Summary
- British Land Company Plc is well-financed with a low LTV and well-positioned properties.
- Income from property development adds to their earnings.
- When comparing apples with apples, we can get better yields elsewhere, which means we would need to get capital appreciation from the share price.
Investment thesis
Although we sold out of British Land Company Plc ( BTLCY ) back in April 2022, we still keep it in view, as it is a well-managed company with solid fundamentals. At a price, we might invest in it again.
When we sold out, we compared the various real estate investment trusts, or REITs, we own to see what we get in net yield after taxes plus what we can reasonably expect in capital appreciation. It was basically a matter of other REITs being more attractive and was in no way a result of British Land stock not delivering.
We have revisited the thesis to see if British Land now looks more appealing.
Financial results
At this moment, the latest financial result is from their interim report for the six months accounting period that ended on 30th September 2022.
Their underlying profit increased by £16 million, or 13.3%, in the period to £136 million, with underlying earnings per share up 12.4% to 14.5 GP pence.
The gross dividend for the interim period of April to September last year was GB pence 11.6, up 12.4% from the year before . This was the same as the dividend they paid for the previous six months period.
We pointed out in our previous article that U.K. REITs like British Land are less attractive for foreign investors, as they will need to pay a withholding tax on the dividend distributed. The gross yield on a TTM basis is 5.27%. After the 20% WHT, which is even higher than what the Nordic countries charge, it becomes only 4.22%.
Their overall occupancy level of 97% is good.
Recycling of capital continues. Assets valued at £1 billion were sold between September 2021 and 2022. Their LTV reduced from 32.9% to 30.7 over the six months period from April to September last year.
EPRA NTA per share deteriorated from £7.27 as of the end of March 2022 to £6.95 at the end of September 2022.
British Land will come out with FY 2022/23 on the 17th of May 2023.
business prospects and development
According to the latest estimates from IMF , the U.K. is the only G7 country that is expected to fall into recession in 2023. Its annual GDP is set to contract by 0.6% this year, predominantly due to higher taxes, rising interest rates, and the high cost of energy as well as lower government spending.
Retail is important to British Land, as it constitutes roughly 30% of the values of all their properties.
OECD reported in October last year that consumer confidence in the U.K. is lower than in most developed economies.
That, too, shall pass, but it was not in a good place last year. Perhaps it has improved early this year.
In any event, such low consumer confidence will impact retailers which will be looking at lower rents, not higher. British Land did report that rent renewals for their retail parks were done at 2.9% lower than previous levels and as high as 13.4% for their shopping centers. This trend might continue unless consumers return to the shops.
Property development at Canada Water
In March 2022, British land sold 50% of their share in the Canada Water Masterplan, a 53-acre redevelopment project in Southwark, London to the Australian pension fund "AustralianSuper" for £290 million.
They also formed a 50:50 joint venture to develop this land. This partnership will accelerate the project delivering new homes, workspace, retail, and leisure opportunities to the local community.
Phase 1 of the project covers 585,000 sq ft of the development, with funding split equally between British Land and AustralianSuper. The total development cost of the entire project is £3.6 billion.
The latest update is that the building of Phase 1 is on schedule, with the first 3 buildings covering 585,000 sq ft. consisting of a 35-storey tower, including 186 homes and 122,000 sq ft of workspace with estimated completion targeted for Q4 2024.
The entire development is expected to take 10 years to complete, and British land estimates that it should deliver a total development value of £5.6 billion, of which the commercial element accounts for £3.4 billion and residential the remainder. The targeted returns on this development are 11% from Phase 1 and slightly higher for the whole project.
Property developments, when executed well, deliver a boost to return well above the return from the leasing out of properties that have lower ROIC.
The share price development
Our previous article's timing was terrible, as it came out at the bottom of the cycle. It was, admittedly, at a time when investor sentiment was very low. The British Land Company Plc share price has done very well since that call, as it has gone up 33.8%.
In our defense, we need to remind our readers that we are not trying to perfectly time the short-term stock market but rather look at a longer time horizon and the potential for return over a multi-year period.
Things do look different when we look at the share price over the last year.
Risk to the thesis
Fellow author John Kingham does an excellent job, particularly in covering U.K.-listed companies, and I highly recommend you to read his articles and follow him. He recently wrote an article on the UK residential market with his market valuation and forecast.
Although British Land is a commercial property company, some of the risks to the thesis for residential properties are also valid for commercial properties.
The most obvious risks, as John mentioned, are higher interest rates, a deep or prolonged recession, and negative sentiment. His article referred to sentiment towards house prices, but you could easily exchange that for "business environment."
A prolonged and deep recession would be a potential risk to the thesis, although we do not think this will take place.
British Land is also conservatively financed and well-managed. Therefore, we do not foresee large cuts to dividends or any serious risks to the finances of this REIT.
Conclusion
As we have pointed out, most investors invest in REITs because of income distribution. It should not be the only reason, as it never should be with any investment. However, it has to be taken into account when we compare apples with apples.
A net yield from British Land Company Plc of just 4.22% does not look favorable to us.
As an example, we get 6.2% from Suntec REIT ( SURVF ) in Singapore, which has offices, a convention center, and retail in Singapore, Australia, and London.
We will continue to revisit the thesis of investing in British Land Company Plc, and perhaps there will be changes to tax regulations in the U.K. for REITs.
Input from readers on these thoughts is appreciated.
Our Hold stance for British Land Company Plc remains.
For further details see:
British Land Is Still A Solid REIT, But A 20% WHT Handicaps Them