British Land reports 12.3 per cent portfolio fall

Full-year figures for British Land (BLND) illustrate why the commercial landlord’s market valuation has fallen by nearly a third over the past 12 months, but look beneath the bonnet and things aren’t quite as worrying as you might imagine.

Rising capital costs and a negative outlook on economic prospects fed through to a 12.3 per cent drop in the value of the group’s property portfolio year on year. The contraction was even more pronounced in the City of London, where the group owns a sizeable chunk of the office space in the Broadgate Centre.

The negative revaluations would not have surprised industry analysts, but it could even be argued that the general economic malaise is masking the long-term impact that the pandemic has had on the central London commercial property market – but that’s another story. It is perhaps significant that the group continues to see strong demand in its campuses segment, and that it is intensifying its strategic focus on the life sciences and innovation sectors, as London’s commercial mix continues to evolve.   

The negative valuation amounted to £1.37bn, including a charge of £567mn linked to joint ventures. So the group duly swung to a reported loss, although it should be noted that underlying profit, which omits property valuation swings, increased by 6.9 per cent to £264mn, underpinned by a like-for-like net rental growth of 6 per cent, while underlying EPS was up by 4.8 per cent to 28.3p.

Professional investors place greater store in the underlying performance of entities such as British Land, as property revaluations inherently wax and wane and tell you little about how the underlying business is performing. Group chief executive Simon Carter makes the valid point that “ultimately, value in real estate is created over the medium to long term”.

As part of the strategy to “recycle capital”, the group completed disposals totalling £746mn, mainly at Paddington Central, resulting in total property returns of 9 per cent per annum. Leasehold arrangements were 15 per cent ahead of estimated rental value, while a preference for “sectors with strong occupational fundamentals” resulted in an occupancy rate of 96.7 per cent.

Consensus estimates from FactSet point to weakness across the wider commercial property sector, with net asset values constrained over the next two years, although the underlying return on assets is expected to tick-up over the same period. Market conditions remain unfavourable, but we think that negative sentiment towards British Land has been overdone. Hold.   

Last IC View: Hold, 389p, 16 Nov 2022