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British Land - rent collection improves, dividend back

Nicholas Hyett, Equity Analyst | 9 October 2020 | A A A
British Land - rent collection improves, dividend back

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

British Land Co plc Ordinary 25p

Sell: 493.40 | Buy: 493.80 | Change 16.50 (3.46%)
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In a brief trading update British Land said that it has now collected 74% of June rents (98% of office and 57% of retail) and 69% of September rents (91% of offices and 50% of retail).

The company has also completed the disposal of £245m of retail property since the start of April, averaging 8% ahead of the book value, as assessed in March.

The group will resume dividends in November, with payments set at 80% of underlying earnings per share and paid semi-annually.

The shares rose 3.3% in early trading.

View the latest British Land share price and how to deal

Our View

Commercial real estate in general, and British Land in particular, is struggling against two major economic trends.

The first is the rapid rise of e-commerce. It's a long running trend, but coronavirus has seen it accelerate. That's bad news for traditional retailers, and even worse for the landlords like British Land that own physical stores.

To be fair, the group has been looking to adapt to that trend for some time. The group's consolidating the retail portfolio through property sales, and is focussing on larger sites with the potential for mixed use. The combination of sales and falling property values mean retail now accounts for less than 35% of the portfolio and it should steadily decline as times goes on.

The second is the sudden increased prevalence of remote working, and that's perhaps much more concerning.

The group has been recycling the proceeds of its retail sales into its mixed use 'campus' London office portfolio. Property value and rents has been growing steadily and new developments were expected to contribute to growth over time. The 53 acre Canada Water development is expected to play an important part in the transition away from retail, and requires significant investment.

However, the coronavirus pandemic has upset plans. Just 18% of the group's London desks are occupied at the moment, despite tenants paying pretty much full rent, and if that trend continues after the pandemic subsides that would affect long term demand for office space. While British Land's flagship assets should be some of the most resilient office assets out there, lower demand is still likely to hit rental rates and property values.

The good news is that British Land's balance sheet was in relatively good shape going into the current crisis. Access to significant cash financing from banks should allow it to weather the immediate storm. As a result the group has resumed dividend payments. But with the new policy set at 80% of profits (rather than an absolute amount), the board are building in room for extra flexibility if conditions deteriorate.

Always bearing that caution in mind, we should flag that British Land's share price at the time of writing is around 50% of management's most recent estimated asset value per share. It's very likely the value of British Land's properties will see further writedowns over the coming months, but at the current valuation you could assume the retail portfolio was worth nothing at all and still be getting a healthy discount on the remainder of the portfolio.

That could make British Land an interesting value opportunity for investors prepared to take a higher level of risk and a longer-term view. Having said that the road to recovery isn't smooth and there's no guarantee the share price will ultimately recover.

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British Land key facts

  • Price/Book ratio: 0.49
  • 10 year average Price/Book ratio: 0.81
  • Prospective yield: 4.8%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Half Year Trading Update

Overall occupancy in both retail and office is at 95%. The group leased 132,000 sq ft of office space between April at the end of August - on average 11% below previous rents and 9% below estimated rental value. 55,000 sq. ft of office space was let in the same period, averaging a 6% uplift on estimated rental value.

86% of British Land's retail stores are now open, with footfall 84% of the same period last year. That represents footfall some 21% ahead of the benchmark, while like-for-like sales in September for stores that were open was around 90% of the same period last year. The improved result was driven by strong results in out of town retail parks, which account for 48% of total out of town assets.

The company's London offices were just 18% full in mid-September, with 65% of campus based retail and food & beverage outlets open.

The group finished the period with £1bn of undrawn facilities and cash on hand, with no refinancing required until 2024.

Find out more about British Land shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.