Interest Rates, Cap Rates, and the Real Estate Cycle

Transcription

1 Interest Rates, Cap Rates, and the Real Estate Cycle Stephen Hester, Chief Executive We are real estate investors and create value by actively managing, financing and developing prime commercial property to provide the environment in which modern business can thrive.

2 British Land at a Glance What We Are 56% Retail 83% Out of Town One of the world s leading REITs 3rd largest Global REIT by assets ( 15.9bn) Equity market capitalisation 4.5bn 1 Total assets under management 20bn Market leadership in Office & Retail Focus on growth sectors Out of Town Retail and London Offices High quality assets (97% in the UK) Prime locations with strong tenants High occupancy and long leases Pro-active management style Driven by customer needs Attractive upside potential from development & asset management Defensive balance sheet and cash flow resilience 42% Offices 99% London 1 As at close 23 November

3 Introduction Interest Rates, Cap Rates, and the Real Estate Cycle The global credit crunch has catalysed and is exacerbating an overdue real estate market correction Significant uncertainty remains and stock markets in many cases seem to be assigning irrational discounts to affected securities The central issue is a re-pricing of cap rates Occupier markets are healthy though not necessarily immune UK REITs, and British Land in particular, have a good investment case to make, with defensive portfolios and upside to capture 2

4 UK Market Fundamentals Investment Market Weakness & Debt Markets Turmoil Background Interest rate rises followed by debt market turmoil left real estate pricing vulnerable to the correction now underway 1% gilt yield rise from November 06 -July 07 - a step too far Too many momentum investors Risk under-priced Year Gilt Yield IPD Prime Equivalent Yield % Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 4 Yield Gap (%) Prime vs Secondary Yields 1 0 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Impact Still hard to be certain macro-environment and subjective factors too important Rational analysis supports correction not crisis Bad news Increased risk premia & funding costs Fear and reversal of investor momentum Silver lining Interest rates back down Correction speeded up quicker to find bottom and free market up again Meanwhile hard to read much into valuations in absence of good transaction evidence Prospect of flight to (asset) quality Reduced development competition Shake-out of weak holders 1 IPD Yields High to Low 3

5 % UK Market Fundamentals What has Happened so Far? British Land Net Equivalent Yields 3 months to British Land Net Movement Sept 2007 Equivalent Yield bp 2 Retail Warehouses 4.5% +18bp Shopping Centres 5.0% +24bp All Retail 4.7% +20bp City Offices 5.1% +29bp West End Offices 5.0% +11bp All Offices 5.1% +25bp All Property 4.9% +21bp IPD Net Equivalent Yields bp bp 2 +23bp 2 All Property Retail Offices Shops - Prime - Secondary CBRE Net Equivalent Prime Yields Shopping Centres - Prime - Secondary Retail Warehouses - Prime (Open A1) - Prime (Bulky) - Secondary Offices 1 IPD Monthly Index 2 Like for like movement in equivalent yields (3 months to Sept 2007) - Prime City - Prime West End - Secondary (all UK) June Nov 2007 Movement bp +90bp +25bp +50bp +65bp +70bp +75bp +75bp +75bp +110bp 4

6 10 Europe UK Market Fundamentals Currently Fear and Short-term Momentum issues Dominate Stocks Share price performance peak to trough YTD UK Real Estate Sector Discount to NAV 1 - other REIT markets also underperformed 1 30 UK - REITs UK 20 % US Australia Japan Singapore Oct-89 Oct-92 Oct-95 Oct-98 Oct-01 Oct-04 Oct-07 Share price performance YTD (31 Oct 07) - peak to trough % 1 DataStream 5

7 % % UK Market Fundamentals Economic Conditions Support Correction not Crisis UK Property Yields, 10 Year Gilts and Inflation UK GDP and Unemployment UK initial property yields UK CPI 10 year gilt yield UK GDP UK Unemployment DataStream, ONS 6

8 UK Market Fundamentals Fundamentals Count Eventually Real economy growing, employment high, corporates healthy, inflation corralled i.e. customers still growing Relative value in property still rational to perceive Return Prospects Indexed Gilts 1 Return Prospects Property (at NAV) 1 Return Prospects - UK Equities 1 Yield 4 1.3% Market Equivalent Yield 2 5.5% Dividend Yield 6 3.0% Growth Prospects 5 3.4% Market Rental Growth 3 2.6% Dividend Growth 7 6.0% Total (as at 31 Oct 07) 4.7% Asset Total (as at 31 Oct 07) 8.1% Total (as at 31 Oct 07) 9.0% + gearing, development & + + asset management - expenses & depreciation - Company Total (i.e. Equity)? So, correction may be limited or bounce-back thereafter 1 This is not a forecast and is for illustrative purposes only, with 4 20 year Indexed Gilt no change in required returns assumed (no yield shift) 5 As implied from 20 year Inflation Swap Rate 2 IPD Monthly Index All Property Net Nominal Equivalent Yield 6 FTSE 100 Dividend Yield 3 Property Market Analysis (PMA) Autumn forecast average ERV 7 Morgan Stanley long-term dividend growth forecast growth pa (next 5 years) 7

9 UK Property Sectors Assessing Customer Trends 1996 UK GDP Growth = Output and Spending Relative to UK GDP Growth F&BS Output Retail Sales Industrial Output Office Service industries are fastest growing sector London has a unique global competitive strength as a service centre Market in cyclical upswing Retail Long-term fundamental growth prospects Greater asset management potential Retail spending growth resilient Industrial Weaker occupier trends and limited supply constraints Ability to pick between sectors a key performance advantage for BL 1 PMA and Verdict 8

10 Occupier Markets Retail Growth pa (%) Growth pa 6% Retail Sales (Value) positive 1 5% 4% 3% 2% 1% 0% % Out of Town Share Increasing 1 50% 50% 42% 40% 32% 30% 26% 20% 15% 19% 10% 5% 11% 0% Neighbourhood Town Centre Out-of-town Non-store 1 Verdict 2 PMA 14% 12% 10% 8% 6% 4% 2% 0% Retailer margins still healthy date Fashion Other High Street All High Street Rental Growth Favours Out of Town 2 Retail Parks Superstores Solus Units Big Shopping Centres Secondary Shopping Centres High Street Shops Average ERV Growth % pa (next 5 years) 9

11 Occupier Markets London Offices 6 F&BS Output expected to outperform UK GDP 1 City Office rents still affordable 3 80 Growth pa (%) F&BS Output UK GDP Nominal Real F&BS Employment growth expected to resume from City Development Pipeline (Pre-let & Spec) Growth pa (%) Rent ( psf) Pipelie (million sq ft) Financial Business Services Q3 Forecast Q2 Forecast 1 PMA 2 CEBR 3 Jones Lang LaSalle (average of headline City and West End rents) 4 CBRE 10

12 UK Property Market UK Real Estate s Attractions Density and population growth drive values UK 8 times denser than the US Restrictive planning regime leads to limited availability of land UK Population density create supply/demand imbalances 1 Growth 2 Japan -0.1% Landlord-friendly lease structure Typically year terms - upward-only with mark-to-market every 5 years Tenant fully liable for repairing and insuring costs High degree of control with landlords limited break options and conditions for assignment UK + 2.1% Europe + 1.4% USA + 5.0% Transparent and accessible markets Huge depth and variety of participants Well developed valuation data Attractive and predictable legal/fiscal framework Australia + 5.2% Population per km 2 1 United Nations Population Division 2 United Nations Population Division estimated population growth

13 Strategy & Positioning British Land s Activist Strategy Focused on Delivering Outperformance Building the business around customer needs and so capturing superior, cash flow driven total return arising from high occupancy and rental growth Seeking to add-value at each level of the business Sector and market selection Asset selection and creation Asset management Balance sheet management Deal-doing Concentrating on markets where we have or can build competitive advantage 12

14 Portfolio Positioning Portfolio Composition 56% Retail 1 42% Offices 1 83% Out of Town 99% London Retail Warehouses (22%) Central London Offices (41%) PMA Forecast Market ERV Growth pa 2 Retail Warehouses Superstores Shopping Centres High Street Superstores (12%) London Offices Provincial Meadowhall (9%) In Town Provincial Offices (1%) Shopping Department Other (2%) Centres Stores High Europe (4%) (5%) Street (3%) (1%) Industrial All Property Forecast ERV Growth % pa - next 5 years 5.5% like for like rental income growth over last 6 mths y-on-y, ahead of the market (IPD) at 3.7% 4.2% rental value (ERV) growth (IPD 2.4%) over last 6 mths to drive future rental income growth 1 Proforma for committed developments and assets contracted (classified by end use) at external valuers estimated end value at completion 2 PMA Autumn 2007 forecasts 13

15 Balance Sheet BL Prepared for a More Testing Environment - Assets Customer appeal of British Land portfolio gives: Exceptional defensive attributes (long leases, high occupancy) Better growth prospects (higher reversion, less exposure to void space, higher development upside plus future ERV growth) Occupancy rate, % Lease length, yrs 1 BL IPD BL IPD Retail Warehouses Security of Income & Potential Growth 3 British Land -2% 8% 12% 4% Shopping Centres City Offices West End Offices All Property IPD -3% 4% 8% 8% % Over-renting Rent frees Rent reviews Vacancies 2 Plus 154m potential rent from committed developments 1 To expiry (comparable to IPD) 2 IPD include signed agreements for lease in vacancies 3 Income analysis for British Land vs IPD showing security of income and growth potential - contracted increases from expiry of rent frees, rent reviews, ERV on vacant space less over-renting 14

16 BL Prepared for a More Testing Environment Liabilities Balance Sheet Gearing (LTV) 44% now at lowest level since 1994/5. Average interest rate lowered to 5.3%, interest cover improved to 1.8x and 2bn of available facilities Leverage & Interest Cover Available Facilities & Interest Rate ,500 9 LTV (%) , , Interest Cover (times) Cash & Undrawn Facilities ( m) 1, Average Interest Rate (%) /6 1997/8 1999/0 2001/2 2003/4 2005/6 2007/8 1995/6 1997/8 1999/0 2001/2 2003/4 2005/6 2007/8 LTV (LHS) (Sep) Cash and undrawn facilities (LHS) (Sep) Interest cover (RHS) Average interest rate (RHS) 15

17 Summary Customer Driven Rental Growth on top of Well Constructed Defensive Value, the key for Future Performance British Land Defensive Strengths Exceptional cash flow resilience Average lease length 14 years Occupancy rate 99% 1 Prime property in prime locations Exceptional financial positioning Interest cost 100% fixed rate Lowest cost of capital (5.3%) 2bn committed undrawn facilities Gearing reduced from 59% to 44% LTV in 2 years now lowest since 1994/5 Value Added Strengths Customer driven growth Outperforming on rental growth Overweight strong customer markets Careful sector balancing to optimise cross-cycle performance Outstanding development programme Active asset management 6.1bn asset sales since March 2005 to weed out underperformers Deal-doing capacity if merited 1 Underlying occupancy rate including asset management initiatives and units under offer 16

18 Disclaimer This presentation may contain certain forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements. Any forward-looking statements made by or on behalf of British Land speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. British Land does not undertake to update forward-looking statements to reflect any changes in British Land s expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. This presentation is made only to investment professionals as defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ('the FP Order'). The content of this presentation has not been approved by a person authorised under the Financial Services and Markets Act 2000 ( FSMA ). Accordingly, this presentation may only be communicated in the UK with the benefit of an exemption set out in the FP Order. An investment professional includes: (i) a person who is authorised or exempt under FSMA; and (ii) a person who invests, or can reasonably be expected to invest, on a professional basis for the purposes of a business carried on by him; and (iii) a government, local authority (whether in the United Kingdom or elsewhere) or an international organisation; and (iv) any director, officer, executive or employee of any such person when acting in that capacity. This presentation is published solely for information purposes. This presentation does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy any security, nor a solicitation of any vote or approval in any jurisdiction, nor shall there be any sale, issuance or transfer of the securities referred to in this presentation in any jurisdiction in contravention of applicable law. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The distribution of this presentation in jurisdictions other than the UK may be restricted by law and therefore any persons who are subject to the laws of any jurisdiction other than the UK should inform themselves about, and observe, any applicable requirements. This presentation has been prepared for the purpose of complying with English law and the City Code and the information disclosed may not be the same as that which would have been disclosed if this presentation had been prepared in accordance with the laws of jurisdictions outside the UK. All opinions expressed in this presentation are subject to change without notice and may differ from opinions expressed elsewhere.