May

British Land returns to profit after three years of substantial losses

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The British Land Co PLC is a real estate (REIT) investment trust owning, managing and developing a portfolio of properties across the United Kingdom.

Specialising in offices, retail and leisure, its strategy now is to leverage its core strengths in property development, active management and re-purposing assets to focus on its two key themes: Campuses – Retail & Fulfilment.

Campus Development is the current term used to describe developments that contains a number of buildings with supporting ancillary uses, operated as a total integrated package with facilities including outdoor space, parking, access, building design, landscaping and design aesthetics.

The company sees its campuses as differentiators, providing high quality, sustainable space, benefiting from “excellent transport connections, an engaging public realm and an authentic sense of community.” The firm’s bets on office-led campuses on the one hand, and retail parks and logistics on the other appear to be paying off for BL.

Employers are increasingly using office space to attract and retain key talent, says the company, so buildings that promote health and productivity are an important part of this approach. BL’s developments and refurbishments aim to incorporate wellbeing principles by design. These include a focus on active design and air quality – a recognition that businesses need to use space efficiently, to balance the need for a personal and collaborative workspace.

BL is also looking beyond its campuses, it says, to invest in local communities with events and activities designed to bring people together and enliven space for everyone who uses it.

Its three London campuses, Broadgate, Regent’s Place and Paddington Central are located in some of London’s growing neighbourhoods and account for around 70.0% of the REIT’s property portfolio. These are well-connected with transport hubs, high build-quality environments aimed at creating work innovation, collaboration and creativity.

Encouraging signs

The return to profit of such a high profile component of the UK commercial property industry, in retail, office and leisure represents a sure sign of optimism, sorely needed as the economy is being battered by a number of headwinds: continuing supply chain and labour shortages, inflation reaching nearly 10%, and significant signs of a slowdown, if not recession.

So far the commercial property market has shown significant signs of recovery following on from the depths of the pandemic lockdowns, as the firm reports a pre-tax profit of £958 million from a loss of GBP1.05 billion last year, and a portfolio recently valued at nearly £7 billion.

BL CEO Simon Carter has said:

“Operationally, our leasing volumes across Campuses and Retail & Fulfilment were the highest in ten years and were ahead of estimated rental value. In London, demand continues to gravitate towards the best, most sustainable space where our Campuses are at a distinct advantage.”

Our “Higher land values mean that returns from London development are more insulated to cost inflation than development in other parts of the country and we anticipate being able to achieve the modest increase in rents needed to offset any further cost inflation above our base case.” he says.

Whilst Retail leasing volumes were strong, the company has prioritised having strong occupancy rates at the expense of rent levels, which were 21% below previous passing rent.

Looking ahead, British Land expects strong demand for its Campus developments to continue, and thinks that “overall market trends are positive.” Construction cost inflation is likely to be between 8% and 10% this year, but BL expects this to moderate to 4% to 5% over the next 18 months.

Further West End developments…

Meanwhile, further welcome signs of optimism return to the London scene: two leading retail and leisure landlords are threatening to create a West End giant, with the proposed merger of Shaftesbury and Capital Counties Properties (Capco).

The two landlords have confirmed they are in merger talks in a deal that would not only bolster their shareholders, the two companies would dominate the hospitality centre at the heart of London.

However, initial reaction from the stock market was negative, with Capco shares down 8 per cent before recovering to 3 per cent down on day one. Shaftesbury’s shares likewise fell 5.5 per cent before recovering to just 2.5 per cent down.

If the merger goes through it will give shareholders in both companies an opportunity to own shares in a much bigger real estate investment trust (REIT), and given the outsider (foreign) interest in companies like this, it could be highly beneficial.

A Stifel analyst, John Cahill says, “If you are bigger, it’s harder for people to take you out because there’s strength in numbers. That said, with some of the overseas capital, their pockets are so deep that they could even take over the expanded company.”

The merged company would have greater cash reserves, giving it the opportunity to expand further and faster. According to Investors Chronicle their latest results show that the two companies have a combined £530mn in cash and cash equivalents in their coffers, yet this firepower might not get them very far in the West End real estate market.

“Assets in the West End don’t come to the market very often, And if they do, there are a lot of people who are prepared to pay very high prices,” says Mr Cahill.

If the deal goes ahead there will be moves for steady hands at the top: Shaftesbury chief executive Brian Bickell is to retire on completion of the deal, while executive directors Simon Quayle and Tom Welton, who have also been with the company for over 30 years, would leave the business.

Despite the similarity between the two companies as West End landlords, Mr Cahill does not believe that the Competition and Markets Authority (CMA) will be against it. “The CMA could get involved. But actually, when you look at what they own, the only overlap is in Covent Garden. The rest of the assets, although they are near each other, don’t particularly overlap. If it did get referred to the CMA, I think ultimately it would be approved.”

[Image – Regent’s Place, London]

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