Why don’t markets react in the way that companies want them to? That’s the question management at British Land (LSE: BLND) will be asking after today’s positive set of results triggered a 2.75% drop in the share price. The downbeat market response may signal a turning point in the commercial property market.
Oh give me Land
British Land’s Q3 results looked decent enough with the company reporting 314,000 sq ft of retail lettings and renewals, 8.7% ahead of estimated recovery value, plus a further 189,000 sq ft under offer. Retailer sales for the quarter were up 0.6% year-on-year, outperforming the benchmark by 200 basis points, and although footfall slipped 0.6% it still outperformed the benchmark by 220 basis points.
Chief executive Chris Grigg talked up “a positive quarter“, saying that it reflects the strong positioning of the company’s portfolio. British Land has also made further disposals of non-core assets and residential units ahead of valuation. However, markets appear to have picked up on his single note of caution, with Grigg stating that: “We remain mindful of potential headwinds going forward.”
A very British boom
Just about everybody is mindful of potential headwinds as Prime Minister Theresa May prepares to pull the trigger on what looks like a hard Brexit. The big question is how long the UK economy can keep booming and leading the G7 growth table, driven by the weak pound and credit-fuelled consumer boom. Wage growth is improving, up slightly from 2.6% to 2.8%, making workers richer in real terms, even with consumer price inflation at 1.6%. That may change if inflation hits 3% this year, as many analysts predict.
The economy looks strong, yet investors are shunning British Land. Perhaps that’s down to its toppy valuation, now on a pricey forecast of 17.3 times earnings. Forecast earnings per share growth looks patchy, including a predicted 2% drop in the year to 31 March 2018, to be followed by a 3% pick-up. However, the dividend is forecast to yield an attractive 4.7%, if thinly covered 1.3 times.Â
The REIT stuff
British Land’s share price is down 13% over the past 12 months, and up just 30% over five years. Fellow real estate investment trust (REIT) Land Securities Group (LSE: LAND) has put on a better show, falling 5% over the last year but rising 58% over five years. The result is that it trades at almost 21 times earnings, while yielding less at 3.4%, covered 1.3 times.
Last year Land Securities reported “hesitant” demand for office space in London in the wake of the Brexit vote, coupled with a warning of weaker rental values. Things may come to a head once Article 50 is triggered, especially with every step of the negotiations set to be greeted with a blaze of scaremongering headlines. Land Securities is insulated by what management describes as its “high quality, well-let portfolio“, and EPS forecasts look promising, with 4% growth to 31 March 2018, followed by 7%.
Despite that, I think the dour market reception to British Land’s results suggests Land Securities will have a tough job convincing investors that it’s ready to hit the ground running.