British Land (LSE: BLND), rated a BUY by Jefferies
Mention commercial property at any dinner party, and many investors turn white during the 2008/9 credit crunch, real-estate prices plummeted 40%. However, there's been a mini renaissance sine then. According to Investment Property Databank, the average value of stores, offices and warehouses has jumped around 30% over the past 26 months. And factoring in rental income of 7% a year gives an annual yield of 8.7%. That beats cash returns hands down.
Better still, the rents charged by British Land, one of the UK's largest landlords, are relatively stable. Backed by top-flight tenants such as Tesco, Sainsbury's, Debenhams and UBS, it should be able to survive even the sharpest of downturns, just as it did three years ago. That's because its property portfolio is focused on prime locations (for example, Meadowhall Shopping Centre in Sheffield) and central London offices, which attract high-quality tenancies. Occupancy rates of 98% and average lease lengths (to first break) of 11 years are among the highest in the UK real-estate investment trust (REITs) spectrum. Overall, the retail to office split of gross assets is about 64:36.
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This all means British Land is able to borrow funds more cheaply than even several European governments. For instance, in September it raised $480m in a heavily oversubscribed bond issue, at an average of just 1.45% above the inter-bank rate. Total net borrowings were £4.6bn at the end of June and the firm can cover interest payments out of profits 2.3 times. Its average loan-to-value ratio is 45% and at an average cost of 4.8%. So why have the shares performed so poorly since the summer?
It is largely down to poor sentiment and overblown fears of another collapse in property values. UK retailers are downsizing in response to shrinking disposable incomes and a move towards online shopping. But there is no sign of this yet in the results, as the company's premium sites are enjoying robust demand. So I rate the stock on a one times net asset value of 583p a share. As a REIT, British Land incurs no corporation tax provided it pays out 90% of its profits, and dividends are distributed gross (yield 5%). So for income-seekers, the shares are tax efficient, especially if held within an individual savings account (Isa). Indeed, over the last 20 years, rent has accounted for 80% of total UK property returns.
Commercial property is not everyone's cup of tea. But if you are prepared to sit through the normal swings of the cycle, this stock looks a good bet. Interims are scheduled for 15 November. Jefferies has a price target of 611p.
Rating: BUY at 490p
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