British Land: capital raise and acquisitions

British Land has acquired seven retail parks from Brookfield for £441mn, part-funded through an equity capital raise of around £300mn. The new assets are expected to contribute to profits in the current year.

Over the half, the group also exchanged or completed the disposal of £407mn of non-core retail and shopping centres.

Half-year results, due in November, are expected to show underlying profit of around £142-£144mn, broadly flat on last year. Portfolio property valuations shouldn’t see any major moves, with 2.3% growth in expected rental value.

The shares were broadly flat in early trading.

Our view

Corporate landlord British Land is starting to see conditions improve. Rent growth is helping to prop up the top line while the more stable rate environment means property values are finally showing some stability.

London "campus" portfolios have been an area of focus recently. These combine top-flight office facilities with retail, leisure, and hospitality facilities as well as carefully designed public spaces. Campus occupancy is back in the 90% bracket, and significant renewals from the likes of Meta show demand for high-quality space remains. We do remain mindful of how this sector will perform, though—the exact nature of working patterns is yet to fully shake out.

The science and technology sector is key to the campus strategy. It’s a higher growth part of the market and makes up about 20% of the current footprint. That could rise to around 50% by the end of the decade. We like the targeted approach, and by partnering up like the recently announced joint venture at 1 Triton Square in Regent’s Place, costs can be spread.

Urban logistics sites are another source for future growth. The London market is heavily undersupplied, and the growth of e-commerce and same-day delivery needs should be a longer-term tailwind to demand.

All these areas are exciting when it comes to the future, but a fair chunk of the business still relies on retail. Retail parks remain a key part of the strategy, with the recent capital raise and acquisition of seven new sites showing commitment to this area. We think the consumer preference for retail parks over high streets will be here to stay, so we are supportive of the push.

Development is also key, but higher interest rates mean it’s not been as profitable a hunting ground of late. British Land is being picky about which projects to take on, but there’s been positive talk that the environment is starting to improve.

The balance sheet is also in reasonable condition. That should give the group the cash it needs to invest in its pipeline of new developments and help support the group's ability to pay dividends. But with the policy set to pay 80% of profits (rather than an absolute amount), the board has built-in room for flexibility. Of course, no returns are guaranteed.

The group has a collection of strong assets and a pipeline that looks promising, in areas where it has expertise and pricing power. After a period of poor sentiment, conditions in the UK look more promising, with interest rates seemingly on a path lower and economic conditions holding firm. That’s brought the valuation back up in line with its longer-term average, probably keeping a lid on any further rerating in the short term.

Environmental, social, and governance (ESG) risk

Broadly, real estate is relatively low risk in terms of ESG. One of the principal drivers of this risk is the capacity to integrate material ESG considerations into decision-making, risk management and public reporting; the most material ESG considerations are environmental, like carbon emissions reduction, energy efficiency and physical climate risk. The rise of hybrid working has also reduced demand for commercial property, making product governance and customer satisfaction a top priority. Other risks to monitor include labour relations, business ethics, and emissions & waste.

According to Sustainalytics, British Land’s overall management of material ESG issues is strong.

British Land Co. Plc has a robust environmental policy, with a portion of executive remuneration explicitly tied to sustainability performance targets. The company also has an effective whistleblower program. Additionally, board-level oversight is in place for ESG matters. However, its ESG reporting does not yet fully align with leading industry standards.