Segro PLC (SGRO.LN), Europe's largest industrial landlord, Thursday reported a 2.3% increase in the value of its assets in the first half and said it will continue to focus on improving occupancy through letting vacant space amid the uncertain economic environment.

Chief Executive Ian Coull said: "The macro-economic environment remains uncertain but Segro is well placed and we will continue to focus on driving operational performance."

Net asset value in the six-month period ended June 30 rose 2.3% to GBP2.65 billion, giving a net asset value per share increase of 1.1% to 358 pence. Net rental income increased 11% to GBP144.3 million amid encouraging leasing momentum and despite challenging occupier markets. Segro generated GBP20 million of new annualized rental income in the first half compared with GBP14.1 million in the same period last year.

"Although the net assets value came in 4% below our expectations the income statement was stronger," said Nomura analyst Robert Duncan. "Overall, the tone of the statement is more upbeat than we were expecting."

Despite positive news and an upbeat outlook, high vacancy rates continued to disappoint investors. At 0831 GMT, Segro shares traded down 10 pence, or 3.6%, at 265 pence while the benchmark FTSE 100 index traded up 0.9%.

Segro, like rival property companies, has been struggling as the credit crunch curbed demand for space, causing property values to fall. While the market turned a corner in August last year, Segro is still facing high vacancy rates, which reached 14%, a slight increase on the 13.5% at Dec. 31, boosted by the return of space in Germany by retailer Karstadt-Quelle AG, which went bust.

Vacancies have been a problem for Segro ever since it took over rival industrial landlord Brixton PLC in August 2009 in an all-share acquisition, making the enlarged group Europe's biggest listed industrial property company by market capitalization with a portfolio of over GBP5 billion.

Brixton's portfolio, although attractive with locations around London's Heathrow Airport, was largely mismanaged and had a lot of empty space. Segro wants to cut Brixton's vacancies to 15% by 2012, which would give it group vacancies of around 12%.

But while Segro has made progress leasing the Brixton portfolio, analysts fear that the remaining space isn't rentable.

"While we would rather see prospective tenants take some of the existing vacant space, the group's redevelopment push suggests a high and rising proportion of the vacant space is obsolete," said Nomura's Duncan, although he added that "some tenants will want bespoke space and management is prepared to be pragmatic."

CEO Coull said that he has seen an encouraging increase in the levels of enquiries and growing interest in pre-let developments, so the company will seek to capitalize on that in the second half.

Still, the company said it is heading for a recovery in both the U.K. and Europe and doesn't expect a direct hit from the U.K. government's spending review in October. Coull said that the "recovery is in a reasonable shape and we will be one of the main beneficiaries of that recovery."

Signalling its confidence, the company increased its dividend 2.2% to 4.7 pence.

-By Anita Likus, Dow Jones Newswires; +44 20 7842 9407; anita.likus@dowjones.com
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