Today’s high interest rate environment means that British Land LON:BLND, with its focus on the retail sector, is experiencing some difficulties. Shares are down 12.7% in the last six months, and 32% over 12 months.
The property group reported a 12% annual fall in the value of its £9bn portfolio, which includes some prime properties like Broadgate in the City of London as well as assets in the Paddington area. City of London properties have fallen in value by 15% in the year to the end of March, the group said.Property experts who spoke with research house Third Bridge said that retail asset valuations, particularly shopping centres, are going to remain challenging for some time, with limited potential for rental growth. Despite shoppers returning to physical stores after Covid, the massive expansion of online shopping and new consumer preferences around entertainment and leisure are taking their toll.
CEO Simon Carter has to sound bullish as he tries to keep the investor community onside: he told the Financial Times last week that he thought the London office market was close to the bottom, especially assets held in the British Land portfolio. However, he also said that secondary office values would continue to decline.
British Land has been reporting results that are largely in line with industry averages and does not seem to be threatening to outperform peers like SEGRO LON:SGRO and Tritax Big Box REIT LON:BBOX. Most of the larger companies in the sector in the UK are rated a hold by the AI engine at Bridgewise.
Shift away from retail
“British Land is currently undergoing a transformation as it shifts its sector mix away from retail and towards logistics, life sciences, and office campuses,” said Max Georgiou, an analyst with Third Bridge. “Since 2013, it has been focusing on reducing its loan-to-value, which will certainly help in the current operating environment.”
Book value factors stand out as the most significant drivers of British Land’s balance sheet strength. The numbers indicate that management has been prudent in focusing on efficient growth. Bridgewise graded British Land’s balance sheet 93/100. Its income statement also looks impressive. Investors should also be paying attention to revenue efficiency, Bridgewise said, as this can be especially impactful for larger stocks in this space.
Enormous challenges ahead for British Land
Georgiou said the Canada Water development is a massive value driver for British Land. However, elevated construction costs and the potential for further delays are enormous challenges.
“Thanks to strong demand for grade A prime office space in central London, yields are improving,” Georgiou said. “Investors will note that many of their assets are well-connected to the newly opened Elizabeth Line and Crossrail.”
Bridgewise said British Land’s asset turnover numbers looked encouraging, and reflected management’s balanced change strategy. In terms of news sentiment, despite the falling share price, the Bridgewise AI flagged up Carter’s talk about an acquisition strategy, especially retail parks, as a positive indicator.
Despite the CEO’s bullish talk, British Land is facing a number of critical macro factors which we think are now being reflected in the share price, including the impact of Brexit and the shift to hybrid working habits, especially in the City of London.
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