Overview
Chief Executive's Report
.jpg "Chris Grigg")
"Our priorities are the
enduring fundamentals of
activist real estate investment
and management."
I am delighted to be reporting to you as Chief Executive of British Land. The smooth transition of Chief Executive responsibilities from Stephen Hester, through Chris Gibson-Smith's leadership and my joining is reflective of the strengths of the Company and its Board. The well established management team is purposeful and disciplined, clearly focused and active in the market.
British Land is one of the world's premier Real Estate Investment Trusts with specialised market leadership in the prime Central London Office and out-of-town Retail sectors. The Company's strong cash flow from long leases to a good spread of tenants and our financing structure are significant advantages in these difficult market conditions. Our asset management is concentrated actively on providing the right accommodation to meet occupiers' requirements in order to best maintain that cash flow.
We expect market distress will create circumstances in which strong players can benefit. While we face significant ongoing market challenges, I am enthusiastic about the opportunities they will provide for us. British Land has deep expertise in its sectors and we will examine each prospective action in a careful and disciplined manner.
Rights Issue
The equity issue completed in March 2009 raised £740 million net of expenses. It combined the two principal aims of strengthening the balance sheet, to see through and emerge from the market dislocation in good shape, and enabling British Land to have the financial flexibility to exploit buying opportunities; though we cannot predict exactly their timing or nature we are confident they will arise. The support of our shareholders was hugely encouraging, recognising the underlying strengths of the Company, its prime assets, debt structure and management team.
Our markets
The ongoing stress and disruption in the financial sectors has resulted in a shocking year for most markets. The steep decline in global economic activity has resulted in considerable damage to business in all sectors.
The IPD Benchmark for property has seen its largest ever annual capital value decline of some 30%, taking the fall from the peak at June 2007 for the sector to 40%. While the fall in capital value for the Benchmark over the most recent quarter (the first three months of 2009) has been at a slower rate of 8.7%, we must expect some further decline over the course of the year. However, we note that the Benchmark now shows an average net equivalent yield of 8.8%, which represents an attractive premium of 530 basis points above the 10 year gilt, and we are already seeing a small measure of increased activity in the property investment market. Almost all transaction activity is in prime assets, as investors are becoming fully aware of the risks associated with secondary property.
Currently in the UK 'real' economy there are somewhat conflicting indicators: for example, house prices appear to be stabilising and consumer spending is holding up better than might have been expected. These factors cannot be relied upon to continue if, as expected unemployment continues to rise (lagging other trends as usual). For retailers the challenge remains to concentrate efforts on store locations where they can trade most profitably.
In Central London Offices the effects of the economic and financial market dislocations are resulting in a lack of clarity on business models going forward and impeding decisions on requirements for accommodation. Nonetheless, in this sector again it will be the best located, specified and flexible offices that attract occupier demand.
The occupational effects of the difficulties being experienced by businesses are in early stages and we expect to see downward pressure on market rents in a number of segments. While prime property will not be immune from this effect, it is much better placed. As the market continues to adjust and reflect relative risk, and more transactions are seen, the investment view of what constitutes prime property is narrowing - and the gap in yields for prime versus secondary property should widen further.
In each of the sectors of our specialisation, out-of-town Retail and Central London Offices, our investments are concentrated in those prime properties that best meet occupiers' requirements. We expect better relative investment performance within our portfolio over time as a result.
Results 2008/9
Reflecting the impacts of global markets and broadly in line with IPD, the property portfolio valuation has declined by 28.2% over the financial year to 31 March 2009, together with the Rights Issue translating into a reduction in EPRA Net Assets per share of 64%, to 398 pence.
Underlying pre tax profits at £268 million and underlying earnings per share at 41 pence were both maintained at the levels of the prior year to March 2008, when excluding the non-recurring dividend from our investment in Songbird Estates plc received in that year.
Like-for-like rental income growth of 2.7% has been achieved this year for the portfolio, ahead of IPD (at 2.1%), reflecting our proactive asset management approach, where we focus heavily on new lettings as well as rent reviews.
Further details of these results are set out later in the Business Review.
Priorities
The management actions taken by the British Land team in the last three years have mitigated the impact of the current market downturn. Some £6.6 billion of assets (gross) have been sold, capturing values at the peak and against a falling market, while continuing to refine the composition of the portfolio. Included in this has been the joint venture opportunity concluded in February 2009 in respect of the Meadowhall Shopping Centre.
The team has also taken decisive action continually to improve and update the property assets, ensuring ongoing appeal to tenants and optimising values. The development programme has been rescheduled and exposure reduced. On the liabilities side, we have continued to fine tune our debt structure and, after receipt of the equity issue proceeds, have significant undrawn bank facilities available on relatively favourable terms.
Our priorities going forward continue to focus on the enduring fundamentals of activist real estate investment and management. We must buy, manage and sell well if we are to perform optimally over the cycle and we do expect real buying opportunities to emerge in the coming months. We will also seek to utilise complementary disciplines from other industries in order to boost our performance. Examples include an intense focus on hold periods and exit strategies for each asset, and a regular examination of how we expect each market sub-sector to perform over time.
We have the capacity and intention to take on the new challenges that will arise and seize opportunities where we see value.
Chris Grigg
Chief Executive
20 May 2009