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British Land - rental income up, higher rates impact valuations

British Land reported full-year net rental income of £446m, reflecting like-for-like net rental growth of 5.9%. Good cost control meant underlying...

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British Land reported full-year net rental income of £446m, reflecting like-for-like net rental growth of 5.9%. Good cost control meant underlying profit outpaced rental growth, up 6.9% to £264m.

The Group leased 3.4m square feet of space, the bulk of which was in the Retail & London Urban Logistics markets. Portfolio occupancy is at 96.7%.

Higher interest rates impacted the value of the overall portfolio, falling 12.3% to £8.9bn. The group sold £746m worth of assets, mainly 75% of its stake in Paddington Central, and bought £203m of retail parks, life sciences and London Urban Logistics assets.

The Group is seeing some easing of the pressures caused by higher interest rates and expects to grow the estimated rental value across the portfolio over the coming year.

The board announced a full-year dividend of 22.64p, up 3.3%.

The shares fell 4.6% in early trading.

View the latest British Land share price and how to deal

Our view

Full-year results were broadly in line with expectations, with rental growth helping to push underlying profit higher, and the leasing environment looks robust. The flip side of current conditions is that higher interest rates have pulled property values lower. But 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.

British Land is a corporate landlord - focussed on the London area.

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 has recovered well, back in the high 90% bracket and significant renewals from the likes of Meta show demand for high quality space remains.

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.

Similarly, the group's disposed of most of its Paddington Central stake. Of course, future revenue from the projects will also be impacted, but cash from the sale can be reinvested into new developments.

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.

It was Retail Parks that were the standout over the past year, with record leasing in the broader Retail & London Urban Logistics segment that it falls into. Occupancy rose to 98.8% in this segment, as customers looked for sites that offer decent affordability and omnichannel compatibility.

We're pleased to see the positive trend in the segment, it's an area we remain slightly wary of. Should economic conditions get materially worse these tenants, and their ability to meet rental payments, could be some of the first to come under pressure.

British Land's balance sheet is in reasonable condition. That should give the group the cash it needs to invest in its pipeline of new developments and helps support the prospective 5.7% dividend yield. 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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 17th May 2023