Replacement cost is the only anchor that holds

There is a comfortable habit in real estate underwriting: value an asset by looking at what a similar asset traded for last quarter. It is defensible, it is quick, and in a rising market it is almost always wrong in the same direction as everyone else.

Comparable transactions tell you what the marginal buyer believed on the day they signed. They do not tell you what the asset costs to reproduce. In periods when capital is abundant and construction is constrained, those two numbers diverge sharply — and the gap is where both the opportunity and the danger live.

The anchor that does not move with sentiment

We underwrite the industrial book against replacement cost: land, hard construction, soft costs, financing during build, and a developer's margin sufficient to make the project rational. That figure moves with steel, labour and planning — slowly, and for reasons you can observe directly.

When an operating asset can be bought materially below the cost of building it, two things are true simultaneously. First, the buyer has a margin of safety that does not depend on rent growth. Second, and more importantly, no rational developer will add competing supply into that submarket until values recover to build cost. The discount buys you a structural moat on the supply side.

If you can buy at seventy cents on the replacement dollar, the market has to move against you by thirty per cent before a competitor can break ground.

Where the discipline bites

The uncomfortable corollary is that this rule takes assets away from you in hot markets. Through 2021 and into 2022 we declined a substantial volume of logistics stock in exactly the corridors we like most, because pricing had moved through build cost and the only way to make the model work was to assume rent growth we had not observed.

Those assets were not bad. Several of them have performed acceptably. But the discipline is not a prediction engine — it is a filter that ensures the portfolio is populated by positions where we are structurally advantaged rather than merely optimistic.

What we actually measure

• Cost to reproduce, current pricing. Refreshed quarterly with regional contractors, not indexed from a national series.
• Effective land basis. Including entitlement risk and the realistic timeline to a permit in that jurisdiction.
• Functional obsolescence. A twenty-year-old shed with 8.5m clear height is not a substitute for a new one at 12m, and should not be valued as if it were.
• Supply pipeline against build economics. If new development pencils in the submarket, the moat is already gone.

The limits of the rule

Replacement cost is an anchor, not an answer. It says nothing about whether the tenant will renew, whether the submarket has structural demand, or whether the roof needs replacing in eighteen months. It is the first test an asset passes, not the last.

It also breaks down entirely for assets whose value is not reproducible — a consented grid connection, a legacy planning permission, a site with genuine scarcity. In those cases we underwrite the scarcity directly and accept that we are paying for something that cannot be rebuilt at any price.

But for the ordinary business of owning boxes near motorways, it remains the most reliable discipline we have found. It kept us out of the 2022 vintage at the top, and it is why our current pipeline looks more interesting than it has in three years.