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British Land cut to ‘neutral’ by Goldman after strong run

Published: 19:01 19 Jul 2011 AEST

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After an impressive outpeformance by British Land shares over the last 6-12 months broker Goldman Sachs believes the stock is looking to get a little ahead of itself. It has therefore reduced its rating for British Land shares from ‘buy’ to ‘neutral’.

Goldman analyst Julian Livingston-Booth notes that since being added to the ‘buy’ list on July 15, 2010, British Land’s shares have put on 34.7% compared to 20.2% for the broker’s coverage universe.

To give another indication of the strong performance of stock, British Land shares have risen a hefty 36 per cent over the last 52 weeks and just over 12 per cent over the last six months.

In early morning trade the shares were down 6p to 598p.

Goldman believes that the strong performance of the shares over this period can be largely attributed to British Land’s exposure to a recovery in central London office rents and ongoing strength of investment markets for prime UK commercial real estate.

More broadly, Livingston-Booth reckons the real estate group’s shares are likely to benefit on a relative basis from any ongoing European macroeconomic uncertainty, especially given the group’s long lease lengths, strong financing position and lower risk development pipeline.

Those highly attractive features suggest to Livingston-Booth that the current valuation of British Land shares - which imply a 7 per cent premium to its last reported net asset value (NAV) and 2012 prospective yield of 4.3% - is justified.

At the same time, however, Livingston notes the group’s increasingly diverse portfolio will lead to an increase in demands on management in terms of successful asset management at the micro level, requiring it to be even more nimble-footed.

The group’s recent £179 million acquisition of 17 racket clubs, mainly in South East England, from Societe Generale is cited by Livingston-Booth as an example of its growing diversity.

Announced earlier this month, the purchase is to be followed by the 17 premium racket clubs being let on new, 25 year leases to Virgin Active pending its acquisition of the Esporta business.

The clubs boast a total of 1.7 million square feet of leisure and gym facilities spread over 380 acres of land. The purchase price represents a capital value of just over £100 per square foot.

They have been acquired at a net initial yield of 7.3% and an equivalent yield of 8.4% and will generate an initial annual net rental income of £13 million.

Leases are subject to a fixed uplift at year five, compounded at 2.5% pa, followed by annual Retail Price Index uplifts of between 1% and 4% for the remainder of the term. The average rent on the new leases is £8 per sq ft.

Nearly 85% (by value) of the clubs acquired are located in the South East of England, with nearly half of the clubs by value within the M25.

British Land says the clubs offer an extensive range of facilities and are all well located on the edge of major towns, highly accessible and dominant in their catchment areas.

Other recent additions that reflect its growing diversity include London residential property and an office/leisure complex in Maidenhead for a total combined cost of £310 million since late June.

Goldman has a target price of 650p for British Land, which is in line with its year-end March 2012 NAV forecast for the group of 649p.

The broker says key risks to its views on the stock are a stronger or weaker than expected performance by the retailers operating in the better performing UK retail locations.


 

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