Brexit, retail woes and Robin Hood tax weigh on British Land even as asset values and dividends rise again

Russ Mould, AJ Bell investment director, comments:

“To confound the market’s worst post-Brexit fears British Land increased its net asset value (NAV) per share in the second half of its financial year by 3% to 915p (which means NAV fell by less than 1% for the year as a whole).

“Demand for British commercial property has clearly remained strong, as evidenced by a 98% occupancy rate and increases in both office and retail buildings’ net asset valuations in the second half of the year.

“The disposal of a 50% stake in the Leadenhall Building, or Cheesegrater, for a premium to the balance sheet valuation also suggests UK assets remain attractive, especially as Canary Wharf and CLS Holdings’ Vauxhall Square development were also sold at or above book value, as overseas buyers used weakness in the pound as a chance to step in.

“This strong trading helped British Land to increase its full-year dividend by 3% to 29.2p and target a further 3% increase in the year just begun to 30.08p.

 Source: Company accounts, company guidance for 2017-18

“That latter figure equates to a dividend yield of 4.6%, which may interest income-hunters, although it did slightly undershoot the analysts’ consensus forecast for the dividend of 30.54p.

“This may help to explain why the shares are opening lower today, especially as they have rallied by some 20% from their post-referendum lows of summer 2016 and three issues continue to niggle away.

1. The first remains what Brexit may mean for the UK economy and the City of London in particular. British Land may have sold its stake in the Cheesegrater but it has committed to major redevelopments at 100 Liverpool Street and 1 Finsbury Avenue. This leaves the risk that these expensive developments are finished at the wrong stage of the economic or market cycle. The City represents some 20% of the company’s portfolio.

2. These concerns will not be assuaged by the Labour Party’s proposal for a financial transaction, or Robin Hood tax, on stock, bond and derivative dealings. While markets will look to the polls and argue Labour may not win, any implementation of such a levy would prompt fears that money will follow Wriston’s Law and simply go where it feels more welcome, taking business flows out of the City.

3. In addition, investors will be aware of a recent sharp swoon in the share prices of American Real Estate Investment Trusts, following a string of poor earnings reports from US retailers such as Nordstrom, Macy’s and JC Penney, the financial woes of Sears and Neiman Marcus and the Chapter 11 bankruptcy filings from firms such as Rue 21, RadioShack and Payless.

“The good news is that British Land, as its name suggests, has no exposure here. But 47% of its assets are retail & leisure related, including Meadhowhall, Sheffield, Drake Circus, Plymouth and Glasgow Fort, all sites where retailers are facing the same bricks versus clicks challenge as their US counterparts.

“The question then for investors is whether these dangers are already factored in to a share price which, unlike those of the housebuilders, has yet to recapture all of the ground lost in the wake of the referendum vote.

“At 660p, the shares trade at a 28% discount to net asset value, the highest amongst any large REIT, to suggest the market is already pricing in a lot of the potential risks. In addition, British Land’s balance sheet is much stronger than it was just before the financial crisis struck, so the chances of a repeat in the 78% peak-to-trough fall in net asset value per share between 2007-09 (including the effects of a 2-for-3 rights issue in March 2009) look limited for now.”

Source: Company accounts