Property Review

The investment market has continued to be strong, with a considerable weight of funds competing for prime assets in limited supply. This has resulted in firmer yields which have contributed to improving values, particularly in the retail sector.

Purchases: £562 million (including joint venture properties), 69% retail
We have been net investors this year, adding to the portfolio in our preferred sectors, primarily through off-market transactions (where costs associated with acquisitions are generally lower). Significant purchases during the year were:

the 50% share in BL Universal PLC held by GUS plc; with a portfolio of some £728 million, we effectively purchased £364 million of prime property in this transaction. The BL Universal joint venture was established in 1997 when it acquired 982 properties, 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: some 894 properties were sold for a total of £768 million; the proceeds were reinvested in 13 properties, primarily retail warehouses, at a cost of £357million; further funds were utilised to repay debt and return cash to the joint venture shareholders; redevelopments and refurbishments were carried out to improve retained assets. The resulting portfolio comprises close to 100 properties with an average lot size of over £7 million, being 83% retail and 17% offices. The portfolio has been managed and selected by us over the last six years and we were pleased to have the well-timed opportunity to own it outright;
the outstanding 60% interest in the St Nicholas Centre, a shopping mall in Aberdeen with a strong tenant mix of mainly national multiple retailers, for £31 million. BL Universal owned the 40% interest, so the property was acquired in full. At the same time, we purchased the long leaseholds of a further two prime shops in the centre for £11.6 million. This assembly of interests assisted us in contributing the centre to the new joint venture with Land Securities, commented on below;
Priory Retail Park, Merton, for £34.7 million, fully let to national multiple retailers, consistent with our continuing strategy to invest in such retail parks;
the majority interest in BVP Developments Limited, the former joint venture company which has developed and let Blythe Valley Park, Solihull, providing some 36,200 sq m (390,000 sq ft) of primarily B1 office space in a landscaped park. The site has outline planning consent for development of a further 76,080 sq m (819,000 sq ft) of business space. The half-share in the property was valued at £50.5 million;
146 residential units, for £20 million. This is a sector where we are increasing our investment. We have concentrated on acquiring new property (mostly flats) from well known house builders prior to completion. These purchases are at a discount to open market value, and provide good prospects for capital growth with a satisfactory yield. The total return from the residential portfolio has averaged more than 12% per annum over the last five years;
in a new 50:50 joint venture with Rosemound Developments, 74 acres at Daventry International Rail Freight Terminal with outline planning consent for distribution warehouse facilities were acquired for £28 million.

Sales: £371 million (including joint venture properties), £38 million above valuation
Sales this year have been focused on continuing to take advantage of high market prices for assets in Ireland and for mainly smaller lot sizes in the UK. Transactions, overall at some 12% above valuation, have involved 83 commercial properties and 80 residential units, including:

our remaining 27% interest in St Stephen’s Green, Dublin for £44.8 million and our 50% share in the Cherrywood Properties joint venture for £48.1million;
19 retail units in BL Universal for a total of £80.5 million;
30 pubs (at auction) for £40.8 million.

Since the year end we have sold the City office properties at 100 New Bridge Street and Watling House, Cannon Street, EC2 from the BLWest joint venture for £151million. These London sales are for reasons of stock selection and do not reflect any change in strategy; we remain confident in the City office market.

New Scottish Joint Venture: with Land Securities

In addition to the purchases and sales reported above, a new 50:50 joint venture has been created in respect of shopping centre assets in Scotland of British Land and Land Securities. The joint venture partners have each contributed assets to The Scottish Retail Property Limited Partnership which now owns the combined portfolio of over 130,000 sq m (1.4 million sq ft) of retail space, producing gross rents of more than £30 million per annum.

In Aberdeen, the principal retail centre for north-east Scotland, British Land’s St Nicholas Centre and the Land Securities Bon Accord Centre make up the prime retail pitch between the John Lewis store and Union Street. In East Kilbride, British Land has contributed the Plaza Centre and the recently completed Centre West with retailers such as Debenhams, Next, Zara, French Connection and HMV. Land Securities added the adjoining malls, The Olympia and Princes Mall containing a strong mix of tenants together with a multi-screen cinema, library and ice rink.

By pooling our property assets and our expertise we will create improved retail environments for both tenants and shoppers, and maximise long term values.

Property Asset Management: annualised net rents up to £567.7 million

A considerable number of transactions are managed within the portfolio each year. This year, across the entire portfolio (including joint ventures) 216 rent reviews produced an increase in rents of some £13.5 million per annum, a 31% increase on the previous passing rents. A total of 71 lease renewals and 218 new leases granted generated additional rent of £17.5 million per annum.

At 350 Euston Road, Regent’s Place, all office space is now let or under offer. The previously reported agreement reached in April 2003 with the European Bank for Reconstruction and Development at Broadgate resulted in an extension of the lease term and removal of the tenant’s break clause in exchange for a nil rent period. This reduces rents passing by £18.975 million per annum until November 2006 when EBRD rent payment will recommence.

In the supermarket portfolio we have again made good progress with rent reviews. At Milton Keynes, for a Tesco superstore of 12,630 sq m (136,000 sq ft) on a high quality retail warehouse park, an independent expert awarded a rent of £21.50 per sq ft per annum on an ‘unfitted’ basis, the highest third-party award for a supermarket achieved to date. This represented a 62% increase over the previous passing rent of £13.25 per sq ft. As part of the renewal and refinancing of the BLT Properties Limited joint venture, all the leases to Tesco were extended for an additional ten years to expire after 2030.

At Meadowhall, rents have been increased by £2.1 million per annum, primarily due to settlement of 13 rent reviews and agreement of 28 new leases with existing and new tenants. Further management initiatives to relocate tenants and reconfigure shop units have improved the focus of certain areas of the Centre.

In Dublin we have a 50% interest in the ILAC shopping centre where terms have been agreed with the anchor tenant for a lease of a new store in a fully refurbished and extended scheme. We have made a planning application and are awaiting consent.

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Vacancy rates in the portfolio remain very low, at 3.1% of rental value.

Within the next five years further rents of £61.6 million per annum are expected from the existing investment portfolio, including £27.7million already committed as a result of expiry of rent free periods and contracted minimum rental uplifts. Additional income will be generated from the expanding development programme, details of which are set out below.

Further rent	Contracted £m	Not contracted £m	Total £m

Annualised net rents, 31 March 2004	567.7		567.7
Reversions*, within 5 years	27.7	33.9	61.6
Committed developments	21.4	20.1	41.5
Development prospects		175.1	175.1

Total	616.8	229.1	845.9

* Includes rent reviews, letting of vacant space and expiry of rent free periods (as determined by external valuers)

Kingston Centre, Milton Keynes

The Portfolio: principal sectors

Retail is 52% of the total portfolio by value, with 78% of this being out of town investments and the balance 22% in high street locations and town centre shopping schemes. Out of town shopping is continuing to take an increasing share of total retail spend. Retailers continue to seek space in these locations which, coupled with a restrictive planning regime, maintains upward pressure on rents and hence values. While we have sold many high street shops, we have retained a significant investment of £541million, mainly in provincial towns in the best locations, where we believe long term prospects to be sound.

Supermarkets, retail warehouses and shops have all performed very well, each with value growth of some 15%; coupled with income this gives a total return of just over 20% this year. There is strong competition from investors to acquire these assets. We calculate that we are the largest owner of UK supermarket properties, other than the operators themselves. The retail warehouse space is flexible, with 58% having the sought after open A1 planning consent which permits the widest range of goods to be sold and therefore attracts the best mix of potential tenants.

Meadowhall, one of the largest and most successful shopping centres in the UK, continues to be in demand from tenants and popular with shoppers. During the year we have brought more fashion retailers to the centre and have continued to improve the overall tenant mix and offer to shoppers.

Offices represent 43% of the portfolio, of which 94% is in Central London, where we believe the market is at the beginning of an upturn. There is limited new supply, and recruiting starting again in both the financial and business services sectors has led to increased demand from prospective tenants. Tenants are withdrawing surplus space from the market and take up is improving from previous years. Overall, sentiment in the City is improving. Our view is that vacancy rates will begin to fall this year and continue to fall through 2005/6, so we should see rental growth for good quality space returning at the end of this year. British Land’s office portfolio, with high quality buildings in the best locations, and long leases with contracted rents from strong covenants, is well placed to benefit from these expected improvements.

Picture of Plantation Place, EC3

Plantation Place, EC3

Development programme: building up

Committed projects, as at 31 March 2004
Project	Size sq m	Rent (est) pa	Cost*	PC• (est)	Pre-lettings (sq m)

Offices
1 Plantation Place, EC3	50,340	£26.5m	£201.6m	Q2 2004	Accenture (34,840)
10 Exchange Square, EC2	15,180	£7.0m	£53.2m	Q2 2004	Herbert Smith (4,100)
2 Plantation Place, EC3	14,960	£7.1m	£60.2m	Q2 2004

Distribution
Thatcham, Berkshire†	23,690	£1.9m	£9.2m	Q2 2004

	104,170	£42.5m	£324.2m		£21.4m pa (50%)

Cost to complete:			£67.7m

British Land share:		£41.5m	£64.3m		£21.4m

* Construction cost • Practical completion of construction † BL Gazeley joint venture

During the year, we completed the final phase of Heathrow Gateway (Phase 3), an 8,680 sq m (93,400 sq ft) distribution unit. Since March 2004, the buildings at 1 Plantation Place and 10 Exchange Square have completed, both on time and within budget. Part of each building is pre-let and there is considerable interest in the remaining available space.

In these early stages of an improving office market, the development programme is being moved up a gear, to add quality assets to the portfolio and to be ready to provide for anticipated demand. Development prospects are those sites and properties where we have identified opportunities and are progressing design and planning applications.

Development prospects, as at 31 March 2004
Project	Principal use	Size sq m	Planning status

Lime Street, EC3	Offices	39,020
201 Bishopsgate, EC2	Offices	69,360	Detailed
122 Leadenhall Street, EC3	Offices	55,870	Submitted
Ludgate West, EC4	Offices	11,710	Detailed
Regent’s Place, NW1
(North-East quadrant)	Offices/Residential	61,150
(West site)	Offices/Residential	50,720	Submitted
York House, W1	Offices/Residential	12,830	Detailed
Daventry International Rail
Freight Terminal*	Distribution	119,050	Outline/detailed
Blythe Valley Park, Solihull	Business Park	76,080	Outline/detailed
Theale, Reading•	Residential	26,260	Submitted
Redditch, Worcestershire†	Distribution	48,730	Outline
Meadowhall Casino Complex	Retail/Leisure	40,240
Dumbarton	Retail	1,860	Detailed

		612,880

Total:	Rent (est) £179.7m		Cost§ £1,392.2m

British Land share:	£175.1m		£1,360.8m


* BL Rosemound joint venture • Countryside Properties has a participation through a Development Agreement † BL Gazeley joint venture § Construction cost

Lime Street is subject to a conditional agreement for lease with Willis Group, the major insurance broker. We will be submitting a revised planning application for a 39,020 sq m (420,000 sq ft) office building. Demolition of the existing buildings has commenced.

At Regent’s Place, a detailed planning application has been submitted for 37,160 sq m (400,000 sq ft) of office and 13,560 sq m (146,000 sq ft) of residential accommodation for the West site. The proposals are being pursued in partnership with The Crown Estate. At 122 Leadenhall Street an application has been submitted for a new 47 storey office tower, designed by the Richard Rogers Partnership. At Ludgate West, demolition has begun to clear the site for a new office building, adjoining our holdings in the BLWest joint venture.

Outside London, we are pleased to have acquired, in joint venture with Rosemound Developments, 74 acres at Daventry on which to develop distribution warehouse accommodation on a phased basis in response to market demand. Working with Countryside Properties, we are pursuing a residential project at Theale, for which a detailed planning application has been submitted recently.

Valuation

All the properties owned by British Land and the joint ventures were valued by external valuers, principally ATIS REALWeatheralls, whose commentary on the commercial property market follows this review. The portfolio, including British Land’s share of joint ventures, was valued at £10,639.4 million, an increase of 4.7% (£482 million) (including developments, purchases and capital expenditure, and excluding sales). This valuation, which suffers overall from the increases in stamp duty introduced over the last few years, has benefited this year from stamp duty relief provided in the April 2003 budget in respect of properties in defined ‘disadvantaged areas’ to the extent of some £133 million. The portfolio valuations by use and by location are shown on the highlights at the front of this section.

Performance benchmarking

For several years the Group has used Investment Property Databank (‘IPD’) to provide independent benchmarking of property returns as one tool in assessing portfolio performance.

The statistics provided below relate to ungeared total property returns of the Group, including our share of joint venture properties and excluding overseas properties, in comparison to the index of fund performance.

Ungeared total returns	British Land* % pa	IPD** % pa

10 years to 31 March 2004	10.8	10.7
Year to 31 March 2004	10.9	12.4

	Year to 31 March 2004

	British Land* % pa	IPD** % pa

Offices	2.4	6.1
Retail	18.8	16.4
Industrial	16.8	12.2
Other commercial	9.2	12.8

Total portfolio	10.9	12.4

British Land and share of joint ventures IPD December Universe (extrapolated to March 2004) unfrozen Source: IPD*

Over the one year period to 31 March 2004 British Land has underperformed the benchmark primarily due to its higher weighting in Central London office properties compared with the benchmark.

British Land’s long term ungeared total returns for the ten years to 31 March 2004 have outperformed IPD.

Outlook

There continues to be increased demand for property from investors, resulting in a significant weight of money seeking assets in the market with little available stock. This has led to a yield shift and, together with rental value growth in our retail assets, has increased the value of our portfolio. In these times of low inflation and relatively low market interest rates, property investment with an average yield of 6.4% and average total return over the last ten years of 10.7% per annum is showing good value compared to other asset classes.

With retail sales forecast to increase over the next five years at 3.9% per annum in town and 5.2% per annum out of town, and the Central London office market sentiment improving, British Land’s balanced portfolio of quality assets with growing rents is well positioned for continued performance. We remain keen to make new acquisitions, selectively and opportunistically, across the sectors.

Robert Bowden
Property Investment Director
24 May 2004

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