British Land's 16% profit rise masks Brexit challenges for UK property

Commercial property company British Land(LSE: BLND) has released upbeat results for the first half of the year. They show that its pre-tax profit has risen by 16.4% as a result of a sound strategy and continued leasing momentum. However, British Land's outlook remains uncertain thanks to the potential challenges posed by Brexit.

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A positive first half

It was able to record a rise in like-for-like (LFL) sales of 3.4% in the first half of the year. Confidence in the commercial property sector and the wider UK economy returned following well-documented uncertainty surrounding the industry in the wake of the EU referendum. British Land also benefitted from reductions in finance and operating costs, while it was able to deliver 769,000 sq ft of lettings and renewals across the portfolio on average during H1.

British Land's portfolio is currently 98% let, with an average lease length of nine years and a high quality, diverse occupier base. This provides it with a degree of stability, while £2.8m of rent added through office rent reviews shows that demand for office space in London remains high. Despite this, British Land will proceed more cautiously on development in 2017. It has modest development commitments and will require pre-lets prior to commitment or else it will pursue lighter touch refurbishment on key expiries.

Outlook

Although British Land has enjoyed a positive first half of the year, its outlook is relatively uncertain. The impact of Brexit has been muted thus far, but is likely to come into sharper focus next year. The UK government will invoke Article 50 of The Lisbon Treaty and the appeal of UK property for foreign investors may fall. The UK may struggle to gain access to the single market without concessions on immigration, which could cause investment in the UK to come under pressure if negotiations appear to be stalling.

Despite this, British Land continues to have long-term investment appeal. Its price-to-earnings (P/E) ratio of 16.9 is relatively low by historical standards, while British Land's yield of 4.9% is relatively well-covered by profit at 1.2 times. This shows that even if the company's profitability fails to rise in the medium term, its dividend growth should still at least match inflation.

Sector peer

British Land's outlook as an investment is superior to that of sector peer Land Securities(LSE: LAND). It has a P/E ratio of 22.1 and yields 3.7% from a dividend covered 1.2 times by profit. Both companies face similar risks in terms of Brexit being likely to act as a drag on the performance of the UK commercial property sector over the coming years.

Therefore, since British Land has a wider margin of safety, it could prove to be the stronger performer in a market downturn. However, both stocks remain cheap compared to historical valuations and offer sound income prospects for the long term.

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Peter Stephens owns shares of British Land Co and Land Securities Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.