Business Review
Portfolio Valuation
The continuing adverse effects of the global 'credit crunch' have further reduced values across most asset classes including commercial real estate. Widening risk premia, increased cost and reduced availability of finance, low investor confidence and fears of the effect of a weaker economy on customers' business and rental growth are continuing to apply.
The table below shows the principal valuation movements by sector for the three and 12-month periods to 31 March 2009, totalling 9.2% decline for the quarter, 28.2% decline for the year.
| Valuation by sector |
Group £m |
Funds/JVs1 £m |
Total £m |
Portfolio % |
Change %2 | ||||
|---|---|---|---|---|---|---|---|---|---|
| 3 mnths | 12 mnths | ||||||||
| Retail | |||||||||
| Retail warehouses | 1,338 | 914 | 2,252 | 26.1 | (9.2) | (29.4) | |||
| Superstores | 113 | 958 | 1,071 | 12.4 | (2.6) | (16.4) | |||
| Shopping centres3 | 192 | 855 | 1,047 | 12.1 | (10.8) | (26.6) | |||
| Department stores | 408 | 69 | 477 | 5.5 | (7.5) | (29.1) | |||
| High street | 20 | - | 20 | 0.2 | (12.7) | (24.6) | |||
| All retail | 2,071 | 2,796 | 4,867 | 56.3 | (8.3) | (26.4) | |||
| Offices4 | |||||||||
| City 5 | 2,653 | - | 2,653 | 30.8 | (9.7) | (30.4) | |||
| West End6 | 895 | - | 895 | 10.4 | (12.8) | (30.7) | |||
| Provincial | 15 | 7 | 22 | 0.3 | (6.4) | (25.3) | |||
| All offices | 3,563 | 7 | 3,570 | 41.5 | (10.5) | (30.4) | |||
| Industrial, distribution, leisure, other |
176 | 12 | 188 | 2.2 | (10.2) | (34.3) | |||
| Total7 | 5,810 | 2,815 | 8,625 | 100.0 | (9.2) | (28.2) | |||
1Group's share of properties in Funds and Joint Ventures
2Change in value for three months and 12 months to 31 March 2009, includes valuation movement in developments, purchases and sales, net of capital expenditure
3Meadowhall Shopping Centre valuation down over 12 months 25.8% to £573 million (BL 50% share); ERV £42 million; net equivalent yield 6.7%
4Includes developments in City, West End and provincial: total value £475 million, 5.5% of Portfolio, 39.5% decline for the 12 months
5Broadgate valuation down 32.1% over 12 months to £2,284 million; headline ERV range £39.00-£52.50 per sq ft (average headline ERV £43 per sq ft); net initial yield 7.4% (assuming top-up of rent-free periods and minimum uplifts at first review); net equivalent yield 7.3% (this valuation includes 201 Bishopsgate and the Broadgate Tower but excludes 4 Broadgate which is classified as a development)
6Regent's Place valuation down 25.4% over 12 months to £529 million; headline ERV range £35.00-£47.50 per sq ft; net initial yield 7.3% (assuming top-up of rent-free periods and minimum uplifts at first review); net equivalent yield 7.1%
7Portfolio valued by external valuers on the basis of Market Value in accordance with the Appraisal and Valuation Standards published by The Royal Institution of Chartered Surveyors; principally Knight Frank LLP £6.6 billion and CB Richard Ellis Ltd £1.7 billion (see note 11)
The capital return from the portfolio at -9.1% for three months, -30.2% for 12 months, as measured by IPD (calculated for our UK assets on average capital employed and excluding capitalised interest) was comparable with the IPD Benchmark at -8.7% and -29.7% respectively. The rate of capital decline was slower over the last quarter of the financial year than that seen in the third quarter (at -13.5% for the portfolio).
Like-for-like rental value (ERV) was unchanged over the quarter for Retail (up 0.8% over the year) and down by 8.7% for Offices (down 14.6% for the year). Overall like-for-like ERV for the portfolio was down 4.0% for the quarter (IPD Benchmark down 3.0%). For the year to March 2009, like-for-like ERV for the portfolio was down 5.9% (IPD down 4.6%), primarily due to our weighting in London offices.
The valuation movements across the sectors were:
- City offices, at 30.8% of the portfolio, over the quarter saw outward initial yield shift of 61bps on the investments which, coupled with the decline in ERV of 8.6%, resulted in an overall decrease in valuation of 9.7% (30.4% for the year);
- West End offices, at 10.4% of the portfolio, were similarly affected in the market with the valuations down over the quarter by 12.8% (30.7% for the year), driven by outward initial yield shift for the quarter of 73bps on the investments and a reduction in ERV of 9.2%;
- Retail warehouses, representing 26.1% of the portfolio, saw outward equivalent yield shift of 60bps over the quarter, with current ERV unchanged but reduced prospects of rental value growth, resulting in the valuation reducing by 9.2% (29.4% for the year);
- Shopping centres, following the sale of 50% of Meadowhall, have reduced to 12.1% of the portfolio, and have seen a fall in value of 10.8% over the quarter (26.6% for the year). On a like-for-like basis, the equivalent yield shifted outwards by 49bps (168bps for the year) to reflect declining rental value growth prospects and general concerns regarding certain tenant covenants; and
- Superstores, at 12.4% of the portfolio, are proving more resilient to market turbulence, with 0.6% ERV growth over the quarter reflected in a smaller valuation decline of 2.6% (16.4% over the year), due to their long income streams, retail sales growth and underlying stronger tenant covenants.
| Portfolio yields | Annualised net rents1 £m |
Reversionary income2 (5 years) £m |
Initial yield3 % |
Top-up initial yield3,6 % |
Reversionary yield3 (5 years)% |
Net equivalent yield4 % |
|---|---|---|---|---|---|---|
| (excluding developments) | ||||||
| Retail | ||||||
| Retail warehouses | 157 | 21 | 7.3 | 7.5 | 8.3 | 7.6 |
| Superstores | 69 | 3 | 6.4 | 6.4 | 6.7 | 6.2 |
| Shopping centres | 73 | 12 | 7.0 | 7.2 | 8.1 | 7.2 |
| Department stores | 38 | 6 | 7.7 | 8.9 | 8.9 | 8.6 |
| All retail | 337 | 42 | 7.1 | 7.3 | 7.9 | 7.3 |
| Offices | ||||||
| City | 166 | 26 | 7.1 | 7.9 | 8.1 | 7.3 |
| West End | 51 | 2 | 6.9 | 7.4 | 7.2 | 7.0 |
| All offices | 217 | 28 | 7.0 | 7.8 | 7.9 | 7.2 |
| Industrial, distribution, leisure, other | 17 | 3 | 9.6 | 10.8 | 11.5 | 11.1 |
| Total | 571 | 735 | 7.1 | 7.6 | 8.0 | 7.4 |
Data for Group and its share of Funds and Joint Ventures
1Net rental income under IFRS differs from annualised net rents which are cash based, due to accounting items such as spreading lease incentives and contracted future rental uplifts, as well as direct property costs
2Includes rent reviews and lease break/expiry and letting of vacant space at current ERV (as determined by external valuers) within five years, plus expiry of rent-free periods
3Gross yield to British Land (without notional purchaser's costs)
4After purchaser's costs
5£39 million contracted under expiry of rent-free periods and contracted rental increases
6Adding back rent-frees and minimum rental uplifts
The net equivalent yield (after notional purchaser's costs) on the portfolio at 7.4% has moved out 40bps over the quarter and 183bps for the year.
At current market values, and without projecting any growth or inflation, achievement of the reversionary income in the investment portfolio would add £73 million per annum to our annual passing rent. Included in this are contracted increases of £39 million per annum due from expiry of rent-free periods and fixed/minimum uplifts. (It should be noted that accounting policies under IFRS require that portions of these contracted rents are anticipated in the Group's income statement.) In addition, the pre-lets of committed developments to date will add £12 million per annum.
