MIDAS SHARE TIPS: WFH hits office prices, but you could Land a bargain

It is not an easy time to own commercial property. If the bulk of your portfolio is offices, the work-from-home (WFH) culture has cut your profits, while if you are in the retail or warehouse sector you are struggling with rising prices and the cost-of-living crisis.

But we still need to work and shop somewhere, which is why full-year result statements from FTSE 100 property stalwarts Land Securities and British Land last week were perkier than many of us might have expected given the situation. Despite both firms posting huge losses for the year ending March 2023, as the valuations of their portfolios tumbled, their bosses were determined to look on the bright side of life.

Mark Allan, chief executive of Land Securities, reckons that a seemingly unpalatable combination of picky consumers and ‘higher for longer’ interest rates will result in ‘exciting opportunities and continued positive rental growth for Land Securities’, while Simon Carter, chief executive of British Land, talks of ‘significant opportunities for future value creation’.

Shareholders might be forgiven for finding these upbeat assessments a little grating. Owners of Land Securities have seen their holdings fall in value by 34 per cent over the past five years, and those who bought into British Land have been even more unlucky, with their shares down almost 50 per cent over the same period.

The big question is, will the bosses’ optimism translate into share price recovery?

Losing some sparkle: Valuations on City office space have been falling

Land Securities

Let’s look at Land Securities first. The company posted a £622 million loss before tax, against £875 million profit the year before, as the company’s property portfolio fell in value by nearly 8 per cent.

The portfolio is focused on three main areas: central London offices, shopping centres and ‘mixed use’ urban neighbourhoods. Much of the portfolio is in good shape, with rising rents and occupancy levels. Many of Land Securities’ assets are well-known, from Bluewater shopping centre in Kent to Brighton Marina, and the company has been focusing its efforts on those areas where it thinks valuations will rise – namely high-quality sustainable office buildings and ‘fewer, but bigger and better stores’ in key retail locations. Where it doesn’t see a future – namely in old-fashioned City of London offices – LandSec has been selling up.

The result is an anomaly, a company that can pay an increased dividend out of rising income while slumping to a loss. That is because the valuation of its underlying portfolio hits the profit and loss account, but the dividends are paid out of the income it is receiving from rising rents and earnings.

What is next? Mark Allan believes that the firm’s strategy will continue to benefit the business during the forthcoming ‘higher for longer’ period when it comes to interest rates, because disposing of unwanted assets will take down debt, when servicing it is more expensive

He thinks the focus on quality will result in valuations rising. Land Securities expects to deliver an 8 to 10 per cent annual return.

British Land

Now let’s turn to British Land. This business also tumbled to a loss, with Simon Carter saying that the value of prime London offices was ‘close to the bottom’.

While the value of the company’s portfolio was down over 12 per cent, rental growth was strong, meaning underlying profit – stripping out valuation changes – was up nearly 7 per cent. British Land’s City office assets performed poorly, but it is focusing elsewhere.

So-called ‘campuses’, which combine office and public space, are one area of focus, while the firm is also keen on the life sciences sector and urban logistics centres. The campus developments are expected to see rental growth of 2 to 4 per cent in the next 12 months, and its retail parks are expected to perform similarly, the firm said.

Other good news included an overall occupancy rate of 96.7 per cent, and disposals of £746 million, which is part of the company’s strategy to ‘recycle capital’.

The disposals were mainly at Paddington Central, West London, strengthening its balance sheet and ensuring it focuses on core assets.

The company acknowledges a tricky macroeconomic backdrop, saying ‘sentiment is fragile, and the outlook remains uncertain’. But Carter believes pressure on yields is easing and there are opportunities for higher valuations ahead.

Midas verdict: With high interest rates, consumer fragility and post-pandemic WFH culture, property giants Land Securities and British Land are far off the highs they reached in the old days, when people actually went to work. Investors must decide whether they represent good value at this level.

British Land is sitting on an undemanding valuation. Investment bank Liberum reckons it trades at a discount of 40 per cent to the value of its net tangible assets and yields 5.5 per cent. That’s better than the average real estate investment trust, which Liberum says has a 16 per cent discount and 4.7 per cent yield.

Land Securities trades at a 30 per cent discount to net tangible assets with a 6.2 per cent yield, but Liberum says the state of British Land’s debt is less attractive than that of Land Securities.

Neither looks expensive at this level and the yields are attractive, but their valuation depends on how commercial property performs and how we change our working and commuting culture.

Land Securities’ balance sheet and forecasts would seem to give it the edge, but both companies are worth holding on to for now, if you can stand a bumpy ride.

Traded on: Main market Tickers: LAND; BLND Contact: landsec.com or 020 7413 9000; britishland.com or 020 7486 4466