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UK commercial landlords can’t bank on the high street

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Property giants British Land and Land Securities have revealed the impact of the retail crisis on the value of their shopping centres. And it makes for uncomfortable reading for shareholders, with net assets lower than the worst expectations.

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One of the UK's largest landlords for offices, commercial premises and shops, British Land’s full year results were always going to be closely watched for any sign from the company as to the future state of the beleaguered retail sector.

But with a decline in rental income as struggling retailers shut stores and others respond with more aggressive rental re-negotiations, a decline was to be expected.

Analysts expected British Land to write down its net asset value by 4.9% to £9.20 a share. It actually came in lower, 6.4% down at £9.05 a share, with buybacks contributing 10 pence of that. That is the largest decline since the depths of the financial crisis a decade ago.

Land Securities, which owns Bluewater in Kent, told a similar story. While it was expected to reveal a 4.1% fall in net assets to £13.45 a share, it said on Tuesday that net assets had actually fallen more than that, down 4.6% to £13.39 a share.

Overall British Land posted a loss of £319 million for the year, down from a £501 million profit a year earlier as retailers’ battle for survival hit home, with the 4.8% drop in the value of British Land’s properties to £12.3 billion, largely on the back of an 11.1% slide in the value of its retail assets.

Rival Land Securities just saw its losses deepen, posting a £123 million loss for the year, far worse than the £42 million loss it had made a year earlier.

The fact is, of course, that things are only going to get worse as the retail sector does all it can to minimise costs as it fights for survival. And landlords like British Land and Land Securities will have no option but to help them, especially with more company voluntary arrangements (CVA) on the cards.

Clothing chain Next has already talked of securing average rent reductions of 29% on rental renewals. And having already had £14 million stripped from its rental income, British Land can expect to see that worsen, with Sir Philip Green’s Arcadia Group, which accounts for 1.5% of British Land’s rent roll, widely expected to launch a CVA and kick-off rent reduction negotiations.

Not surprisingly, British Land has already seen the signs and said it wants to reduce its retail exposure to just 30-35% of its portfolio. It has already reduced its exposure to the sector to 45% from two-thirds in 2010.

That strategy has already begun in earnest with £1.5 billion worth of properties sold off during the financial year, including those 12 Sainsbury’s superstores, bringing in a total of £650 million from disposals in the retail sector.

Much like the retailers the mantra has become for these landlords too - adapt or die.

Robert Noel, chief executive of Land Securities, acknowledged that with the company up against “political gridlock”, as well as well-known problems in the retail sector, there was no let-up in sight. For his company the only way put is to continue to dispose of the group’s retail assets.

British Land’s positioning is much the same, with a focus on other types of property, especially mixed-use developments. But it has stressed that retail will remain an important part of its business long term. And unlike Land Securities it intends to invest in the sector, as it did with the £91.8 million purchase of Royal Victoria Place in Tunbridge Wells at the start of the year.

And that proposal to increase next year’s dividend pay out by 3% will no doubt go down well with investors, who have seen dividend pay outs come under pressure elsewhere.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.