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British Land - ERV to be at top end of expectations

British Land's like-for-like (LFL) net rental income rose 2.1% in the first half, which added £4m to rents.

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British Land's like-for-like (LFL) net rental income rose 2.1% in the first half, which added £4m to rents. This helped underlying profit rise to £142m from £138m.

Total occupancy across the portfolio was 96.2%, with particular strength from Retail Parks and London Urban Logistics. The valuation of the group's portfolio has been affected by higher interest rates, falling 2.5% to £8.7bn. The decrease was entirely driven by Campus valuations falling 4.0%.

British Land's loan to value rose to 36.9% from 36.0%, reflecting lower valuations and higher capital expenditure.

Estimated Rental Value (ERV) growth is expected to be at the top end of guidance ranges, including growth of 3-5% for Retail Parks.

An interim dividend of 12.16p was announced, a 4.8% increase.

The shares rose 6.2% following the announcement.

View the latest British Land share price and how to deal

Our view

Corporate landlord British Land has had a much better first half than expected. Performance has been buoyed by resilient ERV - estimated rental values. Rental growth underpins profit expansion and we still think the leasing environment looks robust.

London "campus" portfolios have been an area of focus recently. These combine topflight office facilities, with retail, leisure and hospitality facilities as well as carefully designed public spaces. Occupancy for campuses is back in the 90% bracket and significant renewals from the likes of Meta show demand for high quality space remains. We do remain mindful of how this sector will perform though - the exact nature of working patterns is yet to fully shake out.

The 53-acre Canada Water development is the latest venture for the campus portfolio. It's a significant undertaking, with a total cost estimated to be in the range of £4bn, and a step to further diversify away from retail. The group decided to sell 50% of its stake in the project, allowing it to offload half of the investment obligations, while keeping a finger in the pot.

Urban logistics sites are another source for future growth, the London market is heavily undersupplied, and the growth of e-commerce and same day delivery needs should be a longer-term tailwind to demand.

All these areas are exciting when it comes to the future, but a fair whack of the business still relies on retail. Retail Parks remain very resilient with occupancy at 99%, as customers look for sites that offer decent affordability and omnichannel compatibility. We think the preference for Retail Parks over high streets will be here to stay.

The flip side of current conditions is that higher interest rates have pulled property values lower. While there is a glimpse of light at the end of the tunnel in that regard, as it looks like the rate hiking cycle is coming to an end, this isn't guaranteed and the timing is unclear.

British Land's balance sheet is in reasonable condition too. That should give the group the cash it needs to invest in its pipeline of new developments and helps support the group's ability to pay dividends. But with the policy set to pay 80% of profits (rather than an absolute amount), the board's built-in room for flexibility if conditions deteriorate. Of course, no returns are guaranteed.

The group has a collection of strong assets and a pipeline that looks promising, in areas the group has expertise and pricing power. We've been pleasantly surprised with how well costs have been managed but can't rule out further pressures over the coming year, and we are a little cautious on the outlook for tenant demand.

British Land key facts

All ratios are sourced from Refinitiv. 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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 13th November 2023