British Land loses £200m in property due to rising interest rates

The property company British Land has seen its profits soar as a result of the rising rental rates, and the demand for retail and office space. However, the increasing interest rates have reduced the value of the portfolio by almost £200m.

British Land, the owner of sites such as the Broadgate Centre, in the City of London, and the Paddington Central Development, reported an increase of 3.4% in profits underlying to £142m for the six-month period ending September 30.

Investors who have received a 5% rise in the half-year dividend paid per share to 12,16p cheered on the positive outlook of the company whose shares price has dropped by over 40% over the last five years due to the Covid pandemic that has ravaged the commercial real estate market.

The company reported occupancy rates of over 96% across its portfolio, with retail parks at 99%. This compares to a 13.9% vacancy rate in the UK retail market. The company’s business campuses had a vacancy rate of 4.2%, compared to 8% in the London office market.

Simon Carter, British Land’s chief executive, stated that the company was so confident about the outlook of top-quality office space in London, it had rejected an offer from Meta to relet the space at a higher level of rental.

Facebook’s owner paid £149m for a break in its lease of an eight-floor building near Regent’s Park that it never occupied. British Land offered an alternative tenant who would take over the contract, which was signed in 2021.

Carter said, “This is British Land reclaiming the building.” Market rents have risen much higher than what Meta was paying.

British Land, who earlier this year were relegated to the UK’s blue chip share index, ending a run of 21 years in the FTSE 100 said that rental growth has accelerated, and now expects its estimated rental value (ERV), which is at the upper end of their forecasts for the current financial year.

Carter said, “We have benefited from our decision to pursue an added-value strategy on campuses, in retail parks and for London urban logistics.”

British Land shares, which have fallen by a fifth this year, rose 5% Monday morning. It was the largest riser of all FTSE 250 listed companies.

High interest rates caused the value of the company’s overall property portfolio to fall by nearly PS200m during the first half of the year, from PS8.9bn down to £8.7bn.

Carter said that while the company has delivered solid earnings growth in the last 18 months, the rise in interest rates has affected asset values.

Carter said that the UK base rate of 5.25% is likely to reach its peak in the near future, and the company anticipates a return to growth for the portfolio’s value.

Victoria Scholar, Interactive Investor’s head of investment, said that the stock was under pressure due to the macro-pressures of rising rates of interest which hurt landlords as well as a decrease in demand for office space with the move towards working at home. But shares of British Land are rising, thanks to its optimistic outlook for full-year growth in ERV.

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