Portfolio Valuation

The investment market is currently difficult following recent financial market turmoil, with the consequent lack of liquidity and higher interest rates resulting in a reduced number of transactions whilst investors wait to assess the changing conditions. Our valuers have reflected this uncertainty in a negative (upwards) adjustment to investment yields though clear supporting transaction evidence is not readily available at present. This process is continuing as seen in data since September from CBRE and other sources (see note 8 to table below).

The table shows the principal valuation movements by sector for the three and six month periods to 30 September 2007, totalling 0.5% decline for the 6 months (Q2 -1.9%).

The capital return from the portfolio at -0.5%, as measured by IPD (calculated for our UK assets on average capital employed and excluding capitalised interest) compared favourably with the IPD Benchmark at -0.9% (Q2 British Land -1.9%, IPD -2.0%).

Contributing to this performance was like for like growth in rental value (ERV) for the portfolio over the six months at 4.2%, ahead of the market in each sector (IPD Benchmark 2.4%). The net equivalent yield (after notional purchaser’s costs) on the portfolio moved out 21bps (like for like) to 4.9% over the six months, a slightly larger shift than that applicable to the IPD Benchmark of 20bps. Given the prime nature of our portfolio, underpinned by its occupancy, lease lengths and rental growth, we would expect that widening risk premia will be reflected in valuations elsewhere, reversing the relative yield movement versus IPD in time.

¹ Group’s share of properties in Funds and Joint Ventures
² change in value for 3 months and 6 months to 30 September 2007, includes valuation movement in developments, purchases and sales, net of capital expenditure
³ Meadowhall Shopping Centre valuation down 4.8% (£79 million) to £1,575 million; ERV £83 million; net equivalent yield 4.87% (true equivalent yield 5.02%)
⁴ includes Developments in City, West End and provincial: total value £1.3 billion, 8.1% of Portfolio, 7.9% uplift for the 6 months
⁵ Broadgate valuation up 1.2% to £3,085 million (4 Broadgate included in Development); headline ERV range £49 - £57.50 per sq ft (average headline ERV has risen 7.4% to £52 psf); net initial yield 4.77% (assuming top up of rent free periods and guaranteed minimum uplifts to first review); net equivalent yield 5.08%
⁶ Regent’s Place valuation up 6.9% to £696 million; headline ERV range £24.00 - £56.00 per sq ft; net initial yield 4.6% (assuming top up of rent free periods and guaranteed minimum uplifts to first review); net equivalent yield 5.08%
⁷ annualised net rents £621 million (excluding developments) (net rental income under IFRS differs from annualised net rents which are cash based, due to accounting items such as spreading lease incentives and contracted future rental uplifts, as well as direct property costs); portfolio initial yield (gross to British Land, without notional purchaser’s costs) 4.3%; initial yield adding back rent frees 4.6%; reversionary yield (gross, five years) 5.1%.
⁸ CB Richard Ellis equivalent yields for prime investment property: