Operating & Financial Review

Activity during the Year

2004/5 has been a year of intense and fruitful activity.

Acquisitions and disposals

We have made a significant net investment this year reflecting our portfolio management priorities as well as confidence in market fundamentals. Several attractive opportunities became available to us, assisted by our strong market and tenant relationships, and where our financial capacity and ability to execute complex property transactions played a major part. Despite the short period of ownership, these purchases have already produced an aggregate 7% increase in value over purchase price.

A key feature of these acquisitions was the negotiation of minimum rent increases for at least 20 years on £732 million of purchases. As a result, across the entire portfolio, minimum guaranteed income uplifts now apply at the next rent review to property of some £1.6 billion, 13% of the total portfolio, underpinning rental growth and providing certainty of rising income. This includes over £950 million of retail and leisure property, where such uplifts may be of increasing importance should consumer sales result in slower rental growth in these sectors.

The 24 Debenhams department stores were bought for £516 million and leased for a minimum of 30 years at an initial yield of 5.6%. The leases have been structured with rent increasing by a minimum of 2.5% per annum, with a review in March 2019 and five yearly thereafter to market rent if higher. There are opportunities, with tenant agreement, to remodel stores and enhance value.

The Queensmere and Observatory Shopping Centres in Slough were bought for £192 million. The initial yield is 6.0%. The zone A equivalent rents are relatively low and we believe there is considerable scope for improving these assets; a masterplanning exercise is in hand.

65 pubs were purchased from the Spirit Group for £174 million, an initial yield of 6.1%. The leases to Spirit are for 30 years with minimum annual rental uplifts of 2.5% per annum for 20 years, and with a landlord’s option to revert to open market rents from year 15.

Purchases £1,361m – already making money	Price £m	Uplift in value %
Group
24 Debenhams stores	516	5.7
Queensmere and Observatory Shopping Centres	192	1.6
65 freehold pubs	174	7.3
6 Homebase stores and Crawley, Sainsburys	102	3.6
Investment in Canary Wharf	97	44.2
471 residential units	71	2.3
Other	17	11.0
	1,169	8.2

Joint Ventures
4 retail parks and 1 industrial estate	122	2.9
7 interests at East Kilbride and Aberdeen	70	(1.2)
	192	1.4
Total	1,361¹	7.2²

¹ Group and 100% of JVs (including our 50% share of JVs, £1,234 million purchases completed in the year)
² valuation uplift on purchase price

The six Homebase stores and an adjacent Sainsbury’s store in Crawley were bought for £102 million at an overall initial yield of 4.75% with reversions to come. All these out of town Homebase stores share sites with a Sainsbury’s food store and five have open A1 planning status.

The Scottish Retail Property Limited Partnership (a joint venture with Land Securities) acquired further adjoining malls at the East Kilbride Shopping Centre; these strategic purchases consolidated into the Partnership the ownership of the entire town centre scheme and enable all the interconnecting malls to be managed by the Partnership as an integrated shopping destination. The Partnership also purchased additional ancillary interests at the Bon Accord and St Nicholas Centres, Aberdeen.

£97.1 million was invested in Songbird Estates plc, representing a 15.8% interest in the consortium which now owns 61.85% of Canary Wharf Group PLC. At the published 31 December 2004 values (adjusted for the change in Stamp Duty relief in March 2005) British Land’s interest is supported by £486 million of underlying investment and development properties in Canary Wharf, financed through this leveraged vehicle.

After 31March 2005, we acquired our joint venture partners’ 50% share in the BLWest companies, for £50 million plus repayment of the related £108 million bank loan. We now own the office properties at 1 and 10 Fleet Place, EC4.

Sales £344m – 8% above valuation	Price £m	Gain £m
Group
Swiss Centre, Leicester Square	47	12
3 Somerfield supermarkets	13	1
33 residential units	8
7 properties (retail, offices and industrial)	18	1
	86	14

Joint Ventures
100 New Bridge Street and Watling House	151
6 office properties	59	9
17 pubs	22	1
13 properties (residential, industrial)	26	2
	258	12
Total	344¹	26^1,2

¹ Group and 100% of JVs (including our 50% share of JVs, £215 million sales completed in the year)
² gross gain over latest year end valuation

The BLWest joint venture sold the City office properties at 100 New Bridge Street and Watling House, Cannon Street, EC2, for £151 million; the offer was known at the time of the valuation and reflected in it.

The largest gain was on the Swiss Centre, Leicester Square, W1. We had relocated the Swiss Tourism office and put other tenants on break clauses, so creating a premium price for its development potential.

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