When the Brexit referendum result was announced in 2016, it is fair to say a lot of commercial property developers and investors panicked. Seven large open-ended property funds had to suspend trading due to a sudden spike in redemption requests.
Meanwhile, Britain’s largest listed property company Landsec, which had already been winding down its development programme for fear of a market correction, said it was “battening down the hatches” and stopping all speculative development.
British Land, Landsec’s closest rival, kept its head, however. Its chief executive Chris Grigg kept quiet about what the Brexit vote meant for commercial property, arguing it was too hard to judge, and carried on committing to new developments, with or without tenants being signed up beforehand. Two years on, he appears to have played a blinder.
The supply pipeline has moderated substantially since the referendum, and nearly half of all space under construction is currently pre-let, including nearly 60 per cent of space due for completion this year. As a result, occupiers with relatively large space requirements have limited options in the coming years and are turning to the likes of British Land.
The company specialises in London office developments and shopping centres and has about £13.7 billion of assets that it owns. Its portfolio includes Meadowhall shopping centre in Sheffield, as well as big London campus office sites in areas such as Broadgate in the City and Paddington. It has a pipeline of 1.6 million sq ft committed this year, and about 55 per cent of those future developments are already pre-let. Big tenants have continued to sign up to its office space, with the European arm of the Japanese bank Sumitomo Mitsui taking 161,000 sq ft at 100 Liverpool Street, part of the Broadgate development, on a 20-year lease in February.
That has helped boost the company’s net asset value, which is a key performance metric used in the property sector that reflects the value of a company’s buildings. It rose 5.7 per cent to 967p in the year to the end of March. Over the same period, Landsec’s net asset value fell 2.7 per cent. This is all because the company has kept a decent amount of development coming through the pipeline and has not been afraid to commit to developments that are speculative — when no tenants are already signed — unlike Landsec. It has been more confident about the future and has been willing to take risks, meaning higher returns for its shareholders when things go right.
British Land achieved 1.2 million sq ft of leasing activity in its London offices division, four times higher than that achieved a year earlier, with occupancy at 97 per cent. That pushed up its office portfolio by 4.5 per cent. A further 548,000 sq ft is in negotiations or under offer.
But let’s come down to the real reason for investing in British Land. The full-year dividend rose 3 per cent to 30.08p a share, and management expect it to increase a further 3 per cent next year to 31p a share, a quarterly payment of 7.75p.
The group is a real estate invesment trust, meaning it is legally required to return 90 per cent of its rental profits to investors as dividends. Its recent signing of big companies as tenants and its relatively long leases means it has nice visibility over future income. Investors have not quite woken up to British Land’s strength, meaning shares are trading on a forward price to book value of 0.76 times, an 8.5 per cent discount to longer-term average. That is leading to a yield of 4.6 per cent, which is not bad going.
ADVICE Buy
WHY Company is confident about the future, with big tenants continuing to take its space, leading to better dividends for shareholders
Fever-tree Drinks
Shareholders of Fever-tree could have been forgiven for wanting a stiff drink at its annual meeting yesterday after the posh tonic maker revealed that trading for the first four months of the year had been “in line with market expectations” (Dominic Walsh writes).
Those were words that investors probably thought they would never hear. Not after a perfect record of 12 consecutive profit upgrades since its stock market flotation in 2014. And not any old upgrades, mind you, but ones suggesting that profits would be “comfortably” or “materially” ahead of market expectations as the world has gone gaga over posh G&Ts.
That “perfect dozen” has been accompanied by a suitably cork-popping share price performance and racy rating. Having floated at 134p in November 2014, they have mostly gone in one direction — up — peaking at £29.57 a couple of months ago, a 22-fold increase and valuing the company at £3.42 billion.
Given all of that, it was no surprise when its “in line” trading update was greeted like a profit warning. The shares duly lost their fizz, falling 168p, or 5.7 per cent, to £27.57.
So is the remarkable rise of Fever-tree over? Far from it. Shareholders will have noted chairman Bill Ronald’s comments on “further positive progress” in the first four months, particularly in the UK, where it recently overtook Schweppes as the biggest-selling retail brand of mixers.
There were two other significant aspects to the AGM statement. First, the confirmation that its imminent switch in America from third-party distribution to a wholly owned operation is going well, bringing with it the ability to drive greater sales and profits. Second, the appointment of Domenic De Lorenzo to the board. Given that his last executive role was chief financial officer of SAB Miller, the FTSE 100 brewer, his recruitment as a non-executive is a vote of confidence in its strategy.
Despite its “in line” remarks, analysts did still push their full-year forecasts a little higher. Investec, its house broker, raised its estimate for pre-tax profits by 4.5 per cent to $62.1 million and lifted its target price on the shares to £32.
ADVICE Hold
WHY A growing portfolio of mixers for dark and white spirits make the long-term prospects compelling
