The cranes stare at each other across the City of London from the top of skyscrapers that they seem to be pulling out of the ground. On one side is British Land's Cheesegrater, one-third pre-let, largely to U.S. insurance group Aon. On the other is Land Securities' Walkie Talkie, a quarter pre-let to a collection of other insurers. It is not only a passion for glitzy developments that unites the two companies. They also offer very similar investment propositions, with £10-billion ($15.8-billion) portfolios focused on U.K. retail and London offices.
Land Securities enjoys the higher rating. Its shares trade at a 10-per-cent discount to forecast net asset value, against 13 per cent for British Land. That partly reflects the latter's higher debt – 46 per cent of its portfolio is financed by debt, against 36 per cent for Land Securities. Although interest payments are comfortably covered by income, the debt-inspired property crash of 2008 still casts a shadow over the sector.
But first-half results from both during the past two weeks suggest that there is reason for a more generous stance towards British Land. First its retail portfolio, which accounts for 60 per cent of the total, is performing slightly better than its rival's. In tough conditions, it limited the decline in value to 1 per cent over the half, against a fall of almost 3 per cent at Land Securities. And it has been shifting the balance of its office portfolio, with the West End (where rents are higher) now accounting for a half. British Land has also been taking advantage of low interest rates to refinance debt, recently completing a convertible issue at a coupon of just 1.5 per cent. The result is that its cost of debt is 4.4 per cent, which is 70 basis points below that of Land Securities.
Add that to the valuation discount and a dividend yield which, at 5.1 per cent, will attract income investors, and British Land looks the more attractive of the two.