Solid merits of British Land

Its star has faded since Sir John retired in 2006. Yet the company's portfolio is still widely acknowledged to be the best in the industry, and British Land is the most profitable of the big reits. If you need a low-risk place to park capital for three years or so while collecting a reasonable income, British Land's shares fit the bill.

Most of the return will come from dividend income. This is where British Land stands out - it pays a conspicuously higher share of its book value in dividends than its rivals. That's mainly because of clever debt management. After a number of financing deals over the past 18 months, British Land pays an average interest rate of just 4.4 per cent on its £4.79bn debt - half a percentage point below the rental yield of its portfolio, net of operating and administration costs.

This means British Land's debts do not just magnify the capital returns from its portfolio - they also boost recurring profits. Contrast that with arch-rival Land Securities (LAND), whose debt, costing 5.1 per cent on average, dilutes its rental income.

There's an irony here. For much of 2012 British Land's shares underperformed those of Land Securities and Hammerson (HMSO), its other close peer, probably because of its higher debt levels. Yet the debt markets have been wide open to large, asset-backed companies so, by gearing up to make acquisitions, British Land has, counter-intuitively, reduced its average interest costs.

Equity investors seemed to recognise this after the company's solid half-year results in November sparked a re-rating. Now British Land's shares trade at just 2 per cent below net asset value, roughly in line with Land Securities. But they have not returned to their traditional peer-group premium - as arguably they should in light of the company's superior profitability.

One problem is chief executive Chris Grigg's failure to communicate a strategy. If he has been gearing up the company to take advantage of rock-bottom interest rates, as is entirely justifiable, he has never said so. Last year's mess over Meadowhall - the company was reported to be selling half its 50 per cent stake in the Sheffield shopping centre, only to announce a new 50:50 joint venture a few months later - smacked of indecision. At the November results, Mr Grigg merely said he was comfortable with the current debt level, but now he is rumoured to be selling the City tower at Ropemaker Place.

One reason investors fear debt is that it magnifies capital losses when property values are falling. This is a particular concern for British Land because roughly 60 per cent of its portfolio is invested in the retail sector, where values have been dropping for well over a year.

Yet the company's portfolio has proved resilient. With an occupancy rate of 98.3 per cent, its UK rents held their value everywhere during the six months to 30 September except in shopping centres. True, valuations plummeted on the continent, but British Land only has £247m invested there. Overall, the portfolio was flat, with a 1.4 per cent decline in the retail portfolio offset by gains on its London office developments.

These gains should continue. Michael Burt at broker Espirito Santo reckons the development pipeline will add 23p to net asset value over the next three years. British Land's biggest schemes are at Regent's Place, where it is building a new headquarters for Debenhams; the so-called Cheesegrater skyscraper in the City; and 5 Broadgate, where it is redeveloping a site for UBS. Crucially, over half the pipeline is already pre-let to blue-chip tenants.