Real Estate

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Britain's commercial property market is at the epicenter of the Brexit tremor.

One of the industry's titans, British Land Co., is fed up with investors' reluctance to buy its shares. The company plans to buy back as much as 300 million pounds ($390 million) of its own stock, about 5 percent of its equity value.

It's a bet that the market is wrong.

Valuation Gap
British Land shares are trading at a steeper discount to net asset value
Source: Bloomberg

British Land shares were trading at a 34 percent discount to net asset value before Tuesday's announcement of the buyback. That chasm reflects two contrasting views of the prospects for British Land's sprawling empire of office space and shopping centers.

The folk who conduct the valuations that drive British Land's reported numbers doubtless see occupancy levels holding up well and can point to fantastic prices for recent transactions like the sale of London's Cheesegrater to a Chinese investment company back in March. By contrast, equity investors fear a sharp fall in values driven by a Brexit-induced economic slowdown lurking around the corner.

In the Doldrums
British Land shares are down 1.4 percent this year
Source: Bloomberg

Who knows what will happen. But the risk of a correction seems sufficiently plausible to be worth preparing for. The clock is ticking on Brexit and the shape of Britain's future relationship with Europe remains elusive. The isolated deals supporting current real-estate valuations could well dry up. It's not as if British Land could sell every asset in its portfolio on comparable terms in a flash.

British Land has been wise to turn assets into cash at stellar prices as the opportunity has arisen. The wisdom of handing proceeds back to shareholders rather than using them to build a fortress against a possible shock is less clear. It's impossible to have too strong a balance sheet with Brexit looming.

Sure, the shares rose as much as 3.6 percent on the move. The stock's lowly valuation means the buyback mathematically boosts net asset value per share by just over 1 percent. The rest of the increase seems to be down to management's signal that it is siding with bullish commercial property valuers over gloomy equity investors.

A decade ago, British Land launched a buyback with then CEO Stephen Hester complaining about the shares' discount to net asset value, as analysts at Jefferies and Credit Suisse helpfully note. Then came the financial crisis. The company halted the buyback and held a rights offering to reduce debt.

Maybe British Land is right this time and the stock market is too gloomy. But it doesn't have to play with its balance sheet to show its conviction.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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