British Land hit by falling retail values

Property giant British Land is having to run very fast just to keep still. Underlying pre-tax profits were up 6.3 per cent year-on-year in the quarter to 31 Dec while the estimated rental value (ERV) of its estate rose marginally, helped by a further reduction in vacancies. Those estimates look conservative – the new lettings and renewals signed during the three months were at a 7.5 per cent premium to ERV in the retail division, and a 9 per cent premium to ERV in the office division.

But none of that seemed to do much good for the aggregate value of the company, which is best measured by net asset value per share (NAV). Adjusted NAV only grew 0.3 per cent over the quarter, to 593p, and the value of the retail portfolio actually went into reverse, falling 0.3 per cent.

That may be one reason why British Land has reportedly put half of its 50 per cent stake in the Meadowhall shopping centre up for sale – alongside the stake controlled by London & Stamford. Chief executive Chris Grigg declined to confirm that specific rumour, but pointedly stressed that “everything has its price” and that British Land would be more active in “recycling capital” – effectively selling mature assets – from now on.

Investec says:

Buy. So the value of assets can go down. British Land’s Q3 figures are decent enough, but represent the first reversal in values seen in the retail segment by a major company's portfolio. We expect that trend to broaden and accelerate, especially in the retail sector. British Land’s portfolio is the most defensive of the major real-estate investment trusts in our view, with a 12-year average lease length and strong covenant quality. The statement stresses this defensive nature, which says it all. The sector may wobble on this given that the four FTSE 100 Reits have over 60 per cent portfolio exposure to retail. On a relative basis, we fear the sector is heading south. We cut our year-end NAV forecast from 604p to 590p.

Jefferies says:

Buy. The reassuringly flat portfolio valuation confirmed that British Land and the other prime Reits have assets that are still attractive to investors. In the valuation mix, offices were up 1.1 per cent and superstores were up 0.2 per cent, but retail warehouses and shopping centres were both down, by 0.6 per cent and 0.3 per cent respectively. One notable contributor to the office revaluation surplus was the development pipeline – up 4.4 per cent now that the ink is finally dry on the massive pre-letting agreement to UBS at Broadgate.