Land Securities (LAND), Britain's largest real-estate investment trust (Reit), has made only two acquisitions this year. They have not been in London, its traditional base and the current darling of the global property industry. Instead, Land Securities bought two entertainment complexes in the North of England.
The first, the Cornerhouse in Nottingham, contains a 14-screen Cineworld as a so-called anchor for restaurants and bars. The second, the Printworks in Manchester, features the city's only IMAX, as well as night clubs and a gym. And these deals are likely to be followed by a third: Land Securities is reportedly in negotiations to take a majority stake in X-Leisure, a £575m leisure-park fund currently managed by Capital & Regional. The 16 assets in the portfolio are a diverse bunch - including an indoor ski-slope at Xscape Milton Keynes - but the one attraction they all have is a multiplex.
Cinemas have also become a core feature of the latest generation of shopping centres. The most obvious example is Westfield Stratford, the mall that opened near the Olympic Park last year, which contains a 17-screen Vue multiplex. But more recently British Land (BLND), the other big diversified Reit, signed up Odeon for a new retail district now under development in Hereford.
This is noteworthy because the Reits have not historically invested in cinemas, which the property industry considers a niche or 'alternative' asset class. The recession is one reason why that old mould is breaking. Like private investors, property companies have had to stray beyond their traditional hunting grounds in search of credible stores of value. Cinemas fit the bill, combining a reasonable income yield with a recent track record of growth. Land Securities paid £50m for the Cornerhouse in Nottingham, representing a rental yield of 6.6 per cent - comfortably higher than its cost of debt.
UK box-office receipts have been recovering from their postwar decline ever since the launch of US-style multiplexes in the mid-1980s. Even in the past two years, which have gone down in retailing lore as the worst in living memory, cinema takings have matched fairly high inflation. That and innovations such as 3D films and digital projection, which reduces running costs, have unleashed a wave of expansion into towns, like Hereford, which would not historically have supported a multiplex.
Property companies are happy to finance that expansion in exchange for much longer leases than they can get elsewhere. Retailers and office tenants used to be happy signing 20-year rental agreements, but have been taught the value of flexibility by two decades of technological disruption. Yet because cinemas are so expensive to kit out and cannot be reused for other purposes, developers can still demand 25-year leases with inflation-linked rents.
Of course, that's only attractive if the tenant is robust enough to exist for another 25 years. That has been a problem in some parts of the leisure sector - some gyms, bowling lanes and night clubs that overexpanded in the boom years have flirted with bankruptcy. But the three main cinema operators - Cineworld, Odeon and Vue - are all considered safe bets. Shares in Cineworld (CINE) currently trade at 243p, well ahead of their 2007 peak.
The other reason why cinemas are in vogue is the blurring of the boundary between retail and leisure. As shoppers have moved online, physical shops have tried to sell sensation as well as product, while shopping centres have started to reinvent themselves as social hubs and sources of shared experience. Mall cinemas are just one facet of this hugely disruptive, ever-evolving trend. Leisure-friendly shop opening hours are another. "People may do their shopping on the way to the cinema, which makes the pitches more attractive," points out Lucinda Bell, finance director of British Land.
Land Securities' move into multiplexes goes further than a simple extension of its old retail remit - it has consistently been buying pure leisure exposure for more than a year. But these acquisitions remain a sideshow within its broader strategy. The company has been avoiding purchases in London not because it does not like the capital but because it has a vast office development pipeline around Victoria Station and in the City. The regional cinemas will bolster the cash flows it needs to pay its dividends even as it loses rental income from its London assets.
I am often asked which of the two giants of the UK property sector I prefer. Land Securities has been the better performer this year, up 25 per cent compared with 17 per cent for British Land, which some analysts have attributed to lower gearing. But British Land's interim results this month were undeniably better, and it also pays higher dividends. Yielding 4.9 per cent on a 10 per cent discount to book value, British Land's shares look the more attractive. Just don't expect an Oscar-winning portfolio performance - it says much about the febrile investment climate that shareholders have been buying the big Reits even though their book values have scarcely budged for more than a year.
