British Land's 5 Broadgate campus in London is among its most valuable office assets.
Source: British Land
U.K. property giant British Land Co. PLC expects the coronavirus pandemic to fundamentally and permanently alter the real estate sector in the years ahead.
It's unclear how deep or prolonged the impact on economic activity or people's lives will be, but fundamental long-term changes will emerge and, based on past experience, the crisis is likely to accelerate trends such as more flexible ways of working, and a further shift to online retail, CEO Chris Grigg said during a full-year 2020 earnings call.
The sudden financial shock experienced by many retailers, who were forced to close due to lockdown measures introduced to slow the spread of the virus, is expected to cause lasting damage to demand for retail property, while many commentators speculate that the success of remote working for many companies could lead to a plunge in demand for office space.
Grigg said he was confident that British Land, whose £11.2 billion portfolio is about 90% office and retail assets, can successfully adapt to the changes in the office market. The company has modernized buildings, become "more customer-focused" in its offering, and can provide flexibility through [in-house flexible workspace business] Storey, which will "position us well for the changes which will inevitably come out of this," he said.
Future demand for office space will be determined by competing factors, with the increasing trend toward homeworking likely to be counterbalanced by a fall in office densities and hot-desking as a result of COVID-19-related health concerns, Grigg said.
Lower demand for office space is likely to hit smaller, lower-quality buildings rather than the assets held by British Land, which continues to get inquiries on new and refurbished space. "We expect demand for headquarters-type space, modern and high-quality, will be resilient," he said.
British Land's office portfolio, which is all in London, performed strongly in the first 11 months of the financial year before lockdown measures were introduced in March, Grigg said. The company leased over 950,000 square feet in the 12 months to the end of March, at an average of 9% ahead of estimated rental value.
The value of the company's office developments rose by 8% during the period, contributing to a 2.3% increase in value across the office portfolio as a whole. The company's office developments are 90% pre-let, with £54 million of rent locked in, said Grigg.
Shops till they drop
British Land's retail portfolio, which until recently made up about 50% of the company's total portfolio value, suffered due to a "very tough" retail market, even pre-COVID-19, said Grigg. Its value fell by 26% during the year, dragging its total portfolio value down 10% overall. Retail now makes up less than 35% of British Land's total portfolio value.
The coronavirus crisis is expected to make the retail segment "more challenging," Grigg said. The disruption caused by the lockdown means that "some shops may never reopen," he added. "And the amount of retail space required in the U.K. will certainly drop. In many ways, this is a change that was always going to take place, just over a longer time frame," Grigg said.
The landlord's retail strategy has been shaped by the reality of falling demand for space for some time, Grigg said. "When the full impact of COVID-19 becomes apparent, and we get a fuller picture of what that means for our business and the [retail] sector more generally, it may be that we adapt elements of our strategy or evolve our approach."
British Land's share price has sunk in recent years as its retail exposure discouraged investors wary of the impact of e-commerce on brick-and-mortar stores. It has fallen by more than 50% in the last five years, during which time the U.K.'s protracted exit from the European Union has tested investor sentiment.
Landsec, which along with British Land is considered a fixture of the U.K. property scene, has suffered a similar decline to its old rival. The companies have a similar portfolio composition of London offices and large retail assets.
Colm Lauder, real estate equity analyst at stockbroker Goodbody, said British Land's results echo the difficulties revealed by Landsec’s recent earnings results. "To resume paying dividends the board wants significant improvement in rent collection rates, and have clarity on what the post lockdown positioning of the portfolio is," he said. "Given, the next two quarters are likely to be even more challenging from a rent collection perspective, this may be some time away yet."