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 Sales and Purchases
Property Asset Management
Principal sectors
Controlled Development Programme
Valuation
Outlook and Strategy
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Sales and Purchases
The investment market continued to be buoyant with
strong competition between purchasers. The increase in
medium-term swap rates has had only a limited effect in
reducing the capacity of those reliant on gearing and there
remains keen interest from a wide range of international
and local institutions, corporates and individual investors.
In this climate, we have been active in reviewing and
bidding on acquisition opportunities. We are not willing to
chase the market, where we believe some higher bids do
not fully reflect the risks involved. We have a well balanced,
high quality portfolio, which is strongly positioned in
sectors that conform to our strategy. We do, however,
continue to seek opportunities where we can find value.
We have also continued to review our portfolio and
have again been active sellers, taking advantage of the
current market. Our trend of achieving sale prices above
the latest valuation has been maintained, at 11% in the half
year (9% last year). This confirms the ongoing strength of
the investment market.
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Liam Gillick
Reciprocal Passage Work, 2003 – Triton Square Mall
Gillick’s work complements the architectural aesthetic of the
structure it is designed for. Often his pieces take the form of
screens or dividers, as with this ceiling installation whose
coloured panels add warmth and brightness to a functional
environment.
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Sales of £192 million, including joint venture properties
and our share in the Cherrywood Properties
joint venture were completed in the six months to
30 September 2003. These disposals involved 36 properties
(excluding residential units) and included our remaining
interest in St Stephen’s Green Shopping Centre, Dublin
for £44.8 million, 14 retail (mainly high street) units in
BL Universal for a total of £47.6 million and 11 pubs (at
auction) for a total of £16.3 million. Since September, we
have completed or exchanged contracts for sales totalling
a further £91 million, also at prices well above valuation.
Purchases of £17 million, including joint ventures,
were completed in the six months and have been valued at
September 2003 at 12% above cost. A further £4.5 million
of residential investment acquisitions have been made
in October.
On 17 November 2003, British Land acquired the
50% share in BL Universal PLC held by GUS plc. This joint
venture company was established in February 1997 when
it acquired 982 properties, being mainly high street shops
with an average lot size of £900,000, from the Great
Universal Stores group. Since then, the joint venture portfolio
has been repositioned:
- 894 properties have been sold (or relinquished) for a
total of £768 million,
- the proceeds have been reinvested during the course
of the joint venture in the acquisition and retention of
13 properties, primarily retail warehousing, at a total cost
of £357 million, with funds also utilised to repay debt and
return cash to the joint venture shareholders,
- a range of redevelopments and refurbishments have
been carried out to improve retained assets,
- the portfolio now comprises 101 properties, with an average
lot size of over £7 million, some 80% retail warehousing
and shops, and 20% offices, with net rental
income of some £50 million per annum.
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This preferred portfolio has been managed and selected
by us over the last six years in the joint venture. The
purchase price was based on the independent valuation of
ATIS REAL Weatheralls at £761 million as at September
2003. The purchase of shares is an efficient form of acquisition
where transaction costs are low. Taking into account
income and capital returns to British Land from the joint
venture since inception and its November 2003 market
value, the venture has shown a 12% annualised ungeared
return before tax.
BL Universal owned a 40% interest in the St Nicholas
Centre, a 10,700 sq m (115,000 sq ft) Shopping Centre in
Aberdeen with a strong tenant mix, mainly let to national
multiple retailers. In a series of transactions, on the day of
our acquisition of the GUS share in BL Universal, British
Land purchased both the outstanding 60% interest in St
Nicholas Centre for £31 million and the remaining long
leases of a further two prime shops in the Centre for
£11.6 million. We are pleased to have been able to
piece together these interests, which will enable us
to consider plans for the future development of the
entire Centre.
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Michael Craig-Martin
Big Fan, 2003 – Triton Square
This huge work 16.4m by 12.4m, the colours brilliantly lit,
is a development of Michael Craig-Martin’s celebrated wall-drawings
and sees him working with light for the first time. The
artist responded to the challenge of designing for an outdoor
situation with characteristic vigour and inventiveness, creating
a piece which at night also illuminates the surrounding
buildings and square in which it is set.
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Property Asset Management:
annualised net rents £539.1 million
We continue to grow rental income from active management
of the portfolio. Annualised net rents at
September 2003 were £539.1 million. This compares to
£545.8 million as at March 2003 but reflects a reduction of
£18.975 million per annum due to a rent free period
granted to the European Bank for Reconstruction and
Development in exchange for an extension of lease term
and removal of a tenant’s break clause. EBRD rent
payments will recommence in November 2006. After taking
into account sales, annualised net rents have increased by
£18 million due to rent reviews, new lettings and expiry of
rent free periods.
At Meadowhall we have concluded 23 new lettings
and seven rent reviews increasing income by £1.6 million
per annum. Total rental income is now £69.9 million per
annum. The major refurbishment of the popular ‘Oasis’
foodcourt has been completed, providing some 400 additional
seats giving a total capacity of 1,400 (in addition to
the separate restaurant and café units). We now expect
increased turnover at the units in the foodcourt, which will
result in additional rents.
At Broadgate, in the half year, rent review settlements
have been reached on four tenancies, totalling 41,800 sq m
(450,000 sq ft), increasing the passing rent by over
£1.1 million per annum.
Voids in the portfolio are very low at 2.4% of total rental
value, including areas under offer and those subject to
asset management initiatives.
Reversionary income from the current investment
portfolio is expected to increase rents by £59.2 million
within the next five years, of which £31.9 million is already
committed (£18.975 million from EBRD and the balance
arising on the expiry of rent free periods and minimum
rental uplifts contracted under existing leases). Further
income will be generated from the development programme,
where £19.4 million is already contracted under
pre-lets.
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| Further income |
Contracted
£m |
Not Contracted
£m |
Total
£m |
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| Annualised net rents, 30 September 2003 |
539.1 |
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539.1 |
| Reversions within five years |
31.9 |
27.3 |
59.2 |
| Committed developments |
19.4 |
21.6 |
41.0 |
| Development prospects |
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103.4 |
103.4 |
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| Total |
590.4 |
152.3 |
742.7 |
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Principal sectors
Retail represents 49% of the total portfolio by value. Our
primary focus is on out of town investments which account
for 80% of the retail portfolio, the remaining 20% being in
high street and town centre shopping schemes. Retail
sales are continuing to grow (for the three months to
October 2003 at 3.7% higher than a year ago) although at
a slower rate than previous years. Out of town shopping
continues to take an increasing share of total retail spend,
current sales growth is projected at 6% per annum.
Consumer preference and a limited supply of these properties
have resulted in sustained retailer demand, improved
rents and increased values.
Supermarkets have been the best performing class
in the portfolio this half year with prime estimated rental
values continuing to rise and yields tightening. Store size is
critical to operators who are continually expanding their
range of goods. The average size of the Superstores, which
represent 95% by value of the overall supermarkets
portfolio, is now 6,450 sq m (69,500 sq ft) and we continue
our programme of extensions.
At Meadowhall, visitor numbers between April and
September 2003 are 1.9% higher than the equivalent
period in 2002, reaching a total of 24.4 million for the year.
The average spend per party has risen in each month
surveyed, April to September 2003, over the same month
in 2002.
Offices represent 46% of the total portfolio by value and, of
this, 95% is in Central London. The Central London investment
market remains strong with £4.4 billion of transactions
recorded in the first three quarters of 2003. However,
letting activity remains subdued. At the end of Q3 2003,
agents’ research indicates the City market vacancy rate
had increased to around 14% of total office space. It is
expected that the small amount of new supply in hand will
complete in 2004 and thereafter no further significant new
supply is anticipated. We are encouraged by the recent
increase in ‘viewings’ by tenants and that the job losses in
the City appear to be at an end, with some sectors now
considering recruitment. Recent research indicates that
employment in existing businesses in the City is expected
to increase over the next four years. If take up of space
even at the historically low 2003 levels is achieved, the
vacancy rate is forecast to fall and in 2005/6 we can
expect rental growth to return.
British Land’s City office investments are of high
quality and in the best locations, and have income generated
from long leases with upward only rent reviews from
strong covenants. The weighted average lease length of
the City office portfolio is 12 years to first break and 14 years
to expiry. With upward only rent reviews, rental income can
only fall at lease expiries or on tenant breaks. Accordingly,
capital values are protected by this long lease profile.
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Controlled Development Programme
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Rent * |
Construction |
Cost to |
| |
Net Area |
(est) pa |
cost |
complete |
| At 30 September 2003 |
sq m |
£m |
£m |
£m |
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| Completed Total |
8,680 |
1.0 |
5.2 |
– |
| British Land Share |
|
1.0 |
5.2 |
– |
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| Committed Total |
80,490 |
41.0 |
312.8 |
109.3 |
| British Land Share |
|
41.0 |
312.8 |
109.3 |
| Development prospects Total |
362,300 |
113.8 |
761.7 |
732.1 |
| British Land Share |
|
103.4 |
686.7 |
660.7 |
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| Total |
442,790 |
154.8 |
1,074.5 |
841.4 |
| British Land Share |
|
144.4 |
999.5 |
770.0 |
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| * Headline rent |
During the last six months, the third phase of the distribution
warehouse development at Heathrow Gateway was
completed. Negotiations with potential tenants are in hand.
Committed projects are now limited to 1 Plantation
Place, EC3 (part pre-let to Accenture), 2 Plantation Place,
EC3, and 10 Exchange Square, EC2 (Broadgate). These
office developments are proceeding on programme
and budget.
Development prospects are sites and properties where
opportunities for development have been identified and are
being progressed through design and planning. Examples
from the half year include achievement of improved planning
consents at 201 Bishopsgate, EC2 (offices), Thatcham,
Berkshire (distribution) and York House, W1 (offices and
residential). 84% (by area) of development prospects now
have detailed or outline planning consents.
These projects will be undertaken in stages, in line
with our strategy of adding quality assets to the portfolio,
with construction commitments made either on pre-lets or
on the basis of anticipated market demand.
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Valuation
All the properties owned by British Land and the joint
ventures were valued by independent valuers, principally
ATIS REAL Weatheralls, whose commentary on the
commercial property market follows this review.
The portfolio, including British Land’s share of joint
ventures, was valued at £9,649.1 million, a small increase
(on a like-for-like basis, after adjustment for purchases,
sales and capital expenditure) of 0.2%. This valuation
benefited from the stamp duty relief in respect of properties
in defined ‘disadvantaged areas’ provided in the April
2003 Budget, to the extent of some £120 million.
The portfolio valuations by use and by location, and the
changes over the half year, are shown on the portfolio analysis page.
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Outlook and Strategy
The retail sector has continued recent trends, with growth
in rents, particularly for out of town properties, and with
good tenant demand. Office rents in Central London have
softened. The investment market overall remains buoyant
with demand from a wide range of UK and overseas
investors and support from lenders.
The portfolio as a whole, due to its balance between
retail and offices, coupled with the long lease profile, has
shown resilience to the softening of Central London office
rents and values, our retail portfolio effectively underpinning
office value declines over these first six months.
We maintain our approach to portfolio review and
anticipate further sales over the remainder of the year. We
expect to continue to seek acquisitions, where we find the
right value opportunities.
Robert Bowden Property Investment Director
25 November 2003
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