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Listed landlords are making strides over private equity in a high-interest rate landscape, according to the CEO of British Land, after his firm secured £300mn from shareholders for a retail acquisition, marking its first equity raise in over ten years.
Simon Carter noted that increased debt costs have “equalized the competition between public markets and private capital, and likely even skewed it in favor of the public market.”
He observed, “There was a time of extremely low interest rates following the [global financial crisis], where debt was almost free.” As a result, private capital firms, which generally rely on more debt for property acquisitions, were able to be “exceptionally competitive on transactions.”
Private equity firms such as Blackstone and Brookfield have overtaken publicly listed companies like British Land and Land Securities as key players in UK real estate, largely due to an extended period of low borrowing costs.
Even though the Bank of England reduced its policy rate from a 16-year peak this summer, the market does not anticipate a return to near-zero rates.
Carter mentioned that the change in borrowing costs has revitalized public companies, enabling them to rapidly raise capital from shareholders for acquisitions, contrasting with private fundraising that can take months.
On Thursday, British Land revealed it had raised approximately £300mn from shareholders to finance a £441mn acquisition of seven retail parks from Brookfield. This is the first equity raise since 2013, as noted by British Land.
Peter Papadakos, the head of European research at Green Street, remarked that the ability to generate several hundred million pounds in a matter of hours offers listed investors a significant advantage. He added that raising such a large sum for a private fund in the current market would likely require three months rather than three hours.
The Canadian asset manager has sold nine parks to British Land since September, following purchases from Hammerson and Nuveen in two transactions in 2021, totaling £405mn during a time of significant pandemic-related uncertainty.
Carter has consistently favored outdoor shopping locations at the outskirts of towns instead of indoor malls, which are the preferred choice of his UK-listed competitor Land Securities, due to their lower operational costs and effectiveness for return and delivery logistics.
“This format is optimal for supporting online shopping,” Carter stated.
Despite these advancements, landlords like British Land still encounter significant hurdles. The 5 per cent increase in the value of its retail parks over the six months leading to September was counterbalanced by declines of 1.6 per cent and 2.6 per cent in its London office campus and logistics sectors, resulting in overall portfolio values remaining relatively unchanged.
The newly acquired parks, spanning locations from Waterlooville in Hampshire to Falkirk in Scotland, boast a 99 per cent occupancy rate and are all vitally anchored by either M&S or Sainsbury’s.
Since April, British Land has committed £711mn towards retail parks. Over the last six months, the company’s shares have surged nearly 14 percent, and it has recently reclaimed its position in the FTSE 100.
Analysts at Green Street argued that issuing equity at a discount relative to the share price and value of British Land’s assets was “justifiable” due to the returns from the new properties, the efficiency gains from expanding the retail parks portfolio, and the advantages of holding more established assets to mitigate the risks associated with new developments.