British Land and its property sector rivals have become a conduit for fluctuations in bond markets and another bump in UK gilt yields has given investors cause for more reticence. Shares in the FTSE 100 constituent trade at a near-50 per cent discount to the net asset value forecast by analysts at the end of March next year. That is greater than the total 35 per cent fall in NAV since before the pandemic.
Given the progress on leasing activity, better growth in rental values and an improvement in the balance sheet, the sheer magnitude of the discount is becoming harder to justify. Analysts are betting that this year will represent the trough for the group’s NAV, coming in at an adjusted 543p a share before returning to growth the year after.
Granted, the stats across the wider office market are not pretty. The central London vacancy rate rose to 9.4 per cent by the end of June, according to JLL, the property services group. That was up from the 8.9 per cent three months earlier and was well above a long-term average of 5.5 per cent. Prime property yields, a measure of rental income versus property values, also continued to move out as the latter worsened.
The value of British Land’s offices fell by 13 per cent last year on an underlying basis. Rental values were better at 2.6 per cent. Meta, which was the group’s largest tenant, has surrendered one of two offices, paying a £149 million premium to the landlord. Better recovery of Covid arrears means that expectations for rents this year across the portfolio are intact, but that still leaves British Land with 366,000 sq ft of space to relet or redevelop.
Leases that it has signed for its offices were 8.2 per cent ahead of estimated rental values in the five months since the end of March. The 1.2 million sq ft let across the entire estate, in line with pre-pandemic levels, was 13.1 per cent ahead.
A decision to pursue retail parks over shopping centres, anchored to high street locations where shopper numbers have fluctuated more dramatically, seems astute. British Land’s sites have a 99 per cent occupancy rate, which should give it more leverage in negotiating rents. Its guidance for rental values this year was boosted again last month to between 3 per cent and 5 per cent this year, from 2 per cent to 4 per cent previously.
Some high-yielding real estate investment trusts have been caught out by higher costs and have paid uncovered dividends. In contrast, British Land’s dividend is properly backed by profits generated. Last year’s payment of 22.64p a share was 1.3 times covered by adjusted earnings.
A stabilisation in interest rates is the clearest potential catalyst for the shares, which could come if the Bank of England holds rates in November. Another is letting more space ahead of estimated rental values, which should validate the group’s NAV. If it can keep the pace clocked up since the start of this year, then the landlord might be able to prove to the market that demand is well grounded.
A mooted disposal of its 50 per cent stake in the Meadowhall shopping centre in Sheffield would be another important test. The Meta lease surrender and the disposal of a data centre for £125 million will reduce the group’s loan-to-value measure to 33.6 per cent, closer towards the bottom-end of its 30 per cent to 40 per cent target range. That also means it has the ability to withstand a heavy fall in value of more than a third before nearing the limits of its covenants.
About £1.7 billion in cash and undrawn debt leaves enough liquidity to finance its committed developments, comprising about 1.8 million sq ft, but selling more assets to free up cash is a more desirable method of funding its activities. The shares could be nearing an inflection point.
ADVICE Hold
WHY Signs that bond yields are steadying could prompt a recovery in the shares
Boohoo
Boohoo built its market value — once valued in the multibillions of pounds — on selling fashion cheaply, quickly and in high volumes. Now, though, sales are stuttering and, without a revival in demand, the retailer might be in store for a more painful cut to its profit guidance.
The sales outlook for this year compared with the previous 12 months has been reduced to a decline of between 12 per cent and 17 per cent, from a previous expectation of a 5 per cent dip or flat sales. The pressure on people’s wallets is to blame, as well as slower delivery times in the United States.
John Lyttle, the fast-fashion group’s boss, wants to be “conservative” about the prospects for a recovery in spending later in the year, but the frequency of warnings will add to the market’s wariness.
An enterprise value of just over six times forecast earnings before interest, taxes and other charges is close to an historic low. The Manchester-based group is now valued at less than a tenth of its 2020 peak. Most recent sales metrics were poor. Active customers were down by 12 per cent, the number of orders fell by 18 per cent and the conversion in online shoppers browsing and then buying was 7 per cent lower.
Strategies to revive sales include pushing marketing and cutting prices by reinvesting money saved on lower raw materials and freight costs. A new American distribution centre is live, with the Nasty Gal brand added in September and the main Boohoo and Karen Millen banners due to follow next spring or summer. If that runs smoothly, it should cut customer waiting times and could help to boost sales in the US. That also should mean capital expenditure next year is lower than the £75 million expected for the present 12 months.
Lyttle expects the adjusted margin to improve this year to between 4 per cent and 4.5 per cent, still below a medium-term target of 6 per cent to 8 per cent. The question is whether another sales shock cancels out progress on savings.
ADVICE Avoid
WHY Sales could disappoint again this year and force another profit warning
