In the first half of our financial year we are pleased to report good progress from the customer side of our business. As a result we have delivered rental rises ahead of the market and higher underlying profits. However in terms of Net Asset Value (NAV) per share it seems that we have been running hard to stand still. The combination of interest rate rises and more recent debt market turmoil left real estate pricing vulnerable to the correction now underway. While we could not predict the debt market problems, we consistently highlighted the changing interest rate/yield relationship and tried to position our strategy in that light.
The NAV picture masks considerable strengths and accomplishments. During the six months we harvested some of the fruits of the activist and customer focused strategy adopted in recent years. The appeal of our buildings, new and old, captured notable new lettings with rental growth again outstripping the market overall. Developments remain a source of distinctive value and we were pleased to profitably complete and let buildings, giving reality to our carefully managed risk profile and allowing the commencement of new projects for future years.
Our portfolio reshaping saw a further £1.9 billion of disposals, making £6.1 billion gross since 2005. We believe this has added value through weeding out our most likely under-performers, by asset and by sector, whilst reducing gearing in the face of a vulnerable market.
British Land’s strategy is clear – we set it out two years ago and have been executing against those goals. We anticipated the end of the bull market and the consequent need for added-value from active portfolio recycling and asset management and development – all in the context of a disciplined risk management culture. We reaped gains from property price inflation with acquisitions taking gearing to its highest ever level in 2005 (59% Loan to Value -LTV) and brought it down again to the lowest level since 1995 in June this year before the property market had turned. Our entire balance sheet was refinanced to give us 100% fixed interest rates, the lowest cost of debt (5.3%) in our sector and average maturities of 12.7 years – with some £2 billion of additional undrawn committed financing should opportunities present themselves. Gearing counts against us when asset values fall but, over a cycle, remains an important positive for our business.
Our 99% occupancy rate and 14.4 year lease lengths also give strong defensive attributes but just as important underpin our growth prospects by confirming that our properties are in demand. Rental growth at British Land has outstripped the market since March 2006.
In sectoral terms, we have used our active management mandate to substantially withdraw from weaker customer markets in industrial, provincial offices and in-town retail whilst expanding in Europe and indexed leases. Even in the strong markets of London Offices and Out of town Open A1 Retail, we top-sliced holdings in key assets, in particular cutting our office exposure to make room for profitable development delivery without further increasing exposure to sector cyclicality.
Markets
As is often the case, real estate’s customer markets do not align perfectly with investment market pricing. By and large those sectors and sub-sectors where customers are enjoying business success continue to show strong occupancy and consequent rental growth. London Offices and Out of town Retail, British Land’s key picks, showed annualised ERV growth rates of 18.2% and 3.3% respectively in the first half.
If anything, Retail customer demand is better than commonly presumed, at least for scarce out of town space where sales densities are rising. The picture in London Offices has been even stronger given its cyclical boost. It is premature to know how much the debt market turmoil of recent weeks will dent this picture. We believe the market outcome may have parallels to 1998 when customer demand recovered within the next 12 months –
