MIDAS SHARE TIPS: WFH hits office prices, but you could Land a bargain

It is not an easy time to own commercial real estate. If the bulk of your portfolio is offices, the work-from-home culture (WFH) has reduced your profits, while if you’re in the retail or warehouse sector, you’re struggling with rising prices and the crisis of the cost of livelihood.

But we still need somewhere to work and shop, which is why the full-year results of FTSE 100 property backers Land Securities and British Land last week were more perky than many of us might have expected given the situation. Despite both firms posting huge losses for the year ending March 2023, while their portfolio valuations plummeted, their bosses were determined to look on the bright side of life.

Land Securities chief executive Mark Allan thinks a seemingly unpalatable combination of picky consumers and ‘longer’ interest rates will result in ‘exciting opportunities and continued positive rental growth for Land Securities’, while British Land chief executive Simon Carter speaks of ‘significant opportunities for future value creation’.

Shareholders can be forgiven for finding these optimistic assessments a little irritating. Owners of Land Securities have seen their holdings drop in value by 34 percent over the past five years, and those who bought British Land were even more unlucky: their shares fell nearly 50 percent over the same period.

The big question is, will the bosses’ optimism translate into stock price recovery?

Land certainties

First, let’s look at Land Securities. The company posted a pre-tax loss of £622m compared to a profit of £875m the previous year when the company’s property portfolio fell in value by nearly 8 per cent.

The portfolio is focused on three main areas: central London offices, shopping centers and ‘mixed’ urban areas. A large part of the portfolio is in good condition, with rising rents and occupancy rates. Many of Land Securities’ assets are well-known, from the Bluewater shopping center in Kent to Brighton Marina, and the company has focused its efforts on those areas where it believes valuations will rise, namely sustainable high-quality office buildings but bigger and better stores in key areas. retail locations. Where it sees no future – namely in old-fashioned City of London offices – LandSec is selling.

The result is an anomaly, a company that can pay a higher dividend from rising earnings while making a loss. That’s because the valuation of the underlying portfolio hits the income statement, but the dividends are paid from the income it receives from rising rents and income.

What comes next? Mark Allan believes that the company’s strategy will continue to benefit the company in terms of interest rates over the coming “higher for a longer” period, as divesting unwanted assets will reduce debt, while maintaining it more expensive.

He thinks the focus on quality will lead to rising valuations. Land Securities expects an annual return of 8 to 10 percent.

British country

Now let’s turn to British Land. This company also lost money, with Simon Carter saying the value of prime London offices was ‘close to rock bottom’.

While the value of the company’s portfolio fell by more than 12 percent, rental growth was strong, meaning that underlying profit – excluding valuation changes – was nearly 7 percent higher. British Land’s City office assets underperformed but are focusing on other things.

So-called ‘campuses’, which combine office and public space, are one of the focus areas, while the firm is also interested in the life sciences sector and urban logistics centers. Campus developments are expected to show rental growth of 2 to 4 percent over the next 12 months, and retail parks are expected to perform similarly, the company said.

Other good news was an overall occupancy rate of 96.7 per cent and divestments of £746 million, which is part of the company’s strategy to ‘recycle capital’.

The divestments mainly took place in Paddington Central, West London, strengthening the balance sheet and ensuring focus on core assets.

The company acknowledges a troubled macroeconomic backdrop and says “sentiment is fragile and the outlook remains uncertain.” But Carter believes pressure on yields is easing and there are opportunities for higher valuations ahead.

Midas verdict: With high interest rates, consumer vulnerability and post-pandemic WFH culture, real estate giants Land Securities and British Land are a long way from the highs they used to reach when people actually went to work. Investors must decide whether they represent good value at this level.

British Land sits on an undemanding valuation. Investment bank Liberum estimates that it trades at a 40 percent discount to the value of its net tangible assets and returns 5.5 percent. That is better than the average real estate investment trust, which according to Liberum has a 16 percent discount and a 4.7 percent return.

Land Securities trades at a 30 percent discount to net tangible assets with a yield of 6.2 percent, but Liberum says the state of British Land’s debt is less attractive than Land Securities.

Neither looks expensive at this level and returns are attractive, but their valuation depends on how commercial real estate performs and how we change our work and commute culture.

Land Securities’ balance sheet and forecasts seem to give it the edge, but both companies are worth holding onto for now, if you can take a beating.

Traded on: Main market Tickers: COUNTRY; BLND Contact: landsec.com or 020 7413 9000; britishland.com or 020 7486 4466