British Land holds firm despite cautious property climate

Added 18th July 2016

British Land saw its share price hold firm at 629p despite expressing concerns over cautious occupiers and investors.

British Land holds firm despite cautious property climate

While several substantial London commercial property deals fell by the wayside after the results of the referendum were announced, British Land was able to get several transactions over the line, including the £400m disposal of Debenhams in Oxford Street.

In its first quarter trading update, the FTSE 100 commercial property company likewise confirmed it had finalised 17 long-term retail leases that were exchanged on terms agreed prior to the referendum. The Leadenhall Building was also fully let during the period with Kames Capital and MS Amlin occupying the remaining 20,000 square feet, the firm said.

Ahead of the referendum, retail and office lettings and renewals activity was “robust,” according to the firm, exceeding estimated rental value (ERV) estimates by 14.8% and 3.8%, respectively.

Although there has not been a shortage of activity over the first quarter, chief executive, Chris Grigg, remained wary of investor behaviour post-Brexit.

“It is too early to properly assess the impact of the referendum result on the markets in which we operate but we do expect some occupiers and investors to take a more cautious approach,” Grigg said. “British Land has entered this period of post-referendum uncertainty in a robust position. We have a strong, resilient business with a clear strategy.”

Societe Generale’s outlook on the UK commercial property sector post-Brexit was largely in keeping with their prognoses of the industry during the last two financial crises.

“As of today the sector index is down 20% from its peak in 29 October 2015. If prices continue to fall, and assuming the same average property price decline of 30% seen the last two crises, UK share prices should fall 44% peak-to-trough – another 21% decline from here,” the bank said.

However, Societe Generale predicts we will see a less severe price decline for prime commercial assets because yields are likely to provide a much needed floor to capital value. British Land’s Debenhams deal is a perfect illustration of this principle, the firm stated. 

“On a positive note we note that last week’s £400m Debenhams transaction in Oxford Street in London was achieved on a yield of 2.75% – and this is a first example of investors seeking to take the opportunity provided by Brexit to access prime assets only on the market at a time of ‘crisis’,” Societe Generale said.

Societe Generale was also cautiously optimistic that four of the asset managers who suspended trading of their £bn property funds the second week of July, Aberdeen, Henderson, Standard Life and L&G, had expressed intentions to dispose of London assets as a way of dealing with redemptions. However, the bank said there do not appear to be any “great landmark buildings” included in the disposals list.

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