK manufacturing industry. Segro has come up against dissent from local residents who have complained its warehouses are an eyesore.
Sleath is taking on the naysayers, hammering home the point these buildings are “vital national infrastructure”. Segro’s “very generic boxes” are now at the forefront of digitalisation, he argues, housing data centres and offering space to online retailers, food distributors and even Netflix studios.
“There are not many people on the planet now that don’t have a phone, certainly in this country, and you can’t really use your phone without data centres,” said the 62-year-old at the company’s head office in London’s Mayfair. “And with all the advances in technology and AI, we need more.”
His message for local communities and the so-called “Nimbys” complaining about development in their areas is that Segro’s warehouses are “a force for good”.
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Sleath, a vegetarian, fitness-obsessed triathlete, is no archetypal property boss. Known for his calmness under pressure and mild-mannered nature, he said it took him time to get used to the public profile of shareholder meetings and media interviews. His board suggested a leadership coach. “I never felt I had the ego . . . It’s not something that comes totally naturally to me.”
He said that while there were plenty of well-capitalised professional landlords and institutions in the industry, “the problem is there’s a core . . . that still has that reputation of cigar-smoking, Bentley-driving fat cats.” While Sleath’s image is not aligned with those individuals, he recognises the need for competitive pay. He said executive pay was too “restrictive” and tilted in favour of investors and their proxy advisers. “The institutions own the companies, but the boards need to have the flexibility to set pay policies to attract the talent they want to run the companies. And there’s definitely a mismatch,” he noted.
Segro competes with private equity for the best staff, assets and opportunities. “I know that someone like me could have earned a lot more money . . . I’m not complaining because that’s not my only motivation but I think it is a challenge,” said the chief executive.
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When Sleath took the Segro job in 2011 he told his team, “This company isn’t going to survive . . . if we carry on doing what we’re doing. We need to do something radical.” It was a big call from someone who, as the company’s chief financial officer, had been living in the shadow of the former CEO.
Segro, which started as Slough Estates Group, was dubbed “slow grow” before Sleath took over and once owned the offices used as the setting for the British version of the television show The Office.
Sleath and his team recognised that modern industrial space in the best locations would be in short supply. London had already lost 50 per cent of its industrial land. Their plan was to sell off anything that was not a quality, modern, industrial space in Segro’s target markets — including offices and retail assets — and reinvest in a portfolio better suited to the company’s future.
At first, investors raised concerns about disposing of still lucrative parts of the portfolio and were wary about being able to cover the dividend. “Of course, nobody believed us initially,” said Sleath. It did not help that Segro’s biggest tenant and rent payer, the German mail order company Neckermann, went bust around six months after Segro announced the strategy overhaul.
But the plan eventually bore fruit. Low interest rates and more demand for space from ecommerce companies, particularly during the pandemic, and cloud computing, pushed up industrial rents and increased the company’s share price by more than sixfold from 2012 to the end of 2021. Online shopping now accounts for 12 per cent of Segro’s rents (Amazon alone is half of this).
“I don’t know to what extent you would call it luck or judgment,” said Oli Creasey, an analyst at Quilter Cheviot. Sleath “didn’t flip the company on its head” in terms of what it chose to invest in but he did capitalise on the opportunity he found himself in, he added.
A former colleague said Sleath did not need an overbearing personality to show his status in the industry. “Look at what has happened to the share price over the past 10 to 15 years. His confidence comes from turning the business round.” One headhunter who has known him for 20 years said: “He’s not perfect, he has made mistakes, but he owns them.”
Sleath is careful to credit his staff. “The thing that really irritates me is when people talk about “I” or “me”. ‘I’ve done this. I’m doing that’ . . . It’s always a team effort and people forget about that. So, that’s something that bothers me,” he said about his management style since becoming chief executive.
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The trading environment has been more challenging over the past year, with energy prices pushed up by Russia’s invasion of Ukraine and commercial property valuations compressed by higher interest rates. An admission by Amazon last year that it had overexpanded caused warehouse values to fall further.
The logistics market has been one of the worst hit in the wider property downturn. As one of the largest listed industrial real estate funds, Segro underperformed the sector, as fund managers reduced their exposure. The net value of its assets fell by 3 per cent in the six months to June 30 and the pace of its rent increases has slowed in 2023. Its share price is down 1.8 per cent since the beginning of the year.
“I suppose with perfect hindsight we should have recognised [the war in Ukraine] as a signal to change course and speed,” said Sleath. “We needed to slow down and invest less over this period because capital is becoming more expensive.”
Sleath also admitted the company could have made a more aggressive push into attractive logistics markets such as the Netherlands and Czech Republic. “But quite often it’s the things you don’t do that you’re grateful for and I’m grateful we didn’t get dragged into other markets outside of Europe.”
As the cost of capital has risen, Segro has started to “recycle” more capital — selling assets to generate funds for reinvestment to reduce its reliance on debt. “We’ve been through a pretty severe correction,” said the chief executive.
But market experts are hopeful that property values in the UK are close to the bottom. They have highlighted the resilience of demand for warehouse space in the UK and across Europe as businesses strengthen their supply chains.
“Suddenly everybody’s realised that actually having really good supply chains and having the right space in the right place is a really important feature, so [the sector] continued to do pretty well despite the economic headwinds we’ve got right now,” said Sleath.
He noted that the current environment felt much more “stable” than in recent months. “There are buyers there. They’re just a little bit cautious about putting their capital to work.”
“We’ve got an amazing land bank already on our balance sheet and if we just concentrate on turning that into income-producing property . . . we will do very well for the next two to three years and we can worry about acquiring more sites a bit further down the track.”
However, he did expect “another shock along the way probably before I retire”.
While Sleath is hopeful “nobody is replacing me anytime soon”, the appointment of a new chair has raised speculation about how long he will continue in the role. He is conscious of his legacy and wants to leave the company in a better position than when he joined.
“I’m sure my name will be forgotten two weeks after I’ve left because it will be about the new person and the new team, but I’d like to think I’ve left the company in good shape and one that continues to survive and thrive for decades to come.”
