British property shows signs of wear and tear

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18 May 2017

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Carol Ryan

LONDON, May 17 (Reuters Breakingviews) - British real estate has looked fairly solid since last summer’s vote to leave the European Union. Property group British Land said underlying earnings increased by 7.4 percent year on year in the 12 months to the end of March and leasing activity is strong. Tweaks the 6.9 billion pound company is making to its office and retail portfolio should offset Brexit pressures. Still, there are signs in there of what’s to come.

The property group led by Chief Executive Chris Grigg had a good year. It hopes to close the sale of its 50 percent interest in London’s landmark “Cheesegrater” skyscraper to a Hong Kong buyer CC Land for a rich 1.2 billion pounds next week – a 24 percent premium to its official valuation. It also offloaded Oxford Street’s Debenhams building to an undisclosed European buyer at a 10 percent premium.

Demand for office and retail space is holding up, with 1.7 million square feet of property leased during the year. However, that may be more down to a well-located portfolio than the health of the wider market - British Land’s retail assets are outperforming UK footfall and sales metrics.

There are early indicators of wear and tear. The value of the group’s property holdings declined for one – particularly retail and residential assets, which are losing value more quickly than office properties. The length of the group’s average lease is now 8.3 years, down from nine a year earlier. That is a function of selling out of properties like the Cheesegrater, but lease lengths are likely to come under pressure as retailers watch what happens to consumers’ mood and navigate the shift online.

And the company is selling down properties faster than it is buying. It made a net divestment of just over 1 billion pounds in the financial year, compared with a net investment of 21 million pounds one year earlier. That reflects a wider trend in UK property, where domestic and institutional groups are using strong overseas interest in British real estate as an opportunity to cash out. That is hardly a vote of confidence in what happens next.

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CONTEXT NEWS

- Property group British Land said underlying earnings increased by 7.4 percent year on year to 390 million pounds in the 12 months to March 31. The value of the company’s portfolio declined 1.4 percent compared with a year earlier.

- The company’s shares were down 4 percent by 0955 BST on May 17.

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(Editing by John Foley and Liam Proud)