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Smart Investor: gearing up with British Land

Real estate investment trust British Land (BLND.L) has made a good recovery since the crash. But is it an attractive investment?

 

Real estate investment trust British Land (BLND.L) has made a good recovery since the crash. But is it an attractive investment?

They're not making any more of it

Property remains a highly lucrative and popular investment in Britain; a land where strict planning laws and a high density of population combine to drive up its cost. Add to this a low interest rate and, as was seen in the housing boom of the late 90s/early 2000s, the sky is the limit for both commercial and residential property.

Until a recession, that is.

However, the credit crunch merely confirmed that the economy moves in cycles and that asset prices are directly affected by those cycles. In other words asset prices cannot grow exponentially, thus property should not be ruled out simply because it has struggled in recent years. With that in mind, is now a good time to invest in FTSE 100 listed British Land?

Ritblat up and start again

British Land has a long and interesting history. It can trace its roots back to 1856 when three Liberal MPs sought a mechanism for expanding the field of voters eligible to elect MPs. However it was from 1971, when John Ritblat took over the company, that it began to exploit a variety of highly profitable ventures in the UK property market. Today the company owns 33 million sq ft of retail space, enables the employment of an estimated 142,000 people in the UK and has stakes in Broadgate, Meadowhall and many other large commercial properties across the UK.

Furthermore since 2007 British Land has been one of Europe’s largest real estate investment trusts (Reit). Reits are corporate entities which invest in real estate and were originally designed to offer a similar investment structure for property as mutual funds do for shares.

Reasonable value

In terms of value, British Land appears reasonably cheap based on last year’s figures. Net asset value per share is £5.50, which is only slightly lower than the current share price of £6.29 and equates to a price to book ratio of 1.14. Buyers of the shares are therefore only buying 79p of goodwill per share and, with earnings per share of 95.2p last year (which gives a price to earnings ratio of just 6.6) this appears to be a relatively small amount.

However, when looking at the performance of the company over the past five years, the shares do not appear to be quite so attractive. British Land has made a loss in two of the last five years and, due to these two years being so bad, has made an overall loss over the past five years of £1 billion.

Of course the last five years include a small event called the credit crunch, which severely affects the figures. How much emphasis is placed on the poor performance in 2008 and 2009 is obviously very subjective. Indeed, based on the past two years the company’s performance has been very good.

Return on equity for 2010 and 2011 is upwards of 20%, which is very impressive especially when the low levels of borrowing are taken into account – more on that later. Indeed a current dividend yield of 4.1% is attractive, especially when profitability is still less than half of pre-credit crunch levels.  In addition, a dividend payout ratio of 27% is encouraging.

Furthermore the company scores reasonably well on viability. Gearing (borrowing) is low at just 39% (after being as high as 117% in 2009 before a £740 million rights issue) and this highlights how impressive a return on equity of above 20% in the last two years is. Furthermore an interest coverage ratio of 8 is acceptable and offers a degree of confidence in the financial soundness of the company.

Tied to the economy

When assessing the economic moat of British Land, it is clear that its fate is very closely tied to the success of the UK economy. If the economy performs reasonably well then voids should be kept to a minimum and rents could be increased as demand grows for prime retail and office space. However, slow growth or another recession would likely mean the opposite and a return to the losses which British Land experienced in 2008 and 2009. Thus buying shares in British Land is, to a large extent, a leveraged play on the future performance of the UK economy.

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7 comments so far. Why not have your say?

michael chaffey

Jul 06, 2011 at 10:22

surely so much retail space could be a serious liabilty in present circumstanes

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NICK GREENWOOD

Jul 06, 2011 at 11:48

Personally I love the commercial property sector, a sector not widely followed or understood by the average PI who tends to think of property as houses! For me the opportunities that frequently present themselves of effectively buying first class property portfolios at substantial discounts to the underlying NAV, provide both a measure of security and also, quite often, tempting yields too.

To play the sector one has to follow the trend of the major blue chips such as BLND, GPOR, HMSO, LAND….or quite simply follow the REITs Index.

Most of the blue chip companies now stand at or above NAV, not what I see as value, but the institutions keep buying as the underlying fundamentals of prime commercial property are sound; and the yields from commercial property are attractive in the continuing low interest rate environment.

The best value REIT on the block is certainly not a stock like BLND which has more than doubled from its Mar’09 low; and now stands at a substantial premium to NAV.

For a private investor, the best value REIT is undoubtedly McKay Securities (“MCKS”), which @ 133p yield 6.2% and stand at a 40.4% discount to the EPRA NAV.

# High NAV discount

# Attractive yield

# A quality portfolio - see website below

# Clear valuation upside - see Finals

# A regular buyer hoovering up stock

# A great looking BOWL-shaping chart with clear upside targets

# A GoldenX as the 50day MA recently crossed the 200day MA

Both Technically and Fundamentally MCKS is a very attractive value opportunity.

MCKS Website

http://www.mckaysecurities.plc.uk

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Maverick

Jul 06, 2011 at 15:33

Nick - If MCKS has such a discount to its NAV and a 6.2% yield, then why has it been unable to break out of its trading range of 110-170p for the last two years? Just looking at value ignores market sentiment, which is arguably as important, if not more important. The share price is low because no-one wants to buy the shares - the law of supply and demand applies. If an investment trust has a whopping discount, it will take an enormous change in market sentiment to make it double its price in two years like BLND.

Look at the one-year graph for TR Property. That's the sort of graph I like.

Anyway, I think looking at sectors in isolation is just another form of tunnel-vision. Each sector has good performers and poor performers. But a high-performing REIT may be knocked into a cocked hat by a high-performing niche engineering company like (e.g.) XP Power.

Having said all that, I shall add MCKS to my watch-list. Thanks! But I won't buy it till it starts to perform.

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Franco

Jul 06, 2011 at 16:01

I think it is too early to start investing in property yet., although its time will surely come. No one has found a way to produce more land and UK governments will never stop immigration and cheap labour. Our population is increasing faster than of any other country in Europe.

Be that as it may, when you are ready to invest in propertry, do not be too greedy. Remember that property companies have one of the highest records of failure and who ever though the banks of England would fail? Invest via unit trusts or investment trusts which have professional managers, spread the risks make your record keeping easy. Yes, their charges are exorbitant, but switch over as soon as a property index tracker is launched. Branson , L&G and even HSBC cannot remain asleep for ever.

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bwanakuba

Jul 07, 2011 at 19:04

I love British Land as investment---a good investment if you analyse over the years!!!!

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Pertan

Jul 10, 2011 at 10:17

Nick,

I am a bit puzzled by the notion that when a large discount on the NAV is apparent, it means buy the share blindly, specially when the return on equity and dividend yield are attractive. I wonder if other factors come in to play such as.

- quality of portfolio and rental periods.Rental contracts maturing shortly

could mean lower renegotiated rents, vacant space. Age of property requiring

high maintenance

- Amount of financial leverage (debt to equity) , bank covenants, interest cover

and maturing loans. The financial position could limit future growth or

require more capital.

- Does the property portfolio reflect realistic valuations (book to market?)

I assume there are a lot of smart professional investors out there who have done their homework.

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NICK GREENWOOD

Jul 10, 2011 at 17:43

MAVERICK & PERRY

Firstly, let me state at the outset that the three most important Indicators for evaluating a commercial property company are: NAV, Yield & LTV.

Thereafter there are a considerably number of secondary factors to be analysed, once interest has been confirmed from assessing the principal three. These are, but not limited to: Portfolio (primary, secondary, tertiary – office, industrial, retail, residential), tenants, voids, average lease duration, borrowing details, management and lastly (in this list at least!) shareholder stakes.

As to specific comments:

Maverick:

1. Market sentiment. Generally an extremely important stockmarket factor; as a chartist it is one I value highly. However it is not strictly relevant in the case of a microcap such as MCKS, which generally speaking is too small for the institutions; and, due to the sector, is not one followed by PI fascionistas.

2. I am not looking at the property sector in isolation. As I stated in my post, it is just a sector I personally favour.

3. TRY – yes, a stock I have held on many occasions. Though personally I have favoured the Sigma shares – TRYS.

PHIL:

1. Clearly one doesn’t buy just on the NAV discount. If you re-read dispassionately what I actually posted and take particular reference of the list of bull points, you will see I refer to the website and the Finals. I wasn’t intending to spoon-feed with a 1000 word treatise; I was intending just to alert.

2. Does the property portfolio reflect realistic valuations? YES. The valuations appear conservative, hence the reason for the Chairman’s admission in the 2010 accounts of unsolicited approaches for a number of properties.

3. I assume there are a lot of smart professional investors out there who have done their homework? YES. Which is why there appears to be an as yet undeclared buyer who has been accumulating over the past 6/7 months. That said, never make the mistake of thinking that a PI cannot be ahead of the game. By competing primarily in microcaps and AIM stocks I can quite often find incredible value ahead of the belated arrival of hedge funds. HPEQ was a classic recent example when the Henderson administrators decided upon self-liquidation of their Private Equity Trust. I bought in the 160s on the day of the statement; and continued to accumulate under 200p BEFORE the arrival of a familiar hedge fund – one which also competed for value in the days of the Split ZEROs and now in quite a few of the property stocks I own. I love it when Weiss buys in after me…

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Henderson Global Investors: 2014 looks set to be another strong year for UK commercial property


Andrew Friend, acting co-manager*, and Marcus Langlands Pearse, co-manager of the Henderson UK Property Unit Trust (HUKPUT), provide an overview of the key risks and opportunities for the UK commercial property market.

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