British Land's - mucky little secret?

Posted by Morgan on 22nd May 2012


Since his arrival at BL Chris Griggs has been very vocal in explaining that BL owns "prime" real estate. Their results yesterday, continued on this theme, as reported in the FT, BL state that their portfolio is mainly "prime" and that "we have started to see a divergence in prime and secondary properties."

This all creates the impression that BL is a safe haven investment that owns only the crème de la crème of UK real estate.

However, this is not reflected in their recent dealings. BL have bought smaller more secondary assets such as a shopping centre in Barnstaple and even a portfolio of gyms. This followed 50% disposals of interests in "prime" assets - Meadowhall and Broadgate. Admittedly they needed cash on the balance sheet when they made these disposals but the pattern is clear. Sell prime, buy yield.

This is an inconvenient truth, when strategically they want to be in the prime space but the cash requirement of running their business does not support this.

BL still own some wonderful prime real estate and I do not dispute that their portfolio is weighted towards prime. However, they have realised that prime real estate is not so great at generating cash flow. If a large proportion of your portfolio is development stock (i.e. non income producing and cash consumptive) and your investment portfolio is high quality but low yielding then a) how do you pay a dividend which is what REITs are supposed to be all about (remember all the stuff about REITs allowing tax efficient income distribution to investors?) and b) how do you pay the huge overhead that seems to be the inevitable consequence of being a mature listed company.

The answer seems to be that you need a bit of secondary, the high yielding yuck where the rest of the business earns its crust. However this does not look great either in the company glossy or in terms of fitting with the prime lead strategy. I guess it is BL's ugly little secret but one that reflects the reality that prime is great, but you also need cash to pay the bills.

BL now need to prove they can make these mucky secondary assets outperform the wider secondary market; to generate yield without dragging on the investment performance of the wider portfolio. Doing this requires them to roll their sleeves up and get their hands dirty. Will this happen if the outward message is that from the outset these assets are non-core and invisible?

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