Last week the investment trust association, the AIC, put out a fascinating report on the fastest growing listed funds here in the UK. Topping the list was Tritax Big Box REIT (BBOX) which, according to the AIC, “has increased in size the most, with an impressive 979% increase in assets under management since it was launched in December 2013 and a share price total return of 64.39% from launch to the end of June 2017”. I’m regularly emailed by investors who read my newspaper columns asking why I haven’t mentioned this fund before. The honest answer until now has been that it simply flew under my radar for many years and I’ve thus not given enough time to properly research it. Last week though, goaded by a friend in the investment trust industry, I did finally have a good look. My conclusion? It is an interesting fund but it still doesn’t really tick all my boxes. It’s not on my buy list and I can’t see that changing anytime soon.

Why my caution? On paper, I think Tritax does look a great investment vehicle. It invests in a fast-growing property niche, namely big box retail brand logistics centres. The need for these increasingly automated consumer caves isn’t going away anytime soon. As the mainstream high street retail sector is slowly but steadily hollowed out, we’ll see a big secular shift to internet based shopping – or off high street box stores, all served by big logistics parks owned by the likes of Tritax.

As if one cue today comes another new project. According to Numis BBOX “has acquired a development site in Littlebrook, Dartford, covering 124 acres for £65m (£524k per acre) in a purchase which will be funded by equity following the company’s £350m equity raise in May. The site, the former Littlebrook Power Station site, is located within the M25 and has port and rail connectivity. It has the potential for development of 1.7m sq ft of logistics facilities, including a number of 400k sq ft boxes alongside smaller urban logistics warehouses”. Curiously this project isn’t typical of the Tritax model as it’s a development project rather than an existing pre-let. According to Numis again” construction will only commence on a pre-let basis with the company retaining developments within the investment portfolio as per its current model; the company aims to commence building by Autumn 2018”.  Clearly, BBOX is still growing at a phenomenal rate!

As an investment proposition, I can also see the attractions. In no particular order, I’d highlight:

1. A well-backed dividend yield currently running at 4.4%
2. Long leases with average terms over 15 years. I’m also guessing that these are probably inflation linked
3. Low Loan to value ratios at around 30%
4. End customers signing leases are by and large very credit worthy blue chip names
5. Share price momentum. The shares have rocketed up despite serial placings to expand the fund size
6. Debt funding is dirt cheap at the moment which enables Tritax to leverage the initial purchase yields of between 5 and 5.5%

So why my caution? The contrarian in me takes issue with the current 12.7% premium to NAV which seems a bit pricey to me, especially when you consider that the average generalist REIT trades at a 7% premium. I’d also maintain that a yield of 4.4% is a bit on the low side given the specialist nature of the underlying assets – again there are more diversified REITs out there with a long track record which pay a larger dividend yield.

But these are all small quibbles besides my main concern: alternative land use and the reliance on customer specific requirements. Investing in commercial real estate is always risky and one of the ways of minimising that risk is to make sure that your core property assets have an alternative land use – and aren’t dependent on the whims and fancies of a dominant customer.

I freely admit to being no expert on these big boxes but my guess is that they’re increasingly technologically focused, with automation built in to serve the brand client’s needs. This means the internal fit outs are very customer specific.

But what happens when the customer decides that they want to quit the lease? What’s the alternative land use especially as many of these big boxes are in the middle of nowhere with no obvious alternative land uses? My worry is that the logistics client has the upper hand in any future lease renegotiations. The site was built for their specific needs and there’s not a lot of alternative uses except equivalent peer firms.

Big boxes in say Slough for instance – where rival listed REIT Segro also has a big logistics presence – could be redesigned, refitted and relet but I worry about other locations. Given all these concerns one would expect to see some discount for uncertainty reflected in the fund’s net asset value. Yet when we look at NAV for the fund we see 10% growth in the last 12 months and just under 50% growth in the last three years. These estimates are all based on independent valuations so I’m sure they’re very accurate but it all leaves me a bit concerned. It doesn’t seem to me that there’s much allowance for the uncertainties built into the share price, all the more acute because the current valuation does look more than a tad expensive. So, until I better understand the core long term drivers for value Tritax stays off my buy list.