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British Land's retail portfolio crumbles as coronavirus speeds online shift

Net asset value per share was down 14.5% over the year

British Land -
British Land's retail portfolio includes the Meadowhall shopping centre

British Land Company PLC (LON:BLND) reported a £1.1bn post-tax loss for the year to 31 March after the value of its retail property shrank sharply. 

Net asset value per share of 774p at 31 March was down 14.5% over the year as the value of the group’s portfolio fell 10.1% to £11.2bn. 

The retail portfolio was hardest hit, shrinking 26% to £3.8bn, while offices expanded 2.3% to £6.8bn and there was a valuation gain from the Canada Water development and a dip from the small residential portfolio.

Estimated rental value shrank 4.7% as retail contracted 11.7% and offices improved by 3.2%. Yields increased by 38 basis points.

Underlying profits were down 10% to £306mln but the office and retail property developer took a £1.4bn impairment from adjustments to its portfolio and other investment revaluations.

The FTSE 100 real estate investment trust has collected 97% of office rents due between 2 March and 30 April, but only 43% of retail, though 40% of retail rents have been deferred and another 4% forgiven. 

Looking at the risk to its near-term rental cashflows, the company said around half of its customers are likely to suffer a relatively higher impact from the coronavirus crisis, including sectors such as food and drink outlets, leisure, fashion & beauty retail and other general retail.

Chief executive Chris Grigg said: "We expect the major trends that inform our strategy to accelerate", including the shift to online retail, and demand for London offices to "further polarise towards safe, modern, sustainable and well-located workspace".

"Near term, we are expecting the offices market to be more cautious, but we continue to conduct virtual viewings and are encouraged by negotiations we are having."

He said the group's financial position is "robust" and able to withstand a further fall in asset values across the portfolio of 45% prior to any mitigating actions, with access to £1.3bn of undrawn facilities and cash. 

Shares in the company, which had virtually halved in the first three and half months of the year, rose almost 7% on Wednesday morning to 405p, reducing a small portion of the discount to NAV.

Analysts at broker Liberum pointed out that the 14.5% decline in NAV was 5% below the consensus forecast and compared to rival LandSec’s 12% fall reported two weeks ago.

“Despite valuation declines, the balance sheet remains healthy enough to weather the COVID-storm, in our view... It is too early to predict outcomes with any certainty, but we would expect higher vacancy ahead, particularly in retail and leisure... While pricing in further significant value falls we are cautious on the near term outlook given the likely impact on earnings and values of a significant decline in rental income in the current year," the analysts said.

That British Land’s retail portfolio is in dire straits isn’t really a surprise nor really that its premium central London office space performed well in the past year, said Nicholas Hyett at Hargreaves Lansdown, but whether the coronavirus outbreak and the shift to home working affects long term demand for office space "remains to be seen".

"British Land’s flagship assets should be some of the most resilient office assets out there."

   --Adds share price and broker comment--

Quick facts: British Land

Price: 378.3 GBX

LSE:BLND
Market: LSE
Market Cap: £3.51 billion
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