Questor share tip: Hold British Land

British Land
723p-1p
Questor says HOLD

BRITISH Land [LON:BLND], one of the UK’s largest real estate investment trusts, yesterday said it had completed the sale of a £26m office property in London’s Soho area to Amazon. The deal underlines the strength of the London property market. But the best of the company’s share price gains might be behind it.

The property group manages a £11.9bn portfolio of property split roughly equally between office space and retail. The booming property market in the capital helped increased the value of British Land’s office holdings, thereby lifting the portfolio as a whole by £1.7bn, or more than 8pc, in the annual results.

Last month the company reported results for the three months to the end of June, which indicated that the property market is still in rude health. The group’s shops are almost all let, with retail occupancy having edged up to 98.6pc.

British Land’s portfolio of retail property makes up 53pc of the group total and are spread across the UK. By focusing on larger shopping centres, which are still proving a draw, the property group was able to report footfall up 2.5pc across the first quarter, well above the national average of a 0.8pc decline during the same period.

The letting activity across the portfolio was also encouraging. The rents that came up for review during the first quarter were increased by 4.8pc for retail space and 0.7pc for offices.

The performance gave the company the confidence to increase the first quarter dividend by 2.5pc to 6.92p, ex-dividend October 1 and payable November 7.

The developer of London’s “Cheesegrater” skyscraper said a recovery in the commercial property market was driven by investment and leasing demand for Britain’s shops, offices and industrial properties.

Chris Grigg, chief executive, said: “We’ve had a good start to our new financial year. The occupational and investment markets in London and retail continue to strengthen.”

British Land has also benefited from falling borrowing rates. Property investing is about borrowing cheaply, buying or building property and then filling it to deliver stable rental income that will generate profits and see the value of the property portfolio increase.

The company has reduced the average interest rate from 4.6pc to 4.1pc and almost three quarters of the loans it has are fixed at low rates for the next five years. British Land’s net debt fell by about £100m, to £4.8bn, during the first quarter.

The big problem when investing in property shares is timing. Property is a cyclical business and the market as a whole has been on a fantastic run for the past five years, ever since UK interest rates were slashed to 0.5pc.

It is difficult to get excited about the value when the shares are trading on more than 22 times forecast earnings and offer a dividend of 4pc.

In the full-year results to March 31 the 2014 net asset value per share was 688p, so the shares are currently trading at a 5pc premium to that. The long-term average for UK real estate has been for shares to trade at a 11pc discount to the net asset value.

It is against this backdrop that an investment in British Land shares needs to be considered. The possibility of an increase in the Bank of England base rate from next year is also worth considering, while not an immediate cause for concern.

British Land shares have had a strong run, increasing more than 15pc so far this year, well ahead of the wider FTSE 100, which has been flat.

Returns for investors in British Land look likely to be much lower from here on in, making the shares no better than a hold at these levels.