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Overview | |
Chairman's Statement | |
Financial Review | |
Property Review | |
Management, Governance & CSR | |
Financial Statements |
Chairman's Statement |
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 Chairman's Statement |
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Chairman's StatementThis was a record year on every count, and once again the strength of British Land’s long-term business model and strategy is clear from the signal results. In the less certain and more testing market conditions which prevailed in the first half of the year the company was still growing and remained highly profitable: in the improving climate which has later developed it was able to increase shareholders’ funds more rapidly. For the full year adjusted fully diluted net assets rose £570 million to £5,035 million.We have accumulated a portfolio of unique quality and diversity, coupled with tightly controlled and innovative debt management, driving fully diluted net assets per share up 107p to 966p, a rise of 12.5%. Profits before tax at £186 million are ahead again, up 6.7% and we are raising the final dividend by 8.3% to 10.07p per share. The total distribution for the year is 14.5p, up 8.2%. This is the 25th consecutive year of dividend increases: the dividend payout has virtually doubled over the past decade alone. The total return for the year was 14.1% on a fully diluted basis. At the half year, asset values overall had risen just 0.2%. Six months later, values had risen 4.7% for the full year. This means that there was an annualised rate of growth of some 9% in the second half. The retail sector of the portfolio, focused primarily on out of town retail warehouse parks, major superstores and shopping centres, has performed particularly well, being up 12.4% for the year. After a quieter period our City of London investments have stabilised and are now poised to resume growth. The merits of property for investors have once more been widely appreciated since the stock market shakeout following the dotcom frenzy. Building up a property portfolio under management amounting to some £12 billion of British Land’s quality is not easy. The management has to buy astutely and must then take the time to manage its purchases actively to maximise value – negotiating leases, optimising rent reviews, acquiring adjacent interests, buying out ground leases, adapting properties to suit changing tenant demand and co-operating with nearby owners and local communities to achieve a better outcome for them too. Then you have to add in the specific skills for development, such as planning, design, efficient and sustainable construction on time and on cost, allied to financing, judging the market’s prospects and forecasting demand in the context of prospective economic verities. It is clear that the overall mix of expertise needed for success in our business is far removed from conventional investment. Property’s rewards are real, the risks can be managed, but instant fulfilment is rare except in the fraught late stages of a boom.  Back to top
Development focusOur view of the market has directed the development programme to the City of London, where we felt confident that prospects would continue to improve. Apparent availability of total space is often a false indicator in the City, as much of it is in secondary locations and of inferior quality, offering little to tenants who seek first class premises, designed for modern needs, and attractive to work in. Tenants seeking efficiency and good working conditions will pay proper rents, eschewing cheaper but less suitable second-hand buildings.Highlights of our 2,760,000 sq ft City development programme at a construction cost of £945 million are:
Joint venturesWe have repositioned some of our joint venture investments, buying out our partners GUS from BL Universal and taking full control of Blythe Valley, the Midlands business park development, from our partners ProLogis. A succession of highly profitable individual pub unit sales has reduced the Public House Company (PubCo), our joint venture with Scottish & Newcastle, to small proportions with only 19 pubs still to go, having started with over 300. We sold our participation in the Cherrywood development outside Dublin, and have been preparing the ILAC Shopping Centre for a radical renewal scheme in that City’s heart.An innovation has been the new Scottish Retail Property Limited Partnership, in which Land Securities and ourselves have pooled our shopping centre interests at East Kilbride and Aberdeen, gaining for both owners larger scale operations and for our tenants and the public much more extensive retail choice. Back to top
Canary WharfOur Canary Wharf foray provides an opportunity to acquire up to 16.4% of that Company’s equity, the exact percentage depending on the level of acceptances to our Songbird consortium’s offer, now declared unconditional, to Canary Wharf’s shareholders. Participation in the consortium has created the way for British Land to obtain a 50% interest in Canary Wharf’s attractive retail assets.Nearby, British Land has been selected by the London Borough of Southwark to masterplan a 40 acre Docklands site, mainly for residential use, around Canada Water Underground station in partnership with Canada Quays Limited. Property purchases and salesWe had refined our holdings earlier and so we were not big sellers of property last year, in the expectation of the market’s improvement. Sales, including those of joint ventures, realised £371 million, at 12% above the 31 March 2003 independent professional valuation.Disposal of the last 27% of St. Stephen’s Green Shopping Centre in Dublin (£44.8 million) and the mixed development at Cherrywood near Dublin (£48.1 million) were the largest elements. Purchases were considerably higher at £562 million which reflected our positive view. The major item was the purchase of the half we did not own of BL Universal (£364 million). Residential portfolioBritish Land has continued to be a net investor in residential property throughout the year, with new purchases contracted or agreed on over 350 units in excess of £60 million. We have concentrated on acquiring new property (mostly flats) from well known housebuilders prior to completion. These purchases are at a discount to open market value, and are in mostly provincial locations that provide good prospects for capital growth and a satisfactory yield as well. Sales have been mainly of older or non-performing stock, taking advantage of increased prices, with sales completed on some 80 units at over £15 million. The total return from the residential portfolio has averaged more than 12% per annum over the last five years.FinanceTo pay for our enterprises we are dependent on Group financing initiatives, and our Treasury has been busy both in reorganising funding arrangements and in raising further finance.In the first quarter of the year we completed negotiations with the fifty or so principal banks with which we deal. Part of the process was the introduction of new banking covenants which are mutually advantageous. The covenants no longer restrict the amount of securitisations and secured debt and, for its part, the Group has covenanted to limit to a standardised 70% the ratio of unsecured debt to unencumbered assets. This covenant will apply equally to bank borrowing and to bonds, providing a level playing field for all our unsecured lenders. Capital markets were utilised in three different ways. £98 million was raised through a private placement to seven US institutions on an unsecured basis for a twelve year period. The new US private placement lifted to over $300 million the amount of US medium-term institutional lending to the Group. We tapped both the Meadowhall and the Werretown (Sainsbury) securitisations to raise a further £51 million and £84 million respectively. The Meadowhall securitisation now represents 80% of the original net purchase price, and in the case of the Sainsbury stores over 100%, so that we enjoy total ownership with only nominal capital committed, making the return on shareholders’ funds exemplary. New Group bank facilities completed amounted to £615 million with an additional £143 million of renewals. The total bank book is £1,976 million, with current undrawn availability of £965 million. Further funds have been raised through joint ventures, including distributions out of BL Universal and BL Fraser, sales from PubCo, and refinancing of two of the Tesco joint ventures. In total £169 million was raised from joint ventures in the year. Group debt now has a weighted average life of 16.9 years at 6.38%. 82% of debt is at fixed rates of interest, 2% capped and 16% at variable rates. Back to top
Broadgate EstatesBroadgate Estates Limited (BEL), our property management company, continues to grow its business, with over £60 million per annum of service charges under management. Just over 40% of revenue arises from managing the Group’s major multi-let London properties including Broadgate, Regent’s Place and Fleet Place. The balance of almost 60% is earned from third parties. In the year BEL has taken almost one million sq ft net of new assets under management, all for third parties.MeadowhallMeadowhall’s performance remained strong with visitor numbers up 424,000 to 24.6 million last year. The Centre has expanded its retail mix with the emphasis on fashion. New additions on the malls include Bank, Faith, Jane Shilton, Mamas and Papas, and the UK’s first Build-A-Bear Workshop. We completely renovated The Oasis Food Court in an £8 million scheme which gave it a fresh, modern look, as well as over 350 additional seats in a new upper level seating area, easing the pressure at peak times and providing a more relaxed setting.Meadowhall’s initiatives to help retailers meet customers’ growing demands were developed further during the year. The interactive GO SHOP loyalty scheme gives retailers access to customer data and allows them to incentivise their loyal customers, and Meadowhall’s own e-commerce gift service, Surprise Someone, offers Centre retailers an additional route to market. The ARC, an on-site warehousing facility, provides extra storage space for retailers away from but near to their shops. The Source is Meadowhall’s leisure and educational facility which opened in March 2003 and has already attracted over 60,000 local users to its IT Learning Centre, conference and interview rooms, classrooms, gym, café, employment advice centre and crèche. Near Meadowhall, we have assembled a 66 acre landbank, and we are working with Sheffield City Council on a masterplanning exercise including this strategic site. British Land has already announced a venture for an MGM Mirage Resort Casino, and we are looking for further initiatives there. Corporate ResponsibilityRecently we published our second Corporate Responsibility Report. British Land’s approach to its social and environmental responsibilities reflects the fact that the business is capital intensive but relatively small in staff numbers; in this sense, for us small is beautiful and efficient. We must ensure that the developments we construct and the buildings in which we invest attain the highest standards.Most of our energy and implementation will be where it matters – on the ground, at our properties around the UK. Staff on-site make the decisions relating to their sites, because they know what their local communities want and what makes sense for their part of the business. Reflecting this belief, we have set up an Award Scheme for on-site initiatives to encourage the involvement of all staff. Back to top
External issuesBritish Land has for some time responded to the Government’s wish that landlords should offer more flexible terms to tenants, including alternatives to upwards only rent reviews. Our experience has been – and it may be in part a reflection of the high quality of our portfolio and its target market – that few tenants are takers of the alternatives. In larger transactions they almost always insist on longer leases, and they do not want to pay the higher rents involved in the upwards and downwards option.Recently we arranged the surrender of a particular 63 year lease we had acquired, and granted a new one for the same term at the same rent. In return for an upfront cash contribution for building improvements, the tenant swapped seven yearly upwards or downwards rent reviews in the old lease for upwards only five yearly reviews in the new lease. This flexible re-arrangement suits both parties and shows how the free market works today. What is interesting is that the tenant is no less than HM Government, and there is nothing new in upwards and downwards reviews as this lease was granted in 1973. We sense that increasing numbers of tenants are wary of Government intervention. It forces artificial changes, but the results may not be what advocates of tilting the table expect. Could it be that removing upwards only rent reviews might increase rather than decrease occupancy costs? It is the nature of markets to compensate, and there is one law which no government can repeal – the law of unintended consequences – which I might say has in the past inadvertently produced some interesting opportunities for us! On a promising note, the proposal to establish Real Estate Investment Trusts in the UK must be welcomed and should be beneficial. For savers and investors to have an easy method of putting their money into property is highly desirable – provided of course that the Trusts are not required to carry uneconomic burdens, for example in funding residential in prime commercial locations. If REITS are unduly burdened or over-complicated, the saving and investing public will shun them, and that would be a great disappointment. Back to top
ProspectsWhat next for the property industry? Given a reasonable economic climate, property will benefit because capitalisation rates are having the long overdue correction I forecast, and REITS also are likely to increase demand for high quality assets. Property is going to continue to make money for its investors, largely the repository for savings and the providers of pensions especially here in the UK.At British Land we provide space for millions of shoppers, and the workplace for large numbers of retail and office staff throughout the country. Nowadays we are offering our customers, our tenants, a range of ancillary services, such as our widely used Vicinitee website which provides both information for occupiers’ employees and property management services. We have been leaders too in PISCES, pioneering electronic data interchange to modernise the paperchase of conveyancing. It is worth restating here what our long-term strategy is. We focus on prime assets, mainly in the office and out of town retail sectors, where we create exceptional investments with strong tenants, long lease profiles and growth potential. We raise returns by active management and development. The distinctive British Land hallmark is opportunistic pursuit of these objectives, including innovative financing and the use of joint ventures. We also engage in the often complex processes of unlocking real estate holdings contained in corporate and other structures. What matters most is that we build or buy well-located buildings that suit tenants’ needs with good prospects for rental growth. Though it has not been easy in the current strong market to acquire good assets, we were able to buy out some of our joint venture partners and acquire the outstanding 50% of properties for which we already have pre-emption arrangements, an advantage of the joint venture partnerships we have employed extensively. We believe that our own particular entrepreneurial culture and approach remain effective, and will continue to serve our shareholders well in both income and capital terms. 
Board and managementMy warm thanks go to my colleagues on the Board. The company is fortunate to have such well-qualified and experienced directors, capable of asserting their views from a wide range of activities and disciplines.Our talented and energetic executives, a blend of ages and aptitudes, have made strenuous and incisive contributions to a productive year. I thank them, all our staff, and our agents and professional advisers throughout the Group for what has been accomplished by our team. 
John Ritblat Chairman 24 May 2004 Back to top
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