What commercial property jitters tell us

British Land's interests include the Glasgow Fort retail and leisure park. Pic: British Land

If you want a good indicator of how the economy has been doing, the fortunes of commercial property companies are a pretty useful one.

They generally tend to be regarded as rear-view mirror indicators, as the commercial property market tends to lag the economic cycle by between six months and a year, but they can also be forward-looking indicators as well.

The terms on which leases are agreed, for instance, are seen as a good barometer of the hiring intentions of employers and therefore the jobs market.

Another is yields – rental income as a proportion of the value of a property – which, when they fall, is a sign of growing demand.

As luck would have it, three of the UK's largest commercial property firms have reported results this week, each offering plenty of insights.

Land Securities, the UK's biggest commercial real estate firm, reported on Tuesday. Great Portland Estates, which specialises in London's West End, followed on Wednesday. And today, we heard from British Land, the second-biggest player.

So, what have we learned?

In general, all three are reaping the benefits of past developments, while not yet seeing any fall-off in rents. Yet, to a greater or lesser extent, all three are cautious about the outlook.

Land Secs, which earlier this year sold its half-share in the Walkie-Talkie, the City's second-tallest building, is clearly wary about the next few years.

Its chief executive, Rob Noel, grumbled that the glacial pace at which Brexit talks are proceeding has created uncertainty in the sector. Accordingly, the company is planning no new speculative developments in London – where Brexit uncertainty has raised doubts over office demand – for at least the next three years, concentrating instead on reducing its borrowings.

However, Mr Noel also revealed that the last six months had been the company's best since the financial crisis in terms of leasing activity, with more than £50m worth of deals covering nearly one million square feet of development lettings, investment lettings and conditional pre-lettings.

In retail, where the company's assets include a 30% stake in the massive Bluewater mall in Kent, Land Secs has yet to see too much of a downturn.

Great Portland is being similarly cautious. Toby Courtauld, its chief executive, revised upwards the company's expectations of rental values, having previously predicted a downturn of up to 7.5%, reflecting what he called the better trading environment.

However, like Land Secs, Great Portland is also looking to sell assets, particularly to overseas investors and especially from Asia, whose appetite for London property – as shown by the Walkie-Talkie deal – shows no sign of abating. He also says Brexit uncertainty is causing some businesses to defer letting decisions.

That brings us to British Land, whose assets include the Broadgate centre in the City of London, the Meadowhall shopping centre in Sheffield, Drake's Circus in Plymouth, the Teesside Park centre outside Stockton and Fort Kinnaird in Edinburgh.

Like Land Secs, it too has had a busy six months, completing £32m worth of lettings covering 1.3 million square feet.

These included a 310,000 square foot lease to Dentsu Aegis Network, the Japanese owned ad-booking giant, at Regent's Place in the West End of London – which it claims to be the biggest such lease of its kind in the West End in 20 years.

Like Land Secs and Great Portland, it too is reducing its borrowings, while it is also fighting shy of speculative developments until the fog created by the Brexit negotiations clears. However, its chief executive, Chris Grigg, has struck a decidedly more optimistic tone than his opposite number at Land Secs.

He said today, of the outlook: "Although the wider operating environment is uncertain, we are generating healthy leasing interest at good pricing across our portfolio, and prime capital values remain firm."

So, while things are quite encouraging at present, there are certainly question marks about the direction of travel.

There is one more signal worth mentioning. The share prices of commercial property firms are a useful forward indicator. When they rise, it is usually a sign that the underlying asset values of property portfolios are set to increase. Unfortunately, here, the omens are not so good.

All three companies have seen their share prices rise this week on their results. However, since the start of the year, shares of Land Secs are down by nearly 18%, Great Portland by 7% and British Land by 2.5%.

And the shares of all three trade at a substantial discount to Net Asset Value – which, crudely put, is how much shareholders would get back if the company was put into liquidation and all its assets sold.

In the case of British Land, despite today's 3% rise in the shares, the discount stands at 35% and, in the case of Land Securities, it's 36%. That tells you investors are extremely concerned about property valuations, if not the wider prospects for both.

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