British Land takes more bullish stance than rival Land Securities

Britain's two largest listed property companies - British Land and Land Securities - are set to report strong annual results in the coming week, boosted by rising capital values, yields back near record lows and investors pouring cash into UK real estate. 

The pair have pursued similar strategies for the past five years - and their share prices have moved broadly in tandem. But now, as fears rise of a new property bubble, they have contrasting views on the market's prospects and how they should respond, with British Land taking a more bullish stance.

Strategy

The companies' decisions to build competing City skyscrapers in 2010 - British Land's Cheesegrater and Land Securities' Walkie Talkie - were risky. The commercial property market had only just begun to stabilise after a severe crash.

Now they are paying off. Few other property companies began to build as quickly as the industry's two behemoths, leaving them both in a good position to benefit from rising rents.

The move back to development marked a fresh start for them, and for the past five years they have adopted similar priorities: focusing on London and the southeast, overhauling their retail assets, and moving into big office developments, particularly in the capital.

Portfolios

About 50 per cent of their portfolios have been bought or redeveloped in the past five years, driven in particular by structural changes sweeping the retail sector.

Mike Prew, an analyst at Jefferies, says Land Securities has "done a really good job" of repositioning, by selling mid-range shopping centres in areas that have no core growth.

The company has spent nearly two-thirds of the £3.9bn it raised from asset sales in the past five years on acquisitions. Its biggest bet was buying a 30 per cent stake in the Bluewater shopping centre in Kent last year for £696m, a price which some analysts thought was high.

British Land, meanwhile, has been battling to extricate itself from its relationship with supermarkets. A £733m asset swap with Tesco earlier this year was hailed by analysts as a positive step, and now supermarket sites make up only 7 per cent of its portfolio.

Hemant Kotak at Green Street Advisors says supermarkets are still "a slight point of weakness" for British Land, but "not as big as people make it out to be".

Broadly, analysts say Land Securities' retail portfolio is in a slightly better position than its rival's.

Performance through the cycle

Both property companies are regarded as having played this cycle well but neither has avoided some criticism. 

British Land made what some analysts say was a misstep early on, when new chief executive Chris Grigg - a former Goldman Sachs banker - sold stakes in two of its biggest holdings, the Meadowhall shopping centre in Sheffield and the City of London's Broadgate office estate.

Blackstone paid £1.1bn for the 50 per cent Broadgate stake in 2009 but sold it on to Singapore fund GIC four years later for £1.7bn.

"In retrospect that was a disaster," says Osmaan Malik, head of European property equity research at UBS. "It would have been far better to hold on and ride it out."

Mr Grigg says the sales were necessary to free up the capital British Land needed to reconfigure its portfolio - and is "relaxed" about the price he received. "If I'd waited a year to get a better price we wouldn't have been able to start this cycle so early," he says.

Mr Prew at Jefferies makes a similar criticism of Land Securities in relation to the sale of a stake in its Nova building in Victoria to the Canada Pension Plan Investment Board in 2012. "There was no need to share the risk," he says.

The consensus among analysts is that Land Securities has played its hand slightly better in this cycle. Its share price has outperformed British Land's, although the latter's has picked up momentum in the past 18 months due to the companies' differing expectations for the market.

Next steps

There are murmurs among analysts that Land Securities' chief executive Robert Noel has adopted too conservative a view of the market's future trajectory. Land Securities has pledged to scale back its development activity from 2016 but most analysts expect the benign conditions to continue for another two to five years.

Land Securities does not have much undeveloped land left, according to some analysts' research. If Mr Noel were to announce new development plans as part of the company's results next week, he will not have many sites to choose from, analysts say. The company declined to comment.

By contrast British Land is bullish. It has put together a 7m sq ft site at Canada Water, in southeast London - a "vast scheme as big as the King's Cross regeneration area", Mr Malik says - where it plans to create a huge development of shops, offices and homes.

Mr Noel, by contrast, "risks looking overly cautious", according to Mr Malik.

Mr Kotak at Green Street Advisors says both companies should reduce their leverage to avoid being caught out when the next downturn hits - but broadly he feels Land Securities' position is the right one.

"In any cycle if you call it a year or two early then people will say you got it wrong and you are wrong for a while," he says. "Then the cycle turns and everything collapses and you look like a genius."

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