Property pressures start to weigh on British Land

Unless you’re in the market of serving the swell of students flooding back to campuses after a couple of years of pandemic-related disruptions, it’s been a tough year to be a landlord. 

The worsening economic outlook has hit valuations in most sectors, and the 4.4 per cent fall in British Land’s (BLND) net tangible asset value per share was to be expected given the negative sentiment. The company reported a 3 per cent drop in the value of its portfolio, dragged down by its retail arm. Shopping centres, particularly, continue to underperform. Like-for-like net rent for British Land’s shopping centres fell by 4 per cent year on year, with occupancy rates weakening to 94.4 per cent.

Shopping centres only make up 23 per cent of its retail and fulfilment arm, however. Retail parks, now 60 per cent, benefited from a 2.2 per cent growth in like-for-like rents and higher occupancy – up one percentage point to 97.5 per cent. Chief executive Simon Carter said that if the general weakness in asset prices spills over into retail parks, it will buy more, arguing they are becoming “the preferred format” for store owners, given their relative affordability and ability to integrate with online sales channels.

The office market is also a mixed bag. Its big London campuses continued to draw tenants, with almost 500,000 square foot of lettings in the first half, but their values also weakened, with investor interest “subdued” given rising interest rates.
The sale of a 75 per cent stake in its Paddington Campus to Singaporean sovereign fund GIC in April for £695mn allowing it to cut its loan-to-value ratio to 30.7 per cent, from 32.9 per cent at the end of March.

British Land’s shares have fallen in value by 27 per cent this year and currently trade at a 44 per cent discount to September’s net asset value (NAV) per share. Although this looks attractive, particularly as the company also upped its dividend by 12 per cent to 11.6p, the gap has averaged around 35 per cent over the past five years and “does not just relate to current market conditions”, broker Panmure Gordon noted. 

In the near term, with inflation at record highs and further interest rate rises needed to tackle it, valuations are likely to remain under pressure. Hold.

Last IC View: Hold, 18 May 2022