British Land leads U.K. real estate stocks higher amid optimism on rents

By Jamie Chisholm

British Land shares led many U.K. peers higher on Monday, after the FTSE 250 constituent defied fears that higher interest rates and the work-from-home trend were badly damaging the property sector as it saw rents grow at the top end of expectations.

In half-year results to the end of September, the London-based group reported a 2.5% cut, or GBP194 million ($237 million), to the value of its U.K. portfolio, as higher borrowing costs pressured property prices. However, demand for its offices, warehouses and stores remained relatively robust, allowing British Land to lease 1.6 million square feet of space at rents more than 12% higher than expected.

"We are pleased with the performance in the first half with underlying profits increasing 3% on the back of another strong period of leasing and good cost control," said Simon Carter, chief executive. "We have seen yields continue to move out...and occupancy remains strong at 96% well above levels in the wider market."

British Land's (UK:BLND) 4% vacancy rate is less than half the London average, and it is sufficiently confident about demand that it recently rebuffed an offer from Meta to find another tenant to take over the Facebook owner's lease at a Regent's Park office because rents have risen since the deal was inked in 2021, according to the Financial Times.

"British Land does have best in-class assets, across corporate and retail spaces -- the question isn't about management strength or strategy, but rather the shape of demand in these two tricky sectors," said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

"Interest rates have continued to dent the valuation of the portfolio, but the group remains positive that rates have peaked. Should that be true there will be space for a recovery, but the higher-for-longer narrative does clip potential in the medium term," she added.

British Land shares rose more than 5%, but remain down 16% for the year. It's bigger competitors, Land Securities (UK:LAND), which is due to publish results on Tuesday, rose about 2%, while Segro (UK:SGRO) gave up most of its early gains to trade a fraction weaker on the day.

Support from the real estate sector helped London's FTSE 100 UK:UKX gain 0.6% amid a generally positive start to the week for Europe's bourses as they inherited a strong Friday rally on Wall Street. Frankfurt's DAX rose 0.3% DX:DAX and the CAC 40 FR:PX1 in Paris added 0.5%.

Shares in Novo Nordisk (DK:NOVO.B) rose 3% to again flirt with record highs after initial trial results indicated the effectiveness of the Danish pharma giant's blockbuster obesity treatment Wegovy in reducing heart attacks and strokes could be due to more than weight loss alone.

BAE Systems shares (UK:BA) also traded around record levels after the defense-and-aerospace group said it has booked more than $30 billion ($36.68 billion) of orders so far this year and expects heightened geo-political risk to deliver another year of strong sales and earnings growth.

"Greater geopolitical instability continues to drive orders for defense outfit BAE Systems, whose shares are up more than 80% since the Russian invasion of Ukraine in February 2022," said Russ Mould, AJ Bell investment director.

"The muted share price response to today's trading update may reflect some disappointment at a lack of further upgrades after the company's boost to guidance at the half year stage in August," Mould added.

-Jamie Chisholm

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11-13-23 0752ET

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