Is British Land's generous dividend reason to buy?

After making a recovery over the past month, the property giant's share price is in retreat again after these half-year results. Our head of markets explains why.

Given British Land Co (LSE:BLND)’s exposure to the office and retail sectors, the screw is inevitably tightening. 

The return to the office post-pandemic has not been fully established given the rise of hybrid working, while in retail the weakening economic environment has put pressure on the sector as a whole, with some smaller players going to the wall.

At the same time, the more recent volatility in property prices has also led to some revaluations. For British Land, the overall portfolio declined by 3% in the six months to 30 September, with Campuses dropping by 2.7% and Retail by 3.6%. A rising interest rate backdrop has also reduced some investors’ appetite to make further acquisitions over the period, with the outcome that decisions to rent further space may be delayed.

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However, given its very exposure to those sectors, British Land has some strong factors in its favour.

The office market is covered by its “Campuses” business, which provides high quality workspaces within a site which provides opportunities to shop, dine and socialise. These environments tend to be modern, with an eye on sustainability, wellness and flexible space which appeals to potential new customers.

In addition, the group’s strategy to focus on sectors with pricing power is particularly evident in London, for example, where the lack of new supply automatically translates to the potential for higher income on its existing sites.

For the retail market, retail parks are also seeing something of a renaissance as trading habits revert more broadly to pre-pandemic levels, and as more retailers embrace the omni-channel offering, where out of town parks are often more convenient for collection services. The presence of the customer at the parks also leads to the possibility of more impulse purchases, while occupancy costs are also lower for the retailer. 

Nonetheless, the overarching deterioration in investor and consumer sentiment continues to weigh heavily on current trading, if not future prospects. While British Land has marginally increased its overall occupancy to 96.7%, the total property return has shifted slightly into negative territory given the uncertain valuations.

Similarly, although underlying profit increased by a healthy 13% over the half-year period, the headline number swung to a pre-tax loss. Net rental growth of 5% and an ongoing focus on cost control cushioned some of the blow, but the company is battening down the hatches where necessary. Its sale of most of its interest in Paddington Central raised £694 million, while access to £2 billion of undrawn facilities and cash will give it financial flexibility and strength during what could be a more difficult period to come. It also provides the possibility of selective investments should the opportunity arise. 

In the meantime, the group has signalled its own cautious optimism on prospects with a further increase to the dividend, where the projected yield of 5.9% provides some solace for patient investors.

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British Land certainly has the building blocks in place, but for the moment those elements outside of its control have been its undoing in terms of share price performance, with the shares having lost 23% over the last year, as opposed to a marginal gain of 0.6% for the wider FTSE100.

Concerns which are more broadly based on economic prospects remain the major headwind, and investors are split on whether any recovery is too early to call. On balance, the current market consensus of the shares remains unconvincing and comes in at a 'hold', albeit a strong one.