Final Results - Part 1

22nd May 2007 07:04

British Land Co PLC22 May 2007 22 May 2007 PRELIMINARY ANNOUNCEMENT THE BRITISH LAND COMPANY PLC RESULTS FOR THE YEAR TO 31 MARCH 2007 Financial Highlights: • Net Asset Value (1) per share 1682 pence after REIT charges and refinancings, pre-charges up 20% over the year (2) - EPRA Net Assets (1) £8.9 billion (2006: £7.8 billion) - Net Assets £8.7 billion (up £2.7 billion including £1.6 billion deferred tax release) • Underlying pre-tax profit(3) £257 million, up 13% - Headline pre-tax profit (4) £1,270 million (2006: £1,604 million(5)) - Profit on ordinary activities before tax £1,440 million (2006: £1,498 million(5)) • Underlying earnings per share (3) 43 pence, up 22% - Earnings per share 470 pence (2006: 227 pence(5)) - Total dividends for the year 20.35 pence per share (2006: 17.0 pence) - Final quarter dividend 8.25 pence per share, payable August • Total return (6) for the year 21.3%2 • Portfolio valuation increase of 9.7% for the year (Q4 2.1%) - 10.9% capital return (7) ahead of IPD Benchmark due to rental growth (8) - Valuation uplift led by both London Offices (including development) and Out of Town Retail • Properties owned or managed £21.3 billion, up 15% Business Highlights: • British Land became a REIT on 1 January 2007 - Confident that new status adds to shareholder value - First full year (to March 2008) REIT dividends not less than 33 pence, 94% higher than 2005/6 • Delivering on our promises - renewing and working the business hard - 3.4 million sq ft London Office development projects progressing well with excellent prospects; 98% of completed offices, and 69% of completions due 2007/8, already let or under offer - £3.4 billion (gross) asset turnover since March 2006, tightening focus, recycling capital and improving growth prospects - Refinancings complete (some £4.9 billion total over last 2 years); overall interest rate now favourable 5.36% • Portfolio positioned to capture rental growth with market leadership in prime London Offices and Out of Town Retail; a strong platform for outperformance (1) EPRA (European Public Real Estate Association) basis - Note 2 to the accounts (2) before charges for REIT conversion and refinancings (3) see Note 2 (4) with proportional consolidation of Funds and Joint Ventures - Table A (5) restated, see Note 1 (6) increase in EPRA NAV plus dividends paid, see Note 2 (7) IPD calculate capital return (excluding Europe) based on average capital employed and excluding capitalised interest (8) ERV growth of 6.9% for the year (IPD 4.3%) Chris Gibson-Smith, Chairman comments: It is with great pleasure I make this inaugural report to you as a REIT. BritishLand is a flagship of the new regime and focused on making the most of thisreform. The company enjoyed an excellent year in 2006/7 and looks forward withconfidence to the challenges ahead. Stephen Hester, Chief Executive comments: We are intent on delivering continuing outperformance for shareholders. Theimplementation of our strategy and strengthening of our capabilities is clearlyvisible in strong 2006/7 results. In the exacting, customer driven marketsahead, British Land is well positioned and working hard to perform. The full preliminary results report follows. British Land contacts:Laura De Vere - Media 020 7467 2920Amanda Jones - Investors 020 7467 2946 Finsbury:Faeth Birch/Ed Simpkins 020 7251 3801 STATEMENT BY THE CHAIRMAN, CHRIS GIBSON-SMITH It is with great pleasure I make this inaugural report to you in British Land'snew guise as a Real Estate Investment Trust (REIT). Having taken up theChairman's role on 1 January 2007 after 4 years on the Board as a non-ExecutiveDirector, I can report that on closer scrutiny your Company looks even better. Results As you will read, British Land enjoyed an excellent year in 2006/7. Our NetAssets are up, our Earnings per Share up and our owned and managed assets nowtotal £21.3 billion. On top of that shareholder returns again outperformed thereal estate index and the FTSE 100. In the light of these results we have declared a final quarterly dividend of8.25 pence per share (to be paid in August), making 20.35 pence for the year (up20% on 2005/6) and reaffirm our minimum dividend pledge for 2007/8 of 33 penceper share. REITs In January it was a pleasure to celebrate the start of REIT trading in the UKwith the property industry in my other role as Chairman of the London StockExchange. British Land is a flagship of the new regime and focused on making themost of this reform. Quoted REIT vehicles are a vital and growing part ofinternational capital markets. As a REIT, British Land is unchanged in all structural senses from before, butnow has the benefit of being substantially tax free as to both income andcapital gains. Our dividends are going up and will take a slightly different form as explainedin the Financial Performance section of the following Review. We also submit toa light touch regulatory regime, underpinning our property focus and securecapital structure. However, in strategic terms, REITs are also an important development. UKproperty companies previously operated under a disadvantageous tax regimerelative to most other real estate participants which limited the size of thequoted sector and its delivery of shareholder value. With a level playing fieldnow granted, REITs can further improve returns from active, tax efficientportfolio management. And with the benefits of liquidity, governance, managementtalent and gearing, I expect UK REITs to take market share from less liquidprivate and institutional property vehicles over the medium term. There will be property cycles, but overall we are confident that British Landwill be more valuable to shareholders in REIT format than otherwise. Property Industry The property industry is a fascinating one. Its central role in developing ourbuilt environment is increasingly important. Providing the modern space for ourservice industries to grow whilst intermediating society's need for social andenvironmental advances in physical space is itself a major challenge. But less appreciated by many is the property industry's unique dynamics at theinterplay of two markets - the global investment markets that establish tradedvalues for real estate alongside and in competition with other financial assetclasses - and the 'bricks and mortar', occupier driven markets where space ismanufactured to compete for demand and value created or lost in ways comparableto most other non-traded industries. This juxtaposition is particularly relevant at present as a period of majorchange in investment markets' relative valuation of real estate ebbs, while aperiod of continuing change and growing demand in occupier markets flows. Inthis context British Land's enduring characteristic has been the ability tounderstand and respond to both markets. Strong capital market skills leverageinvestment market trends and are complemented by an increasingly impressiveproperty level activism to ensure we capture superior asset value from meetingour customers' needs. We are also very much alive to our influencing role on the built environment andthe community and environmental responsibilities implied thereby. British Landis leading the industry in these areas, partnering with customers, suppliers,communities and public authorities to advance the cause of sustainability. York House British Land is changing - building on its distinguished past and adaptingdecisively to the challenges ahead. Our move to new headquarters at York Housein March was an exemplar of this change - a transformation in our own space,efficiency and culture, highlighting the importance of modern well located spaceto service industry occupiers in general whilst also showcasing our owndevelopment skills. The Board Nowhere are the changes more notable than at the human level. May I pay tributeto my predecessor as Chairman, Sir John Ritblat. John was truly a giant of thereal estate industry over the last 35 years. From very small beginnings he builtan industry leader in British Land. Along the way he created immense shareholdervalue whilst never diluting his charismatic, entrepreneurial personality. We areproud to keep a symbolic connection with John as our Honorary President and owehim a debt of gratitude for the Company he built and for its timely handover inthe best of health. Similarly there is much other human change ongoing at British Land. Across theCompany, our Chief Executive is working swiftly with his colleagues to renew ourmanagement ranks and install a determined performance culture. In so doing weare all conscious of the debt owed to those retiring from the Company and thankthem for their sterling service. This is especially true at Board level. 2006/7saw the retirement of John Weston Smith and Patrick Vaughan as ExecutiveDirectors and Michael Cassidy retires as non-Executive at our AGM this July. Iam pleased to note that we are already back to full strength as a Board. AndrewJones and Tim Roberts joined the Board last July running our Retail and Officesectors and have made a major contribution. Our non-Executive ranks were ablyboosted by Kate Swann and Lord Turnbull who joined last May. I am delighted alsoto welcome Clive Cowdery (Chairman of Resolution plc) and John Travers (ex CEO,Cushman & Wakefield EMEA) as non-Executive Directors. The coming years will almost certainly bring more exacting market conditions. Iam therefore delighted at the close partnership that is developing with StephenHester our Chief Executive and have every confidence in him and the wholeExecutive team taking our business forward. We look forward to the challengesand believe your Company to be facing them in fine shape. STATEMENT BY THE CHIEF EXECUTIVE, STEPHEN HESTER 2006/7 was a notable year for British Land. We reported strong financialresults. The election to REIT status was successfully made. Our overhaul of theCompany to boost future prospects is being well executed. And most importantly,our customer-led strategies are producing high occupancy of our buildings,profitable delivery of more and attractive rising rental streams as testimony tothe appeal of our real estate. British Land is well placed for continuing success. 2006/7 Results Underlying earnings per share grew 22% to 43 pence on the back of recordunderlying profits of £257 million and headline pre-tax profits of £1,270million. The headline figures are distorted by REIT related charges which saw abalance sheet offset in the release of £1.6 billion in deferred tax provisionsto boost statutory net assets. EPRA net asset value was 1682 pence per share (up 20% before charges for REITconversion and refinancings). EPRA net assets are £8.9 billion. Our underlying profit growth was driven by three factors: like-for-like rentalgrowth ahead of the market overall; strong income from asset management fees andour Canary Wharf investment; lower average interest rates reflecting debtrefinancings. Total rents fell slightly as a result of asset sales but more thanoffset by associated falls in interest cost. Our growth in asset value was driven by property valuation gains and profits onasset disposals. Rental growth prospects drove our valuations along withdevelopment profits and yield shift - the latter now largely complete. Thesegains translated to outperformance at the Net Asset level as a result of ourefficient gearing policy. British Land's total return (Net Asset growth plus dividends pre-charges) was21.3%. British Land's Strategy We are focused on delivering outperformance for shareholders. With real estatemarkets increasingly customer driven, we are building our business aroundmeeting their needs and thereby capturing the superior total return resultingfrom high occupancy and rental growth. We seek to "add value" at each level of the business from an activist approachto: - sector and market selection - asset creation and selection - asset management - balance sheet management - partnership and structuring. Superimposed upon all this are the twin disciplines of attention to shareholdervalue creation and concentration on markets where we have or can buildcompetitive advantage. Delivery on our promises The implementation of our strategy and continued strengthening of our capabilityto outperform was clearly visible in our 2006/7 activities. Our market leadership in prime retail and office property was made moredistinctive by increased focus on London offices and out of town retail,including the leadership position we have built in Europe in this lattercategory since 2005. An intense pace of activity saw over £3 billion of asset sales and purchases toimprove the growth prospects of our assets and ensure our capital is workinghard. The development programme is the biggest in our history with successfulpipeline building, starts and completions to deliver space at the forefront ofcustomer appeal. Throughout the business, asset management initiatives honed the appeal of ourbuildings and contributed to rental growth outperformance. All of this rests on the capabilities of our people. The year saw a continuationof our substantive management renewal process and further embedding of a strong'performance driven' culture. Our activity enabled the financial outperformance British Land delivered 2006/7.But perhaps of greater import, it gives us good prospects to deliver more in thefuture. Real Estate Markets Real estate markets produced another strong year as the repricing of the assetclass by investment markets in relation to other financial assets was completed.Real estate's growing cash flows and strong downside protection position itbetween bonds and equities in the hierarchy of total return prospects.Superimpose the benefits of active management, development and gearing and youhave, in British Land, an attractive equity vehicle, defensively priced. Markets' relative relationships fluctuate in response to changes in investorsentiment and movements in other asset classes which are hard to accuratelypredict. Real estate's current positioning seems to represent a fair equilibriumon which to build fundamental value, though rises in long term interest ratesmay have an impact if sustained. Real estate markets are now reverting, therefore, to a more normal position asoccupier driven markets where quality and location of space capture occupancyand rental growth which in turn drives asset values forward. The UK is a denselypopulated island, with concomitant scarcity of modern space. The serviceindustries that are powering economic growth and employment are the real driversof property values. We are pleased that the appeal of British Land's space drove rents forward in2006/7 which in turn underpinned the quality of our asset valuation growth ingreater measure than the market overall. Looking Ahead 2007/8 will be one of our most active years as we capitalise on REIT status toaccelerate portfolio repositioning whilst driving home the strategic themesdiscussed above. The investment market is likely to be more challenging thanlast year, underlining the importance of value creation from rental growth. We believe in the Company's strategy and capabilities. Our size and shape willbe an outcome of value creation from our property dealings. We expect ourindustry leading position, our market leadership positions and our efforts tomake the assets perform well to combine and continue to present British Land as'the company of choice' in our sector. As ever, we would have achieved nothing this year without the efforts of ourpeople. My thanks and gratitude, on shareholders' behalf, go to them. FINANCIAL HIGHLIGHTS Income Statement Year ended Year ended 31 March 2007 31 March 2006(1) Gross rental income £706m £751mNet rental income £661m £701mNet interest costs2 £370m £436mUnderlying profit before £257m £228mtaxation3Valuation gains4 £1,424m £1,748mREIT conversion charge and costs £338m -Profits before taxation5 £1,270m £1,604mUnderlying diluted earnings per 43 pence 36 penceshare 1, 6Diluted earnings per share 6 470 pence 227 pence Dividend per share7 20.35 pence 17.0 pence Balance Sheet 31 March 2007 31 March 2006 Total properties8 £16,903m £14,414m Net assets £8,747m £6,016mEPRA net assets9 £8,862m £7,802mEPRA net asset value per share9 1682 pence 1486 pence Group:Net debt £6,404m £5,593mLoan to value10 41% 42% Including share of Funds and JointVentures:Net debt £7,741m £6,684mLoan to value10 45% 46% Total return2, 11 21.3% 34.6% Data includes share of Funds and Joint Ventures (Table A), unless otherwisestated. 'Group' excludes share of Funds and Joint Ventures. 1 restated - see Note 1 to the accounts 2 excludes refinancing charges of £305m (2006: £122m) 3 see Note 2 4 includes £1,274m revaluation gains, £82m gain on disposal of assets and £68m gain on appropriation of trading properties to investment properties at market value. A further £206m (2006: £194m) revaluation gain is included in the statement of recognised income and expense, see Note 5 5 including valuation gains and after impairment charges for goodwill of £111m (2006: £240m) 6 diluted for all potential share issues, Note 2 7 interim paid plus final declared 8 does not include the investment in Canary Wharf through Songbird Estates plc, Note 10 9 see Note 2 10 debt to property and investments 11 increase in EPRA NAV plus dividends paid, Note 2 PORTFOLIO HIGHLIGHTS Valuation by Sector Group Funds/ Total Portfolio Uplift2 JVs1 £m £m £m % % RetailRetail warehouses 2,503 1,566 4,069 24.1 10.3Superstores 1,678 622 2,300 13.6 9.5Shopping centres3 1,999 512 2,511 14.8 3.4Department Stores 797 148 945 5.6 5.1High street 348 - 348 2.1 4.6 All retail 7,325 2,848 10,173 60.2 7.6 OfficesCity4 4,126 - 4,126 24.5 13.1West End5,6 964 - 964 5.7 18.0Business parks & 172 3 175 1.0 5.6provincialDevelopment6 899 1 900 5.3 13.6 All offices 6,161 4 6,165 36.5 13.6 Industrial, 531 34 565 3.3 7.4distribution, leisure,otherTotal 14,017 2,886 16,903 100.0 9.7 1 Group's share of properties in Funds and Joint Ventures 2 increase in value for 12 months to 31 March 2007 - includes valuation movement in developments, purchases and sales, net of capital expenditure 3 Meadowhall Shopping Centre valuation up 3.5% to £1,640 million (up 5.8% pre cap-ex); ERV £83 million; net equivalent yield 4.63% (true equivalent yield 4.76%) 4 Broadgate valuation up 10.6% over 12 months to £3,569 million; headline ERV range £44-55 per sq ft (average headline ERV is £48.60 per sq ft); net initial yield 4.78% (assuming top up of rent free periods and guaranteed minimum uplifts to first review) 5 Regent's Place valuation up 12.3% over 12 months to £651 million; headline ERVrange £23.50-49.00 per sq ft; net initial yield 4.5% (assuming top up of rentfree periods and guaranteed minimum uplifts to first review) 6 West End now includes York House, previously shown under Development Portfolio yields Annualised Reversionary Current Reversionary(excluding net rents(1) income(2) yield(3) yield (2),(3)developments) £m £m % %All retail 427 61 4.2 4.8 All offices 216 47 4.1 5.1 Other 30 4 5.2 5.9 Total 673 112(4) 4.2(5) 4.9 1 net rental income under IFRS differs from annualised net rents which are cash based, due to accounting items such as spreading lease incentives and contracted future rental uplifts, as well as direct property costs 2 includes rent reviews and lease break/expiry and letting of vacant space at current ERV (as determined by external valuers) within 5 years, plus expiry of rent free periods 3 portfolio yield (gross to British Land, without notional purchasers' costs) 4 £59m contracted under expiry of rent free periods and fixed/minimum rental increases 5 current yield after adding back rent frees 4.5% Leases and occupancy Average lease Underlying1 Vacancy rate term, years to vacancy rate % %(excluding first break developments)All retail 16.3 1.2 2.5All Offices 10.9 2.2 4.8Total 14.7 1.6 3.3 1 the underlying vacancy rate excludes asset management initiatives and units under offer OPERATING AND FINANCIAL REVIEW Introduction This Operating and Financial Review ('OFR') sets out what British Land hasachieved in the year under review. It shows how our actions fit the strategieswe have laid out. It shows the business and financial results of those actions.We seek to highlight positioning for the future, risks in our business and howwe are managing them as well as giving Key Performance Indicators ('KPI') tojudge progress. Importantly we show also the way our business is shaped by and responding to theneeds of our customers and the wider needs of society in relation to the builtenvironment of which we represent an important part. Objectives & Strategy British Land's primary objective is to produce superior, sustained and securelong-term shareholder returns from management of our chosen real estateactivities and their financing. Our strategy aims to capture superior total return through the high occupancyand rental growth which results from successfully building our business aroundcustomer needs. We seek to do this in a number of ways. Property sales andpurchases adjust the market and sector mix of our property portfolio to bestcapture growth trends in customer demand. Within our selected markets we alsorecycle capital, buying and selling buildings to improve the appeal and growthprospects of our holdings. And we look to create more value from new developmentin areas where demand for the best new space is highest. Our occupancy andrental growth is further enhanced by active asset management to hone ourbuildings' customer appeal. The importance of the investment markets which interlink with our occupiermarkets also dictates that adroit financial management, partnerships anddeal-doing complement our property based strategies to capture and translateproperty returns most efficiently to our shareholders. In executing these strategies our "bedrock" disciplines are: •a focus on areas where we have or can build competitive advantage •clarity that our business success will come from serving customers well •a bias to high-quality assets, with long lease profiles and favourable demand and supply characteristics •strong integrated risk management skills - blending leasing, development, asset and liability risk into a single attractive and secure growth proposition for shareholders •a confident, entrepreneurial, performance-driven culture •particular regard for long-term income/cash flow growth •an appreciation of the importance of sustainability to our customers and other stakeholders in the built environment on which we operate. British Land's Activity in 2006/7 This was a year of real progress and achievement for British Land. We deliveredoutperformance for shareholders whilst strengthening the Company's prospects todeliver more in the future. As we noted last year, investment market led capitalgrowth is slowing. Our focus on adding-value in a more demanding environment isfounded on our customer-led strategy. This way we can capture high occupancylevels and rental growth to provide future outperformance for shareholders. The commentary in this Review highlights the actions we have taken to producefinancial outperformance in line with the strategy we describe above. Theseactions rest on the effectiveness of our people and as before, much work hasgone into building still further our human capital and a performance culturewith which to execute our business plans. Under "Portfolio Reshaping" we report on over £3 billion (gross) propertypurchases and sales. These reduced our holdings in market sectors where weforecast weaker customer demand and reinforced our market leadership positionswhere prospects are strong. It also shows how, even in favoured markets, we keepcapital working hard by investing in property best placed to capture demandtrends whilst reducing our holdings in more mature assets where we cannot domuch more to improve them. We highlight newer initiatives in Europe and indexed-lease property whichleverage our existing market skills into areas where customer demand can drivegrowth and we perceive pricing to be attractive. The "Development" section showcases one of our more distinctive added-valueareas. By creating new buildings at the forefront of modern service industryneeds, we use our property skills and financial strength to make attractiveincremental return. Our notable success in letting these buildings is the acidtest of their customer appeal. Under "Asset Management" we show the range of work we undertake to better tailorour existing buildings to areas of greatest customer demand. In turn thisresults in the above market rental growth. Our "Property Sectoral Outlook" and market commentaries explain in more detailthe implementation of strategy and its rationale. In the "Financial Performance" section and the "Partnerships" section, the wayswe have added value to supplement our property activity are described alongsidean explanation of the financial results of this activity and the KPIs that showits effectiveness. Our balance sheet and debt management continue to bedistinctive strengths, amplifying property returns. Equally fiscal managementand especially our REIT election were major value creators during the year. Andby working with others, inter alia through Joint Ventures and Unit Trusts, weearn valuable extra income, leverage our skills and capital and increasemanoeuvrability in the property markets. This year we also highlight more fully, in our Corporate Responsibility Report,our actions on sustainability including the commitment to lead our industry andbecome carbon neutral. We are a business of the built environment. Our carefuluse of scarce resources and our buildings' impact in improving our communitiesand facilitating growth remain integral to our business success. The CR Reportmay be viewed in full on our website www.britishland.com. Portfolio Reshaping We continually review the prospects and expected performance of each asset inour portfolio in the light of market conditions, deciding across the portfoliowhen to buy, hold or sell, as part of the ongoing process of improving riskadjusted returns. Our occupier led strategy informs these decisions,concentrating on markets, sectors and properties with positive supply/demandcharacteristics, and focusing on providing efficient and flexible accommodationin the right locations. Our principal themes are: - to amend and refine the sector and market mix of our portfolio to best capture trends in customer demand and rental growth; and - within our selected markets to recycle capital, buying and selling properties to improve the appeal and growth prospects of our holdings. We have further strengthened our positions in our favoured markets: - prime offices, especially in London, with new investment primarily via our development programme, to capture the increasing rental values driven by strong demand for accommodation from the financial and business services industries; - UK out of town retail, principally open A1 use parks and superstores, where consumer sales are growing fastest and retailers require increasing representation and new flexible trading formats. Together with the constrained supply characteristics of this sector, these factors are resulting in rising rental values; - European out of town retail where initial and prospective returns are favourable, responding to changing customer demographics and shopping trends which are expected to follow similar growth patterns to those seen in the UK; and - properties subject to long leases with fixed or indexed annual rental increases. The RPI indexed increases are both more certain and potentially higher than 'all property' rental growth estimates and therefore are likely to be increasingly valued investments in a market with slower capital growth and intense focus on rental improvements. Conversely, we have decreased our holdings where we see limited remainingopportunities to add value under our management and where we are less confidentof their growth prospects in comparison with the alternatives available to us. The sectors reduced this year are in town shopping centres and high streetunits, retail parks with bulky goods profiles, provincial offices and industrialunits. The strong investment market has provided good opportunities to achievehigh sale prices; proceeds which we have reinvested into areas where we cancreate greater value. Our portfolio choices have already added value as the sectors and assets pickedhave performed more strongly than those reduced. Sales Price BL Share Gain/ 12 months to 31 March 2007 £m £m (Loss) %(1) Retail: Queensmere & Observatory 200 200 (9.0) Shopping Centres, Slough Gallions Reach Shopping Park, 192 35 8.4 E6 2 29 in town retail units 146 146 9.0 Weston Favell Shopping 122 61 22.0 Centre, Northampton3 9 Retail Warehouse Parks 112 75 9.2 Marsh Mills Retail Park, 57 28 12.6 Plymouth4 4 Homebase stores 56 56 22.2 New Cross Gate, SE1 4, 48 48 20.5 Sainsbury's and retail units5 Purley Way, Croydon, Units 44 44 12.5 1-3 2 B&Q warehouses: 41 41 (1.1) Stockton-on-Tees and Dagenham Sainsbury's, Hanley 21 21 (5.0) 1,039 755 5.2 Offices: Plumtree Court, EC4 6 120 43 18.8 133 Houndsditch, EC3 110 110 41.2 51 Eastcheap, EC3 55 55 7.1 2-12 & 20-21 Cornwall 50 50 59.8 Terrace, NW1 5 Provincial Offices 39 39 8.3 374 297 27.7 Others: 60 50 82.3 1,473 1,102 12.7 1 sale price versus last year end valuation (March 2006) 2 Hercules Unit Trust (HUT) 3 The Tesco British Land Property Partnership 4 BLT Properties Ltd 5 completed April 2007 6 City of London Office Unit Trust (CLOUT) We also continue to adjust holdings within our favoured markets. This isbecause, even where our sector view is positive, there may be assets which fortheir own specific reasons have less we can do to improve them further orrepresent outsize commitments overall. Disposals of retail parks, for example,included the sale by HUT (and others) of Gallions Reach Shopping Park, Becktonfor £192 million. The 'Phase 2' site adjoining Gallions Reach owned by BritishLand was also sold for £15 million, against a book value of less than£1 million. Our decision to sell the in town Slough shopping centres (at a lossversus March 2006 valuation) also reflects our disciplined focus on futuretrading prospects. The City offices sold were less prime, mature investments andwe had the opportunity to take profits and recycle the proceeds more effectivelyin our developments. After the year end, in April 2007 we began marketing for sale the landmarkbuilding at One Exchange Square, in the heart of Broadgate, currently theheadquarters of the European Bank for Reconstruction and Development. Contractshave recently been exchanged for the sale to KanAm Grund for £406.3 million,with completion due in June. We also launched in April 2007 proposals to introduce investment partners forour 1.5 million sq ft regional shopping centre, Meadowhall, Sheffield. Investorswill have the opportunity to acquire a stake in Meadowhall. Since this is anexceptional asset, British Land expects to remain the largest individualinvestor and will act as Fund and Property Asset Manager, enhancing the returnsfrom our in-house skills. Further details of Meadowhall are shown later in thisreport. In May 2007 our joint venture, the Scottish Retail Property Limited Partnership,exchanged contracts for the sale of the East Kilbride Shopping Centre. Purchases Price BL Share Value 12 months to 31 March 2007 £m £m uplift % 1 Retail: UK - 50% share of 21 Tesco 325 325 - superstores portfolio 2 50% share of BL Davidson 269 269 9.7 portfolio 9 B&Q warehouses3 230 221 6.8 Centre Retail Park, Oldham 115 115 - Hatters Way Retail Park, 39 14 - Luton4 Giltbrook Retail Park, 35 35 - Nottingham5 2 further retail parks: 24 16 8.9 Dartford6 and Hyde Worcester Road, Evesham7 20 5 0.1 8 Somerfield Supermarkets 20 20 4.1 Europe - Nueva Condomina, Murcia, 237 118 - Spain8 9 retail parks in Europe9 200 63 - 50% share of Puerto Venecia, 69 69 - Zaragoza10 1,583 1,270 3.4 Offices: 50% share of BL Davidson 96 96 26.2 portfolio 9 Cable & Wireless offices/ 88 88 - network sites11 Osnaburgh Street Estate, 55 55 - NW1 12 Colmore Row, Birmingham12 25 25 2.0 264 264 9.7 Others: Leisure, hotel & office 47 36 - ancillary investments 14 TGI Friday restaurants 11 44 44 8.0 91 80 4.4 1,938 1,614 4.5 1 from purchase price to March 2007 valuation (or earlier sale price) 2 £650 million portfolio acquisition in new Limited Partnership, March 2007 3 includes 7 acquired in portfolio, 1 in Hercules Income Fund (HIF) 4 HUT (completed May 2007) 5 existing park and new development project 6 Dartford acquired by HUT 7 HIF - forward purchase of retail development 8 joint venture BL/PREF (Pillar Retail Europark Fund), exchanged contracts with completion due summer 2007 9 PREF - 3 parks in Portugal, 2 in Spain, 2 in Switzerland, 1 in Belgium and Italy 10 purchase of 50% interest from and joint venture development agreement with Copcisa Corp (a Spanish construction company) and private investors 11 completed April 2007 12 for development The retail parks acquired are part open A1 schemes in prominent positions whichattract strong customer demand. With scope for our proactive asset management totailor the accommodation and amenities to further increase the appeal of parksfor both tenants and shoppers, we expect to achieve increasing rents. The new Limited Partnership with Tesco PLC (our fourth joint venture with them)incorporates 21 high quality Superstores across the UK, on leases subject toannual RPI indexed increases. Tesco is a strong superstore operator, attractingincreasing numbers of customers and spending, and these investments are inlimited supply due to land and planning restrictions. We expect the propertieswill rise in value, reflecting these attributes, while the lease structureguarantees increasing rental income. The occupational leases to Tesco alsoprovide tenant operational flexibility, reflecting both Tesco's strategy and ourcustomer focused approach. The purchases of the B&Q stores (each of c 100,000 sq ft), the TGI Friday'srestaurants and the Somerfields stores, all in good trading locations, togetherwith the Cable and Wireless offices, also involve long leases with fixed orindexed annual rental increases, subject to a cap. Our holdings of properties subject to this type of lease, with a certain levelof cash flow and security of return, now amount to some £1.6 billion. The marketis not presently attributing full value to these types of leases - they provideattractive initial yields with guaranteed increasing cash flow growth, pluswhere market rental growth for the property exceeds RPI, the further increase isrecognised in valuations and captured at the open market review or at leaseexpiry. The acquisition of the outstanding 50% of the BL Davidson joint venture broughtinto our portfolio properties including further retail parks and London offices.We are making selective profitable disposals of the smaller assets. Post year end, in April 2007, HUT formed a new £680 million joint venturelimited partnership with The Crown Estate incorporating three major retailinvestments: HUT's £480 million Fort Kinnaird Shopping Park in Edinburgh(550,000 sq ft) and The Crown Estate's Gallagher Retail Park, Cheltenham(246,000 sq ft) and The Shires Retail Park, Leamington Spa (140,000 sq ft),together £200 million. British Land will act as property adviser to the newlimited partnership. HUT unitholders will benefit from diversification ofinvestment, gaining exposure to two new high quality retail parks (not availableon the market) which, together with Fort Kinnaird, offer further assetmanagement opportunities under joint ownership. It also enables HUT to realisecash for reinvestment and degearing. Investment in European retail In an important strategic step, we extended our investment in Europe, becomingmarket leaders in its growing out of town retail park market. This profitablyleverages the management infrastructure and expertise we have built in the UKand our European representation. There is an under provision of modern out oftown retail parks in many of the major countries in Europe, resulting inattractive supply/demand characteristics. The Eurozone retail market currentlyhas lower rents and higher initial yields than in the UK, with similar customerpreference trends which indicate that the market will develop and grow. 'Out oftown' retail offers customers great value compared with the high street, withrents on average only 10/15% of those in town - and some 50% of a fashion parkin the UK. These assets have strong prospects for growth and are attractingincreasing international investor interest. In May 2006 we completed the purchase of a 50% joint venture interest in thePuerto Venecia retail and leisure development project of 200,000 sq m(2.2 million sq ft) in Zaragoza, Spain. British Land also has an effective 40%interest in PREF, which now owns 12 income producing retail parks in Spain,Italy, Portugal, Belgium, France and Switzerland, and has contractedconditionally to acquire a further six schemes currently under development. Thecombined area of these PREF schemes and developments when completed will total340,000 sq m (3.6 million sq ft) with an estimated market value of over €745million (£510 million). In March 2007, British Land and PREF formed a joint agreement to acquire a newprime regional shopping centre and retail park known as Nueva Condomina inMurcia, Spain for c €350 million (£237 million) with completion expected in thesummer. The 120,000 sq m (1.3 million sq ft) scheme includes a two storeyenclosed shopping centre, which opened in September last year, with a multiplexcinema and a hypermarket, and a retail park due for completion shortly. Thescheme is overall 96% let to major international and Spanish retail brands. In the office sector, the acquisition of the remaining freehold interest inOsnaburgh Street, NW1, from the Crown Estate has enabled us to beginconstruction of the next phase of development of the Regent's Place estate, asset out below. The freehold of the former Natwest building in Colmore Row, Birmingham, is aprominent and prime office site in the centre of the city for prospectiveredevelopment. We are designing some 250,000 sq ft of new high quality offices,to provide an attractive addition to the Birmingham office market. Development The objectives of our development activities are to: - add high quality assets to the portfolio in areas of strong customer demand - provide new buildings to meet modern business requirements in both the retail and office sectors - create investments with potential for growth - realise attractive capital returns. Important elements of development projects include the transport and otherinfrastructure attributes of the location, quality of specification,configuration and flexibility of accommodation, and timing of delivery intomarket demand. Emphasis is also placed on working with talented architects tocreate well designed and sustainable buildings that enhance their location.Construction is rigorously managed to achieve efficient completion with highhealth and safety standards. Our London Office development programme represents an ideal way for us to meetcustomer needs in this sector, producing high quality buildings of architecturalmerit in the right locations, offering flexible, efficient floor plates and anattractive working environment. In turn, the programme is an effective way toincrease our holdings in this sector, generating higher returns than thoseavailable in the current investment market. ------------- ------ --------------- ----- ----------- ------- -------Completed Sq ft Rent £m pa Site Construction Value Projectprojects 000 --------------- cost cost + March Uplift(since 31 March Total(1) Let/ £m interest 2007 %2006) pre-let £m £m ------------- ------ ------ ------ ------ --------- ------- -------York House 137 7.4 6.1 23 60 127 53Blythe Valley 35 0.7 0.7 1 7 11 38(G2)Willis Building 491 21.4 21.1 48 230 360 29------------- ------ ------ ------ ------ --------- ------- 663 29.5 27.9 72 297 498Coleman Street 180 - - 9 30 44 13(CLOUT -forward sold)============= ====== ====== ===== ===== ======== ======= ====== (1) current headline rent (excludes provision for tenants' incentives) Data for Group and its share of Funds and Joint Ventures (except areas which areshown at 100%) Four projects totalling 843,000 sq ft have completed since 31 March 2006, onschedule and generating significant profits. The Willis Building at 51 LimeStreet, EC3, designed by Foster and Partners, with all the offices pre-let toleading insurance broker Willis Group, is now in the fit out phase. The new 29storey tower and adjoining 10 storey building occupy a prime site oppositeLloyd's of London, and are a striking new addition to the City skyline. York House, W1, is complete and we now occupy c 40,000 sq ft as our new headoffice. In May 2007 we contracted to let 33,700 sq ft, the majority of theremainder of the office space, to Government of Singapore Investment Corporationat £67.50 sq ft. Three of the four retail units also have terms agreed forletting. The 22 residential apartments in York House have all been let, orreserved for letting, on assured shorthold tenancies. Aside from itsprofitability, York House is a prime example of the merits of modern flexibleoffice space with strong design, redefining the attractions of its location andcapturing customer demand in so doing. ------------------------------------------------------------------------ Cost £m2Committed --------------developments PC(1)Sq ft Total To Value Notional Rent Sales complete March Interest pa £m5 07 £m £m3 £m4 ----------- ------- ------ ----- ------ ------ ------- ----- -----LondonOffices:201 Q3 2008 822 302 174 369 17 42.1 -Bishopsgate/BroadgateTowerThe Q1 2011 612 396 368 114 46 36.9 -LeadenhallBuildingRopemaker Q2 2009 593 229 211 175 29 31.5 -Osnaburgh Q3 2009 490 228 214 77 19 19.4 51Street6Basinghall Q2 2007 199 40 8 32 - - 43Street7Ludgate West Q4 2007 127 49 20 71 2 6.2 ------------ ------- ------ ----- ------ ------ ------- ----- -----Total Offices 2,843 1,244 995 838 113 136.1 94Retail ParksPuerto Q4 2007/ 2,159 106 88 77 8 9.3 21Venecia, Q4 2009Zaragoza8 Giltbrook, Q2 2008 199 46 44 10 3 3.9 2Nottingham ----------- ------- ------ ----- ------ ------ ------- ----- -----Total 5,201 1,396 1,127 925 124 149.3 117=========== ======= ====== ===== ====== ====== ======= ===== ===== 1 estimated practical completion of construction 2 estimated construction cost 3 from 1 April 2007 to PC 4 current estimated headline rent (excludes provision for tenants' incentives) 5 parts of development expected to be sold, no rent allocated - see also footnotes 6 and 7 below 6 Regent's Place, development includes 110,000 sq ft residential, expected to be sold 7 CLOUT - BL share 35.9% - forward sold 8 joint venture (Eurofund Investments Zaragoza) - BL share 50% Data for Group and its share of Funds and Joint Ventures (except areas shown at100%) London offices developments, customer focused and carefully timed 201 Bishopsgate and The Broadgate Tower are well underway and on programme forcompletion in 2008. The steel frame for the tower has reached its full height atlevel 35, establishing its position, with the adjoining 13 storey building, asthe next phase of Broadgate. This project is the largest speculative officedevelopment undertaken in the City of London and has already attractedconsiderable tenant interest. Contracts have been exchanged with Henderson Groupplc for a pre-letting of 124,000 sq ft at 201 Bishopsgate. Henderson willrelocate from 4 Broadgate which we plan to redevelop; the first element ofunlocking the future development potential at Broadgate under our '2020' masterplanning exercise. In addition at 201 Bishopsgate head of terms have been agreedfor a pre-let of 223,000 sq ft with Mayer, Brown, Rowe & Maw LLP, one of thelargest international law practices. Taking into account the additionalaccommodation over which Henderson and Mayer Brown have options, all the officesat 201 Bishopsgate are fully reserved. We have also agreed heads of terms for a pre-let of 155,000 sq ft at TheBroadgate Tower. Construction of Ludgate West is also progressing as scheduled, towards estimatedcompletion in late 2007. We have recently announced heads of terms agreement topre-let about 69% of the offices to Charles Russell LLP, a leading firm oflawyers. London offices Total Lettings:developments pre-let, heads of terms, under offer, or forward soldCompleted developments 754,000 sq ft 98%Under development with PC 1,148,000 sq ft 69%2007/8 Our development of the Regent's Place estate has redefined this area of London'sWest End, creating a new working environment with modern office floorplates,together with retail and public spaces - meeting occupier demand withaccommodation not otherwise available in the crowded West End, and generatingrental growth. We have already developed 1 million sq ft and at Osnaburgh Streetand the North East Quarter will provide another 1 million sq ft. OsnaburghStreet is a 2.5 acre site on the west side of Regent's Place where demolition ofthe existing buildings has begun in preparation for a mixed use scheme of380,000 sq ft offices and 110,000 sq ft of residential accommodation forcompletion in the second half of 2009. The North East Quarter will be the nextphase; a detailed planning application has been submitted to provide a further384,000 sq ft of offices and 124,000 sq ft of residential units. Ropemaker, a prominent 1.2 acre City site close to Moorgate, was purchased inMarch 2006 with planning consent in place for an office development of 505,000sq ft. During the year we changed the design and have obtained a revised andincreased planning consent for a building of 593,000 sq ft, which will maximisethe efficiency, floor areas and tenant appeal of the project we are takingforward. Construction is well underway. At Leadenhall, following achievement of revised planning, demolition of theexisting building is also underway to prepare for construction of a new strikingCity office tower which we consider destined to be recognised as London's finestsuch tower. The Building Research Establishment Environmental Assessment Method (BREEAM) wasestablished to evaluate a broad range of the environmental impacts of variousnew building types. All our London offices developments have target orprovisional BREEAM ratings for the buildings of Very Good or Excellent (at thetop of the scale). As examples of these environmental factors, the appeal of TheBroadgate Tower and 201 Bishopsgate is enhanced by their energy efficiency (theyare expected to produce a 29% lower level of emissions than is stipulated bycurrent building regulations) and the design of Ropemaker also incorporateshighly efficient plant to reduce energy use and carbon emissions. 2.4 million sq ft retail development - projects in UK and Spain Giltbrook Retail Park, Nottingham was purchased in mid-2006. We redesigned theproject, achieved a revised planning consent and are proceeding with a 199,000sq ft mixed used scheme of retail and industrial space, with improvedenvironmental attributes. The development of the park is expected to complete in2008, anchored by an adjacent existing IKEA store. Approximately 50% of the newarea is under offer, attracting premium rents and confirming our expectationsthat Giltbrook will become an important regional retail destination. The joint venture development project, Puerto Venecia, Zaragoza, Spain, willprovide a retail park, a shopping centre and a specialist retail and leisurepark, with ancillary facilities. Zaragoza is Spain's fifth largest city,approximately 300 kilometres from each of Madrid, Barcelona and Valencia. Thisimportant project will provide a new regional centre for the city, which willhost the International EXPO in 2008. Infrastructure works for Puerto Venecia are making good progress - including theaccess required to enable the opening of the IKEA store in May 2007. IKEA willanchor the retail park and we have exchanged contracts with El Corte Ingles,Spain's largest department store operator, to anchor the shopping centre with anowner occupied store of distinctive design, providing over 400,000 sq ft. Othertenants for the retail park include Leroy Merlin, Conforama and Porcelanosa.Over 70% of the retail park has been pre-let, pre-sold or is under offer, withunits planned to begin opening from the end of this year. We are in the processof further design enhancement for the retail and leisure centre, with goodinterest from major retailers. Development prospects Sq ft Cost Value, Notional Rent Sales Planning 000 £m1 March Interest2 £m £m 2007 £m pa3----------- --------- ------ ----- ----- --------- ------ ----- ------- Regent's NE Quarter 508 222 38 13 18 64 SubmittedPlace Colmore Row Provincial 249 70 26 9 8 - Pending Office Blythe ValleyParkPhase 1 Business 697 116 16 4 14 - Outline/ Park - Detailed Blythe Valley ParkPhase 2 Business 680 114 - 3 14 - Outline Park New Century Business 582 76 21 3 8 12 DetailedPark4 Park/ Distribution Meadowhall Mixed use 1,270 293 24 6 22 38 Pendingadditionalland Theale Residential 204 31 15 2 4 - Submitted Preston Deepdale 67 14 3 - 1 - Detailed Retail Park ----------- --------- ------ ----- ----- --------- ------ ----- -------4 Broadgate City Office ) PendingEuston West End ) master planning in PendingStation5 Retail, progress office, ) residential Canada Water6 Mixed use ) Outline=========== ========= ====== ===== ===== ========= ===== ==== ======= 1 estimated construction cost to complete 2 during construction to PC 3 current estimated headline rent (excluding cost of tenant incentives) 4 post year end to be sold to BL Rosemound JV 5 in partnership with Network Rail 6 joint venture with Canada Quays Limited Network Rail recently chose British Land as the preferred partner for a majormixed use redevelopment of Euston Station. We will work with Network Rail toprepare a masterplan for the creation of a landmark station interchange. The 15acre site will accommodate up to 4 million sq ft of mixed use developmentincluding retail, office, residential and the new station, realising itscommercial potential and assisting with the on-going regeneration of the area.Following settlement of legal agreements a planning application is expected tobe submitted in early 2009. We are also working with Sheffield City Council for the master-planning of theland we own adjacent to Meadowhall Shopping Centre. The proposals, includingoffices, residential and car showroom facilities have attracted strong interestfrom potential commercial occupiers and will provide a further boost to theeconomic activity and amenity of the area. 'Broadgate 2020' is a master planning exercise for Broadgate - presently arelatively low rise and low density estate. We are exploring the possibilitiesof higher rise development in certain areas and adding extra floors to someexisting buildings. In particular, 4 Broadgate has been identified as aredevelopment prospect for a new tower scheme with substantially increased floorareas. We aim to submit a planning application in due course. Other elementsinclude working with Crossrail which has proposed an adjacent station with a newBroadgate ticket hall, giving opportunities for improved transport links andadditional amenities. Asset Management Our aim to add value to the portfolio and our attention to customer needs andservice across the business are reflected in the range of asset management anddevelopment activity. Good results have been generated from new and renewedlettings, rent reviews, lease restructurings, planning improvements and schemerefurbishments. Our market leadership in Retail and in Central London officesoffers tenants an unrivalled choice - and this scale benefits both parties. New lettings and lease Number Sq ft Rent, £m parenewals 000s ------------------(including Funds and Joint New BLVentures) total share of increase------------------ -------- --------- ------- --------Retail Warehouses 75 554 13.3 8.0Shopping Centres 135 485 16.9 6.9High Street 16 87 1.3 0.1Central London Offices 22 197 8.1 4.4Other 129 543 5.4 2.5------------------ -------- --------- ------- --------Total 377 1,866 45.0 21.9------------------ -------- --------- ------- -------- Retail parks During the year we have achieved more lettings at our out of town locations toretailers who are either moving from in town or introducing new formats for outof town trading. We are able to deliver both revised unit sizes and new formatsat these properties, responding flexibly and meeting retailers' changingrequirements. Our completed development at Nugent Shopping Park, Orpington is now fully let orunder offer; major retailers represented there include Game, HMV, Vision Expressand WH Smith Stationery. The latter two are first lettings to these companies inout of town retail park formats. HUT has secured the first out of town lettingsto Stylo Barratt's new concept store, Shutopia, at Parkgate, Rotherham andBorehamwood Shopping Park. HSBC also took their first out of town unit atBorehamwood. Marks and Spencer is one of the retailers active in developing new out of townformats, and extending their 'Simply Food' outlets. Across our portfolio thisyear we have concluded seven new lettings to M&S over a total floor area of250,000 sq ft at locations including Stockton, Edinburgh, Preston and Hayle -and there are more in negotiation. In several cases we have been able to reviseplanning and design, and improve configurations, to meet the customer'sindividual requirements. Meadowhall Shopping Centre Letting activity has included 29 new lettings and renewals covering over 220,000sq ft. These include the reconfiguration of the area previously occupied bySainsbury's where Primark and Next have taken units of 73,000 sq ft and 66,000sq ft in the new space, recently delivered to these tenants for their fit out.The major refurbishment programme is well advanced and expected to complete onschedule in October 2007. These works have included the balcony bulkheads beingcut back to improve the visibility of the shops when viewed between ground andfirst floor levels. The Arcade columns have been reduced in diameter, lightingand signage have been enhanced, and escalators and lifts are being renewed. Allthese improvements are designed not only to maintain Meadowhall as a pre-eminentregional shopping centre but also to provide customers with ease of movementaround the centre and a more comfortable shopping environment. Superstores In this sector of the portfolio we see operators continuing to prefer longleases to secure their trading positions. During the year we completed asurrender and renewal of the lease to Sainsbury's at a store in Surbiton whichwas due to expire in 2014. The new lease has a term of 30 years from March 2007(an effective extension of 23 years) at an increased rent. Our joint ventures with Tesco have agreed and funded extensions to provide atotal of 72,000 sq ft of new space at four stores - another way to add to ourholdings in this selected sub-sector where there is restricted supply. Theextensions include one complete redevelopment (increasing the store size by over50,000 sq ft) to provide a new Tesco Extra store with ancillary units. Furtherextensions of a total 50,000 sq ft have been agreed and are being implementedover the course of this year. London offices New lettings at Plantation Place South, EC3 in the year of a total of 73,000 sqft have been achieved, including 28,000 sq ft to AIG Global and 19,000 sq ft toArch Insurance. Plantation Place South is now 76% let. We have also let (afterthe year end) the last remaining floor of 14,500 sq ft at 10 Exchange Square,Broadgate, to Herbert Smith at £55 per sq ft - a new rental high for the estate. A number of value enhancing initiatives have been taken at our London officesover the year. Reflecting our confidence in the market, we negotiated thetake-back of the lease to Baring Investment Services in respect of 38,000 sq ftat 155 Bishopsgate. We have refurbished this area, as part of our ongoingprogramme, and it is now available for open market letting. UBS, an existingtenant at Broadgate, had a requirement for further office accommodation. To meettheir needs we were able to agree with two other tenants the surrenders ofleases at 6 Broadgate and re-let 66,000 sq ft to UBS. This established a revisedopen market rental value for unrefurbished space, and another indication of theimprovement in City occupational market conditions. A planning application has been submitted and preparatory works are in hand at338 Euston Road, Regent's Place in respect of a major refurbishment andextension of the ground floor and common parts, together with at least 20,000 sqft on three floors; this project is intended to create a new standard andprofile, and to establish new market rental evidence on relettings. -----------------------------------------------------------------------Rent reviews Number Rent, £m pa(including Funds and Joint -----------------------Ventures) New Increase BL share total of increase------------------ -------- -------- -------- --------Retail Warehouses 57 20.4 5.1 3.6Superstores 27 31.0 2.6 2.1Shopping Centres 115 28.8 2.4 1.8High Street 15 3.4 0.4 0.4Central London Offices 20 39.3 0.1 0.1Other 23 5.1 0.2 0.2------------------ -------- -------- -------- --------Total 257 128.0 10.8 8.2------------------ -------- -------- -------- -------- Good progress has been made with rent reviews across the portfolio, concluding257 reviews over the year at overall 5.5% above the external valuer's applicableERV, and generating an increase in current rental income to British Land of over£8 million per annum. Customer focus In our 2005 Annual Report we recorded major changes in our approach to customerservice. There have been encouraging results from this activity. To assess ourprogress, in early 2007 we undertook independent Customer Surveys to understandour occupiers' perception of our management effectiveness: €73% rated British Land as excellent or good in fulfilling its role as a landlord €84% said they would recommend British Land. Portfolio Valuation The table below shows the principal valuation movements for the year to 31 March2007, by sector across our £16.9 billion portfolio. All sectors improved invalue, contributing to the 9.7% uplift for the 12 months. The capital return from the portfolio at 10.9%, as measured by IPD (calculated,excluding Europe, on average capital employed and excluding capitalisedinterest) was slightly ahead of the IPD Benchmark at 10.7%. Contributing to this performance was like for like growth in rental value (ERV)for the portfolio, ahead of the market at 6.9% (IPD Benchmark 4.3%), generatedfrom both Central London offices and out of town retail. The net equivalentyield (after notional purchaser's costs) on the portfolio also tightened by 23bps to 4.7% over the year. The main sector drivers of the valuation increase were: •London offices, including developments, at 35.1% of the portfolio rose by 14%, including 12.8% ERV growth on the investments, reflecting the improving occupational market and sustained investment demand, •retail warehouse parks at 24.1% of the portfolio were up by 10.3% led by rental growth and sustained demand for open A1 parks in particular, •superstores, which represent 13.6% of the portfolio, increased in value by 9.5%, based on ERV growth and a measure of further yield compression under strong investor demand. Valuation by Sector Group Funds/ Total Portfolio Uplift2 JVs1 £m £m £m % % ---------------- -------- -------- ------- ------- ------- RetailRetail warehouses 2,503 1,566 4,069 24.1 10.3Superstores 1,678 622 2,300 13.6 9.5Shopping centres3 1,999 512 2,511 14.8 3.4Department Stores 797 148 945 5.6 5.1High street 348 - 348 2.1 4.6---------------- -------- -------- ------- ------- -------All retail 7,325 2,848 10,173 60.2 7.6 OfficesCity4 4,126 - 4,126 24.5 13.1West End5,6 964 - 964 5.7 18.0Business parks & 172 3 175 1.0 5.6provincialDevelopment6 899 1 900 5.3 13.6---------------- -------- -------- ------- ------- -------All offices 6,161 4 6,165 36.5 13.6 Industrial, 531 34 565 3.3 7.4distribution, leisure, other---------------- -------- -------- ------- ------- -------Total 14,017 2,886 16,903 100.0 9.7---------------- -------- -------- ------- ------- ------- 1 Group's share of properties in Funds and Joint Ventures 2 increase in value for 12 months to 31 March 2007 - includes valuation movement in developments, purchases and sales, net of capital expenditure 3 Meadowhall Shopping Centre valuation up 3.5% to £1,640 million (up 5.8% pre cap-ex); ERV £83 million; net equivalent yield 4.63% (true equivalent yield 4.76%) 4 Broadgate valuation up 10.6% over 12 months to £3,569 million; headline ERV range £44-55 per sq ft (average headline ERV is £48.60 per sq ft); net initial yield 4.78% (assuming top up of rent free periods and guaranteed minimum uplifts to first review) 5 Regent's Place valuation up 12.3% over 12 months to £651 million; headline ERV range £23.50-49.00 per sq ft; net initial yield 4.5% (assuming top up of rent free periods and guaranteed minimum uplifts to first review) 6 West End now includes York House, previously shown under Development British Land also owns 17.8% of Songbird Estates PLC, which in turn owns 60.8%of Canary Wharf Group PLC, providing a "look through" 10.8% economic interest inthe London Docklands estate, comprising 7.9 million sq ft of high qualityinvestment properties valued at over £6 billion. Canary Wharf is aninternationally recognised premier office estate, having established newstandards of construction, and has done much to facilitate London's financialservices sector growth. British Land invested £97 million in Songbird in June 2004. Cash dividendstotalling £67 million have been received since that date. The investment wasindependently valued for accounting purposes at 31 March 2007 at £255 million,equivalent to 227 pence per share. The market value of the AIM listed B sharesat 31 March 2007 was 323 pence per share. Portfolio yields Annualised Reversionary Current Reversionary(excluding net rents1 income2 yield3 yield2,3developments) £m £m % %---------------- --------- ---------- ------- ---------- Retail Retail Warehouses 153 30 3.8 4.6 Superstores 102 6 4.4 4.7 Shopping Centres 114 17 4.6 5.2 Department Stores 42 6 4.5 5.1 High Street 16 2 4.6 5.1 ---------------- --------- ---------- ------- ---------- All retail 427 61 4.2 4.8 OfficesCity 173 32 4.2 5.0West End 35 12 3.9 5.2Business Parks & 8 3 4.5 6.1Provincial---------------- --------- ---------- ------- ----------All offices 216 47 4.1 5.1 Industrial, 30 4 5.2 5.9distribution, leisure,other ---------------- --------- ---------- ------- ---------- Total 673 112(4) 4.2(5) 4.9---------------- --------- ---------- ------- ---------- 1 net rental income under IFRS differs from annualised net rents which are cash based, due to accounting items such as spreading lease incentives and contracted future rental uplifts, as well as direct property costs 2 includes rent reviews and lease break/expiry and letting of vacant space at current ERV (as determined by external valuers) within five years, plus expiry of rent free periods 3 portfolio yield (gross to British Land, without notional purchasers' costs) 4 £59m contracted under expiry of rent free periods and fixed/minimum rental increases 5 current yield after adding back rent frees 4.5% Strong growth in cash rents is targeted within the next five years from theexisting portfolio and from the committed development programme. At currentmarket rental values, without projecting any growth or inflation, achievement ofthe reversionary income and letting of committed developments would add £261million to our annual passing rents (while interest costs on the funding for thedevelopment costs would also increase). Contracted increases of £59 million perannum are due from expiry of rent free periods and fixed/minimum rental uplifts.(It should be noted that accounting policies under IFRS require that portions ofthese contracted rents are anticipated in the Group's income statement). Leases and occupancy Average lease Underlying1 Vacancy rate(excluding term, years to vacancy rate % % developments) first break ----------------- ------------ ----------- ----------RetailRetail Warehouses 13.4 0.8 2.2Superstores 20.4 - -Shopping Centres 12.8 2.8 5.3Department Stores 29.8 - -High Street 10.0 0.5 1.7----------------- ------------ ----------- ----------All retail 16.3 1.2 2.5OfficesCity 11.0 1.7 2.9West End 10.1 2.4 11.4Business Parks & 12.2 11.2 11.5Provincial ----------------- ------------ ----------- ----------All Offices 10.9 2.2 4.8Industrial, 22.2 4.1 4.1distribution, leisure, other----------------- ------------ ----------- ----------Total 14.7 1.6 3.3----------------- ------------ ----------- ---------- 1 the underlying vacancy rate excludes asset management initiatives and unitsunder offer Our portfolio income is low risk, from leases with an overall weighted averageterm of 14.7 years to first break. Occupancy is very high across all thesectors, with only 1.6% of the total accommodation being available for letting.Vacancies in West End offices at the year end are primarily due to completion ofYork House (where the majority of the space is now let or under offer) and ourasset management project at Regent's Place where we have taken backaccommodation for refurbishment and extension. Property Sectoral Outlook The UK property investment market continued to be strong during the year as therepricing of the asset class in relation to other financial assets wascompleted. Real estate's growing cash flows and strong downside protectionposition it between bonds and equities in the hierarchy of total returnprospects, while value can be added by active management, development andgearing to produce enhanced equity returns. As the rate of yield shift subsides future performance is likely to be moredependent upon rental value growth. Rents remain affordable in most sectors andthe economy's prospects should support continued growth in the serviceindustries, with rising employment and consumer spending. However, all occupiersface their own competitive pressures and will be discriminating as to whichspace is most appropriate for them. Investor demand has been good and continues to be so, albeit increasinglyselective. Transaction levels have been high, with maintained liquidity anddemand from both UK and overseas investors. The British Land portfolio has leading positions in the two main sectors withthe best prospects for rental growth - out of town retail and London offices. Retail Sector £€10.3 billion invested, including completed value of committed developments •total property under management £14.5 billion €80% out of town Investment Market Demand for prime retail, in the right locations and providing well configuredtrading floorspace, continues to be healthy and market prices are robust.Superstores and Open A1 retail parks are experiencing particularly strong demandwith limited supply. The majority of available supply is of secondary assets andthere are initial signs of differentiation in yield levels between these andprime. We consider this differentiation should widen to reflect correctly theirrelative growth prospects. Occupier Market While retail trading remains competitive and retailers' experience in thecurrent market varies, with some affected by the impact of e-commerce, consumerspending is continuing to grow, albeit at a lower rate. Total retail sales areforecast to grow over the next five years, with out of town shopping locationsmaintaining the trend of taking an increasing share. Driven by factors includingconvenience and enhanced choice, out of town is expected to see sales growth of18.5% to 2011 compared to in town at 5.8% (Verdict). Retailers find the size and layout of out of town space advantageous, while theoverall costs of occupation and servicing such locations are typically lower.Migration or expansion by tenants from the high street to out of town iscontinuing with several utilising new store formats. The UK food retail sectoris also strong with operators stepping up expansion to provide increasingnon-food sales capacity. All retailers require ongoing flexibility of unit useand configuration, with favourable car parking ratios. Accordingly, there isstrong demand for the types of out of town retail parks and superstores in whichwe are invested, against an increasingly constrained supply. Conversely, themarket development pipeline is expected to increase availability of in townshopping centre space over the next five years. These features are producinghigher than average rental growth for out of town retail. Strategy and positioning British Land has a distinctive retail portfolio, being the largest investor inUK out of town retail warehouses and superstores. In retail warehouse parks wefavour open A1 planning consents where supply is extremely restricted andcustomer demand remains high. Our occupier led strategy, understanding thecustomer and providing the preferred trading space, is focused on these assets -their popularity with both tenants and shoppers bring continuing prospects ofsuperior returns. We also hold selected in town assets where we seeopportunities for adding value. We pursue acquisitions and disposals which further strengthen the portfolio.Assets are subject to regular review as we recycle capital into those retailassets which offer best prospects for rental growth. Sales in the year amountedto over £1 billion (our share £755 million) including: retail warehouses eitherprimarily occupied by "bulky goods" tenants where demand for space is lower, oropen A1 schemes which are highly rented following our asset management and whereadvantageous market prices have been obtained; shopping centres which aresimilarly 'mature' or where our expectations of future growth is more limited;and in town retail where we consider trading is likely to be weaker goingforward. We have purchased new retail parks within our preferred sub-sectors,for example parks in the BL Davidson portfolio and at Oldham, where CentreRetail Park is dominant in its catchment and offers good asset managementopportunities for us to generate increased value. Out of town - £8.0 billion invested - £8.2 billion including completed value of committed developments • 208 retail schemes, including superstores • providing 22 million sq ft • arranged in 1680 retail units • let to over 590 tenants • average lease length to first break of 15.6 years Key features in the out of town portfolio are: • open A1 use, applying to 74% of our retail park schemes (plus a further 11% 'open restricted'), which can attract high street retailers • larger schemes, usually over 100,000 sq ft, capable of dominating their catchment area • flexibility of unit size and configuration, to ensure that we can offer retailers their preferred floorplate at both shopping parks (where trend is towards smaller units for efficient trading) and superstores • schemes we can manage overall to improve the tenant mix and to provide better facilities (from cafes to cash points) in an environment which will increase shoppers' dwell time and improve sales densities for our retailers, while keeping occupational costs at a reasonable level in each case to benefit the retailers trading and our opportunities to generaterental growth. We calculate that we are the largest owner of UK superstores, other than theoccupiers themselves. The superstore operators are gaining an increasing shareof consumer expenditure through broadening product ranges, especially non-food,while maintaining their customer appeal of convenience and accessibility. In anincreasingly restrictive planning environment which is limiting new supply ofthese assets, the retailers continue to require more and larger, flexiblestores, and are prepared to commit to full lease lengths of over 20 years. Theprofile of rental growth with highly secure income is an attractive asset forBritish Land's portfolio. We have added to our portfolio in this sub-sector thisyear through the purchase of a 50% interest in 21 Tesco superstores - highquality assets in good locations let on 20 year leases to Tesco with RPI linkedannual rent increases. The sale of New Cross Gate, with a Sainsbury superstore,at a sub-4% yield and 20% above book value, provides further evidence of marketdemand and pricing, which should assist our superstore portfolio valuation goingforward. The Meadowhall Shopping Centre of 1.5 million sq ft is also an importantcomponent of our out of town portfolio and probably the best scheme of its kindin the UK, with exceptionally strong ongoing customer appeal. Our strategy is tocapitalise on these strengths, positioning Meadowhall for attractive low riskgrowth through active management and ongoing refurbishment. This is expected tobe complemented by the introduction of investment partners to the asset'sownership structure, and we have recently announced our plans to offer themarket the opportunity to acquire such a stake in Meadowhall. In town - £2.1 billion portfolio: • 7 shopping centres - 3.7 million sq ft • 38 department stores - 5.6 million sq ft • 53 high street shops • 11 supermarkets Key features: • shopping centres £839 million Our focus for in-town shopping centres is on those which have specificasset management opportunities. The centres are typically: - located within large catchment populations - well anchored and the dominant retail scheme in the area - of sufficient size to enable future redevelopment to provide new sales space - where we believe income growth can be achieved through our proactive asset management, including introduction of additional customer facilities which will also be income generating, such as catering and leisure operations. • department stores £945 million These stores are fully let to Debenhams and House of Fraser with aweighted average term of over 30 years. Income growth from theseassets is underpinned by provisions in the leases for guaranteedincreases in rent, such that gross rents will increase by some£5 million (14%) over the next five years. All the stores are located in town centre retailing locations andopportunities for adding value are under review, including sales anddevelopment. • high street shops £348 million Disposals in the year of 27 high street shops, and two in townsupermarkets have been made, for a total of £146 million, tighteningour focus in the sector, and where particularly good market priceshave been achieved. More such disposals are planned. Asset management and development initiatives continue apace, including theacquisitions and disposals, lettings, rent reviews, unit reconfigurations,refurbishments, developments and the major project at Meadowhall, all as set outearlier in this report. In summary across the retail portfolio, during thisyear: • 214 rent reviews were concluded at £7.9 million per annum (BL share) above the previous rent and overall 5.8% above ERV • 226 lettings and renewals generated £15 million per annum (BL share) of new rent • implementation of 225,000 sq ft of additional space at mezzanine level in retail park units (part of the c 1 million sq ft of potential such projects within the portfolio) • improving tenant mix and shoppers' choice at out of town retail parks by replacing catering units of c 4,000 sq ft with several smaller units of c 1,000 sq ft let to retailers including Costa and Subway • amendment of the planning consent for the development of the retail park at Giltbrook, Nottingham has been achieved. Some 50% of the new floor area is under offer and we expect to generate premium rents at this attractive regional destination park. The market is very competitive in the UK and retailers are focused on marginsand selective on trading locations. As a result tenants are becoming moredemanding and we are seeing an increase in market incentives for less than primespace. We expect modest rental growth rates for the sector overall, withincreasing differentiation depending on location, planning, trading performance,tenant mix and unit flexibility. However, the diversity and quality of ourportfolio enables us to respond positively to trends, deliver the requiredaccommodation to our tenants and take advantage of new retailing concepts, suchas Marks and Spencer Simply Food, Tesco Home Plus and Asda Living stores. We arealso expanding in Europe, through PREF and our own investments and developments,as set out earlier in this review. Office Sector £€6.2 billion invested £€7.6 billion including completed value of committed developments London Office Investment Market London's global stature as a place to do business continues to grow with itsunique competitive advantages as a pre-eminent financial and business servicecentre. To boot, these markets, including insurance, accounting and law, arethemselves expanding. As a result, London's GDP is growing at a rate of 3.6%,higher than the UK's overall GDP growth of 2.8%, and employment is increasing.The investment market demand is still strong with the favourable expectations ofrental growth keeping yields low, although yield compression is slowing.Transaction levels continue high, with improved prospects maintaining liquidityfrom a diverse range of investors. Occupier Market The employment growth in London has been fuelling demand for accommodation, inparticular top quality Grade A. Increased demand has led to a significantimprovement in take up of offices and, on the supply side, vacancy rates inLondon are low and falling. In the City, where the majority of our officeportfolio is located, vacancy rates have reduced by 34% over the year, nowstanding at 6.1% overall, or 3.4% for Grade A offices, while rents areincreasing. The immediate outlook is positive. We expect the strong levels of rental growthseen last year to continue this year, as rents remain affordable both in realterms and compared with other operating costs. Towards the end of the decade,primarily in the City and in response to rising rents, we do anticipateincreased supply, although building cost inflation and the overall economics ofmany redevelopment opportunities may be limiting factors. That is why,especially in relation to our development programme, we are keeping our focus oncapturing occupier demand by delivering the right product for our customers atthe right time in the market, and thereby increasing rents. Portfolio 97% in Central London: • 5 million sq ft prime offices in the City • 1.4 million sq ft prime offices in the West End • weighted average lease length of 11 years • 3.4 million sq ft London office developments plus our investment in Canary Wharf through Songbird Estates. Strategy and positioning Our strategy is focused on four themes: - concentrating our efforts on and increasing our weighting in London offices where relative returns are likely to be attractive over the medium term - focus on providing occupiers with the right accommodation and best in class property and management services - actively varying the amount invested and assessing development starts and timing of completions, depending on our judgement of the stage of the office cycle - enhancing returns through active management and recycling capital from the sale of mature assets into our carefully timed, customer focused development programme. Our market leading office portfolio has performed well in the year due toincreasing rental value, particularly in the second half of the year, and yieldshift, which was a feature of the market in the first half of the year and isnow slowing. We have limited exposure to downside risks in the investmentportfolio due to the strong income flows under average lease lengths of 13 yearsto lease expiry, 11 years to break. Activity during the year to progress our strategy included: • recycling capital through the sale of 'mature' investments, and those which in our view do not offer adequate risk adjusted returns. Total sales of over £370 million of offices have been made in the year, achieving significant gains over valuation. Further sales will be made where we do not see adequate growth potential or where we believe the market is pricing too aggressively against the risks involved; • increasing our weighting in the sector through the development pipeline (set out earlier in this report), where we are delivering the best quality product to the market, and well timed to meet rising demand at higher rents. During the year the development programme has risen, through a combination of spending of over £250 million and value increase. Completed London office developments this year have added some 600,000 sq ft to our investments, and a further 2.2 million sq ft is being scheduled for delivery in 2007 - 2009; • achieving lettings in the year to March 2007 of some 200,000 sq ft in the City and West End, generating over £8 million of rent and, importantly, the recent further 600,000 sq ft let or under offer at our committed developments. These are confirming the improved market rental levels, overall in line with or ahead of our projections, and generate development profits through higher values - mostly to follow after the year end valuation. The prospects of further lettings of the accommodation becoming available in the developments are good, and we expect to achieve new higher rental levels. The minimal current vacancies in completed buildings are nearly all new or 'take back' accommodation; • employing asset management projects, such as taking back space and reletting it on the open market to establish new rental levels in otherwise fully let office investments, demonstrating our confidence in market rental levels and demand and enabling us to establish increased rents in open market transactions. We have reported, as part of our asset management activities, earlier in this report our taking back and reletting of offices at Broadgate and Regent's Place. In the case of Broadgate, the rents passing at present range between £44 and £55 per sq ft some of which, as the market continues to improve, will become reversionary. Our aim for the accommodation taken back at 155 Bishopsgate, having refurbished the offices, is to relet it in the open market at a level which will demonstrate further that rents at Broadgate are rising; • further rent reviews and preparation for the 1.9 million sq ft of London offices in the portfolio which is due for review in 2008/9, presently at an average rent passing of £41.75 per sq ft, where we expect to see strongest growth; • working hard to improve the services we offer, and our relationships with occupiers. This has led, as outlined below, to a marked increase in our customer satisfaction ratings. It also means we are closer to key occupiers like UBS and Henderson at Broadgate, so we can work with them to meet their changing accommodation requirements. Financial Performance Introduction The intense reshaping of the business over two years is reflected in a strongfinancial performance. The focus on rental growth, asset management, sector andasset specific buy and hold decisions and dispassionate view when selectingassets for disposal, the refinancing programme and finally our positiveengagement with the REIT process, each contributed to financial outperformance. The election for REIT status became effective on 1 January 2007 enabling our UKproperty rental activities to operate largely on a tax exempt basis. Nonethelesstaxation will continue to arise on our overseas businesses, interest and feeincome and surpluses on investments, including the units we hold in the HUT, HIFand PREF funds. The impact of REITs on the financials are explained furtherbelow. Total Return British Land has delivered a total return for the year of 21.3%, beforerefinancing and REIT charges, which follows the 34.6% return in the previousyear. Over five years, our annualised total return has been 18.6%(pre-exceptional charges). The valuation gains from our development programme,our active management as well as continuing positive market conditions andgearing contributed to this strong performance. March 2007 March 2006 % increase----------------------- --------- --------- ---------NAV per share1 1682p 1486p 13Underlying earnings per share2 43p 36p 22Dividends paid per share 17.4p 16.1p 8Total return per share1,3 21.3% 34.6%----------------------- --------- --------- --------- 1 EPRA basis - note 2 to the accounts 2 see Note 2 3 before charges for REIT conversion and refinancings Total returns are delivered from capital growth and income - the key componentsare described below. Capital Growth Net revaluation gains for the year were £1,630 million. A revaluation surplus of£1,234 million arose on wholly owned properties, and £22 million frominvestments (principally Songbird Estates PLC). Net revaluation gains from ourshare of Funds and Joint Ventures amounted to £257 million. The quirks of IFRS require us to recognise this unrealised surplus in differentparts of the financial statements and a reconciliation is provided in Note 5 tothe accounts. During the year, the Group appropriated its trading properties to investmentproperties, giving rise to a gain of £68 million, which is unrealised but isrecognised in the income statement in accordance with IFRS. This amount is notincluded in underlying profits. The largest component of growth is the valuation uplift of 9.7% which includesthe valuation movement in developments, purchases and sales, net of capitalexpenditure. Offices contributed 13.6%, all retail 7.6%. Capital profits realised on sales of properties amounted to £82 million,measured against the carrying value at 31 March 2006. Net Asset Value Growth EPRA net assets at 31 March 2007 were £8.9 billion, 1682 pence per share, 13%ahead of the previous year and 20% ahead before charges for REITs andrefinancings. The principal components of the 196 pence increase in EPRA NAV pershare are as follows: Pence per share--------------------------- ------------------At 31 March 2006 1486Revaluation of properties and gains on 292asset disposalUnderlying profit after tax 43Dividend paid (17)REIT conversion charge (see REIT section (64)below)Refinancing charges, net of tax relief (40)Other (18)--------------------------- ------------------NAV per share at 31 March 2007 1682--------------------------- ------------------ Income Returns A proportionally consolidated Income Statement and Balance Sheet are included asTable A to the accounts for the benefit of Stakeholders who wish to see theresults of British Land's interest in Funds and Joint Ventures on a look-throughbasis. The following commentary refers to financial information of the Group asreported under IFRS where the after tax results of Funds and Joint Ventures areshown as a single line on the Income Statement. Gross rental and related income for the year is down 6% at £649 million,principally due to sales as shown below. Gross rental and related income £m------------------------------------ ---------Year ended 31 March 2006 690Purchases 24Sales (76)Like for like growth 10Other 1------------------------------------ ---------Year ended 31 March 2007 649------------------------------------ --------- On a like for like basis rental income (including our share of Joint Venturesand Unit Trusts) showed growth of 3.5%, which is ahead of the market overall(IPD at 2.9%). The rental income growth was strongest on retail properties at4.0% and 2.6% on offices. Office market rental levels have been growing and inso doing have largely eliminated the gap between market rents and the higherpassing rents in our portfolio. Future rent review settlements in Central Londonabove these levels will increase income. Net rental income has reduced to £561 million (2006: £589m) and represents 93.9%of gross rental income, after taking into account void costs and the expenses ofindividual asset management initiatives charged to property income. This is animprovement on the previous year (92.8%), partly due to the impact of sales. The contribution to underlying profits from Funds and Joint Ventures is £37million, a reduction of £2 million from the previous year reflecting BL Davidsonbecoming a subsidiary during the year. As required by IFRS the reported results for Funds and Joint Ventures areincluded on a post tax basis as a single line with profits totalling £459million, an increase of 47.6% on the prior year. This profit includes financingcosts of £57 million, profit on sale and valuation gains £257 million and ataxation credit of £170 million. Underlying fees and other income were £50 million, the same level as the prioryear, and include dividends from our investment in Songbird of £18 million(2006: £16m) and performance and management fees from our fund managementbusiness of £30 million (2006: £29m). A further special dividend from Songbirdof £33 million results in total reported fees and other income of £83 million. We again enjoyed a healthy level of performance fees where the HUT Fund enjoyeda total return of 17.5% and so outperformed its relevant IPD benchmark (15%) by2.5%. The absolute amount of the performance fees is lower than the previousyear, which had benefited from the effect of stronger yield shift in thatperiod. The performance fees are earned by exceeding stretching targets in acalendar year and are measured against the relevant benchmark. Our managementfees are based on a percentage of the portfolio value. The third party elementonly of fees earned are recognised in the Income Statement. Only half of the performance fee earned is recognised immediately, while thebalance is released over a vesting period at the rate of 50% of theundistributed amount, provided there is no significant underperformance againstthe benchmark in each subsequent year. There is no clawback of released income.At 31 March 2007 fees of £13 million have been deferred and are subject topotential clawback. Underlying administration expenses amount to £78 million which is £3 millionlower than the previous year partially due to one-off items in the current andprior year. In December and January a group reorganisation was carried outallowing the Group to reduce complexity in its corporate structure and ongoingcompliance and operating costs. Retirements and redundancies in the year havelargely offset salary and other cost inflation. Finance costs include net interest payable and exceptional refinancing charges.Net interest payable (before refinancing charges) is some £313 million, 15.2%lower than the previous year representing the reduced interest costs through thesales in the current and prior period, as well as the effect of refinancing thesuperstores and Meadowhall securitisations and our higher coupon legacydebentures. The refinancings gave rise to an exceptional cost of £305 million and have thebeneficial effect of reducing ongoing interest costs. Underlying Profits Underlying profits have increased by 12.7% from £228 million in 2006 to £257million in 2007. The £29 million increase is due to the following factors: £m------------------------------------ ---------New lettings and rent reviews (net of £17m lease 10expiries)Effect of purchases and sales 3Interest savings from refinancings 14Administration cost savings 3Other (1)------------------------------------ ---------Increase 29------------------------------------ --------- Amortisation of Intangible Assets and Goodwill The fair value of fund management contracts acquired with Pillar is amortisedover the contractual lives. The charge for the year is £15 million (2006: £10m)leaving an unamortised balance of £50 million. Taxation The underlying tax rate this year is 12% (2006: 19%). This low rate arisesprincipally through the effect of REIT exempt income in the fourth quarter,non-taxable Songbird dividends, capital allowances and capitalised interest. Therate of tax on disposals is low because refinancing costs have been used torelieve gains in the current year. The conversion to REIT status leads to a release of some £1.6 billion ofdeferred taxation representing the amount of tax provided for under IFRS onvaluation surpluses, which is now exempt from tax on a disposal. This deferredtaxation was previously added back under EPRA guidelines in calculating NAV, sothis release does not affect reported NAV. The £338 million cost of the REIT election represents a conversion charge of 2%of the relevant assets payable for the most part in July 2007 and includesrelated costs of £13 million. Unlike deferred tax, this item has reduced NAV inthe year. Impact of REITs £m------------------------------------- --------Deferred tax benefit on investment properties 1,673 on development properties 84Goodwill impairment (106) --------Elimination of deferred tax, net of goodwill 1,651REIT conversion charge and costs (338) --------Net effect of REIT conversion 1,313------------------------------------- -------- Goodwill impaired during the year amounted to £106 million (2006: £240m).Goodwill primarily arose through the recognition of deferred tax on acquisitionof subsidiary companies and such goodwill has been expensed as a result of thedecision to become a REIT. The related deferred tax has also been released. Dividends In November we announced a move to a quarterly dividend cycle, which mirrorsrental cash inflows, as rents are typically settled quarterly. Together with ourfinal dividend proposal for the year of 8.25 pence, our total dividend for theyear will amount to £107 million, 20.35 pence per share, an increase of 20% onthe previous year. Dividends 2007, pence 2006, pence----------------------- ------------ ----------February (interim) 5.6 5.2May (first quarterly dividend) 6.5August (final, proposed) 8.25 11.8 ------------ ---------- 20.35 17.0 ------------ ---------- As announced in November, our dividend for the year to 31 March 2008 is expectedto be not less than 33 pence per share, a 94% increase on 2006. We intend tomaintain a progressive dividend policy thereafter, growing dividends in linewith our underlying business. The REIT rules provide for a minimum payout of 90% of relevant profits, being UKrental business profits adjusted for capital allowances and interest capitalised(Property Income Distribution ("PID")). Our dividend proposals for 2007 and 2008however will exceed this minimum by a substantial margin. Accordingly future distributions will comprise a combination of PID and normaldividend. The coupons sent to investors will make the split clear. Withholdingtax will be applied at the rate of 22% (20% from April 2008) to the PID element.Certain investors, such as pension funds and charities, may receive their PIDincome without withholding tax (but to do so must first complete formalitieswith our registrars). The PID calculation for the quarter to 31 March 2007 must be distributed before31 March 2008. As the PID for the year to 31 March 2008 is currently expected tobe unusually low, the final dividend for 2007, due in August, will be payableout of non-PID income, that is as a normal dividend. The split of the Novemberdistribution between PID and normal dividend will be announced at the same timeas the results for the quarter to 30 June 2007. Investors should note that thesplit between PID and non-PID will vary over time. Earnings per share Diluted earnings per share increased to 470 pence from 227 pence in 2006.Underlying earnings per share have risen 22% to 43 pence, due to both theincrease in underlying profits and reduced tax charge. Cash flows Cash generated from operations has increased by £24 million to £479 million.Reduced interest costs and higher levels of cash distributions from Funds andJoint Ventures have increased the net cash flow from operating activities by£100 million (96%). March 2007 £m March 2006 £m---------------------------- ---------- ----------- Cash generated from operations 479 455Net cash flow from operating activities 204 104Net investment cash flows (39) 986Financing (11) (1,025)Dividends paid (91) (84)---------------------------- ---------- --------- Accounting Judgements The most significant judgements made in preparing these accounts relate to thecarrying value of properties and investments which are stated at open marketvalue. The Group uses external professional valuers to determine the relevantamounts. Significant accounting policy judgements are highlighted in our accountingpolicy note. The most important judgement affecting comparability with otherproperty companies is the approach to deferred tax, albeit following theintroduction of the REIT regime this has become of less significance. Finance and capital structure British Land is managed on an integrated basis to produce secure and attractiverisk-adjusted returns to Shareholders. Risk management is a distinctive skill atBritish Land where the mix of assets, leases, developments and debt are managedtogether to ensure the most effective result. Overall, the Group's prime assetsand their secure long term contracted rental income, primarily with upward onlyrent review clauses, present lower risks than many other property portfolios,enabling the returns to be enhanced using financial leverage. A 45-55% loan tovalue ratio is currently targeted, subject to the Board's view of markets, theprospects of and risks within the portfolio and the recurring cash flows of thebusiness. At 31 March 2007, this was 41%, 45% proportionally consolidated (43%and 47% respectively pro forma for payment of REIT conversion charge). Since we seek to maximise shareholder returns, we prefer to avoid equityissuance, except where the commercial opportunity clearly merits it. We alsowould expect to return capital to Shareholders if over the medium term surplusfunds arise over and above that which we believe can be attractively deployed inthe business. Debt is raised from a variety of sources with a spread of maturity dates. Longerterm debt is raised principally through securitisations and debentures.Securitisations have a range of benefits, including long maturities atcompetitive rates with no recourse to other companies or assets in the Group,and without financial covenants by British Land. Debentures benefit from longmaturities and bullet repayment. Unsecured revolving bank facilities provide flexibility of drawing and repaymentand are committed for terms of five to ten years. We aim to spread thematurities of the different facilities from a wide range of banks. Otherunsecured funding includes US private placements, with terms of up to 20 years. The Group borrows at fixed and floating rates and uses derivatives to achievethe desired interest rate profile; currently the policy is to maintain around85% (subject to 5% tolerance) of debt at fixed or capped rates taking intoaccount prospective transactions including development funding. This interestrate profile is closely monitored as part of our management of the overallfinancial effects of transactions. The year end position of 96% fixed/cappedreflects recent disposals (and expenditure due in respect of the developmentprogramme). The Funds and Joint Ventures are separately financed, and have their owninterest rate derivatives, all with no recourse to British Land. Financing statistics 31 March 31 March 2007 2006----------------------------- ---------- --------Group:Net debt £6,404m £5,593mWeighted average debt maturity 14.1 yrs 15.0 yrsWeighted average interest rate 5.32% 5.71%% of net debt at fixed/capped interest rates 96% 95%Interest cover1 1.70 1.51Loan to value2 41% 42%Unsecured debt to unencumbered assets 28% 26%Undrawn committed facilities and cash £1,855m £2,415mGroup and share of Funds and Joint Ventures:Net debt3 £7,741m £6,684mWeighted average debt maturity 12.7 yrs 13.4 yrsWeighted average interest rate 5.36% 5.69%Interest cover1 1.69 1.52Loan to value2 45% 46%----------------------------- ---------- -------- 1 Underlying profit before interest and tax / net interest excluding refinancing charges 2 debt to property and investments 3 see Table A This has been another busy year for refinancings and raising new finance for thebusiness, in each case reducing future interest costs and increasingdistributable income: •a £1 billion restructuring of the British Land debentures was completed in August 2006, creating a debenture security pool valued at £1.8 billion. A pre-tax refinancing charge of £228 million, mainly due to the difference between the market and book values of the debentures, reduced EPRA NAV per share by 30 pence; there was virtually no effect on NNNAV (being NAV less the mark to market of debt and deferred taxation). British Land's annual interest costs are reduced by some £10 million and the weighted average cost of debt is reduced by some 0.3% per annum. With the simplified uniform structure, improved common covenants and enhanced transparency, the new debentures are already showing benefits of greater liquidity, •the refinancing of the Meadowhall Shopping Centre securitisation, with a new simplified structure provided rating improvements for bondholders and a lower on-going interest cost for the Company of 4.98% per annum. This refinancing incurred a charge of £39 million, •the last of British Land's higher coupon debentures (8.875% 2035 and 9.375% 2028) were refinanced by replacing them with a new amortising 2035 debenture at a rate of 5.0055% per annum, subject to a charge of £38 million, •we issued £98 million 5.50% Senior Notes 2027 to US investors, effectively refinancing a similar amount of maturing notes. The new notes are unsecured and have a term of 20 years with no amortisation, with the same covenants as all other unsecured facilities, •over £1 billion of new or renewed bank committed revolving credit facilities were raised during the year. These included a successful syndicated seven year loan facility of £405 million, at lower market pricing to replace more expensive lines with shorter terms. Over the last two calendar years we have taken advantage of financial marketopportunities to refinance all British Land's secured and securitised debt ofsome £4.9 billion, and have agreed new or renewed bank facilities of over £2.7billion. The refinancings have contributed to reducing our interest costs goingforward; the weighted average interest rate at 31 December 2004 was 6.49% whichreduced by 31 March 2007 to 5.36%. In the Funds and Joint Ventures we have arranged the development finance for theJoint Venture project at Puerto Venecia, Zaragoza, provided in October 2006 by asyndicate of banks in Spain. The Tesco Aqua Limited Partnership was financed oncompletion in March 2007 by a term loan facility. Key Performance Indicators Property is a long term business. Decisions taken to create value over timefrequently affect current year's earnings and so the Board measures performanceover a range of time periods. Our management judgements over sector views, assetselection, redevelopments, financial structure, corporate and communityresponsibility all combine to deliver a single set of financial returns andthese should be judged against the risk profile adopted. In measuring and benchmarking performance, a number of key performanceindicators are used to indicate the impact of management actions. At the 'totalcompany' level, the three most visible indicators are "total shareholderreturn", "total return" and "earnings per share growth", reflecting theperformance of the whole business. Benchmarking is undertaken against our majorquoted peers and the FTSE Real Estate Index. The key performance indicators demonstrate British Land's strong track record inrelative and absolute value creation over the last one, three and five years. Performance Indicator One year Three Years Five Years------------------- ----------- ----------- ---------Total shareholder return1- British Land 24.3% 49.4% 23.7%- Peer group2 21.7% 39.6% 20.8%- FTSE Real Estate Index 22.3% 45.4% 19.4%- Ranking in peer group 2 1 1Total Return3- British Land 21.3% 24.3% 18.6%- Peer group 20.8% 21.2% 14.6%- Ranking 2 2 1Earnings per share growth4- British Land 22.0% 7.9% 7.5%- Peer group 5.2% 5.4% 4.7%- Ranking 1 1 2------------------- ----------- ----------- --------- 1 total shareholder return represents growth in share price plus dividends per share (assuming reinvested) 2 average of major peers - Land Securities, Hammerson, Liberty and Slough (some differences in year ends) 3 total return (pre-exceptional) represents growth in adjusted, diluted net asset value per share plus dividends per share 4 adjusted diluted earnings per share (excluding exceptional items, profits on asset disposals and revaluation gains) Non financial performance indicators which are also key to the business and usedas measures of progress are, as reported under Portfolio Valuation above: Year to March 2007 British Land IPD Benchmark------------------- --------------- --------------Like for like rental value 6.9% 4.3%growth (ERV)Portfolio capital return 10.9% 10.7%per IPD (ungeared) ------------------- --------------- -------------- Risk Management British Land generates returns to shareholders through long-term investmentdecisions requiring the Company to evaluate opportunities arising in thefollowing core areas: •demand for space from occupiers against available supply; •differential pricing for premium locations and buildings; •alternative use for buildings; •demand for returns from investors in property, compared to other asset classes; •economic cycles, including their impact on tenant covenant quality, interest rates, inflation and property values; •price differentials for capital to finance the business; •legislative changes, including planning consents and taxation; and •construction pricing and programming. These opportunities also represent risks, the most significant being change tothe value of the property portfolio. This risk has high visibility to seniorexecutives and is considered and managed on a continuous basis. Executives usetheir knowledge and experience to knowingly accept a measured degree of marketrisk. The principal external business risks identified can be summarised as follows: Risk: Principal Mitigations: Property Market Market pricing and other changes Regular investment appraisalsaffecting property value, assess prospects and identifyincluding: properties for disposal where justified - Change in investor and Upward only long leases on good occupier demand quality well located buildings - Letting risk on speculative Occupier led development strategies development with a phased pipeline of projects - Environmentally unsustainable New developments built in line with buildings a formal Sustainability Brief - Tenant default Spread of tenants with strong financial covenants and regular covenant review processDebt Market Reduced availability or increased Leverage regularly reviewedcost of finance Borrowing covenant headroom maintained Spread of sources and maturities of facilities Sufficient lines maintained for spending commitments Interest rate management policy with high level of hedging Currency exchange movement Foreign currency assets financed by matching currency borrowingsDevelopment Poor control of design and Contractor performance closelyconstruction programme, or monitored within project managementcontractor failure leading to cost processoverruns and programme delays Regular monitoring and forecasting of project costs Contractor financial covenant review process Reputation Health and safety Health and Safety Policy and defined responsibilities and reporting throughout the Group Non-compliance with regulation Independent compliance auditing programmePeople Retention of key staff Career development and succession planning for key executive positions Key man insurance Remuneration structure reviewed and benchmarked Key internal management and process risks are also identified within BritishLand's formal risk management process. These internal risks are the focus ofassurance work performed by the Group's Internal Audit function. The riskmanagement process includes defined risk areas and a risk scoring methodologybased on the assessed impact of the risk event and the likelihood of itsoccurrence. The principal risks identified are considered and reviewed atvarious stages in the process, culminating in consideration of and discussion bythe Executive Directors, the Audit Committee and the Board. Partnerships British Land's net investment in Funds and Joint Ventures is £1,610 million(2006: £1,234m) at 31 March 2007. This investment is principally in four activefunds and 15 (2006: 13) active Joint Ventures, which hold in total £7 billion(2006: £6.4 billion) of properties in retail, offices and development. The Fundsand Joint Ventures are financed by £3.1 billion (2006: £2.8 billion) of externaldebt, all of which is without recourse to British Land. The Funds provide British Land with interests in properties in our key sectors.British Land acts as property adviser to the Funds and receives performance andmanagement fees. Fund Portfolio Value Net Finance BL BL £m Rent £m Share Interest £m % £m (1)--------------- --------- ------ ------ ------ ------ -------Hercules Unit Trust Retail 3,408 112 1,225 36.27 787('HUT') Shopping Parks Pillar Retail European 340 20 201 22.35(2) 29Europark Fund Retail('PREF') Parks City of London Offices - (3) - 69 35.94 10Office Unit Trust('CLOUT') Hercules Income Fund Retail 153 6 6 26.12 39('HIF') Warehouses --------------- --------- ------ ------ ------ ------ ------- (1) annualised (2) will increase to 40% when committed new equity fully contributed (3) CLOUT investments all forward sold or sold during the year HUT The Hercules Unit Trust ("HUT") was established in 2000 as a Jersey based closedended property unit trust with a fixed life to September 2010, subject toextension with consent of unitholders. Its aim is to acquire and own retailwarehouse and shopping park investment properties throughout the UK, with a viewto providing an annual total return on the portfolio in excess of the IPD AnnualRetail Warehouse Index over the life of the Trust. The Trust return for the year to 31 December 2006 was 22.5%, with a three yearannualised return of 31.5% per annum. At the property level, without the effectof gearing, the portfolio returned 17.5% for the year, compared to the IPDAnnual Retail Warehouse Universe (excluding HUT) of 15% for the same period.Drivers of this performance were: • rental value growth of the portfolio of 4.4% over the year (IPD Retail Warehouse Index 2.9%) • low vacancy rate at 2.3% (IPD Retail Warehouse Index 7.5%). In HUT's year to December 2006: • the net asset value of the Trust increased to £2.1 billion (2005: £1.7 billion) • the net asset value per unit rose 20.8% to £1,635 (2005: £1,354) • the underlying property portfolio increased in value to £3.4 billion (2005: £3.0 billion), despite net property sales of £87 million. At 31 December 2006, gearing equated to 35.6% of the aggregate Trust value, wellwithin the Trust's limit of 60%. The secondary market has continued to be active, with no new units issued in theyear. A total of 174,532 units were traded over the year with a total value of£252.5 million. The units traded at a premium of 7% above their net asset valueduring the year with the exception of one large portfolio sale. British Land Property Advisers Ltd is HUT's property adviser, and SchroderProperty Managers (Jersey) Ltd is the Fund Manager. PREF PREF (Pillar Retail Europark Fund) was created in March 2004 as a closed-endLuxembourg based Fonds Commun de Placement to invest in out of town retail parksin the Eurozone - particularly France, Spain, Italy, Portugal and the Beneluxcountries together with Switzerland. On completion of outstanding contractedacquisitions, the target of a €1 billion portfolio, set when the fund waslaunched, will be exceeded. The annualised total return for the year to 31 December 2006 was 15.2%. Gearingat 31 December 2006 was 58%. PREF gears up to 60% loan to value with debtprovided by a syndicate of banks. The Investment Manager is BL European Fund Management LLP, in which British Landhas a 70% interest. HIF Hercules Income Fund ("HIF") was established in September 2004 as a Jersey basedclosed ended property unit trust with a fixed life of 10 years, subject toextension with unitholder consent. Its objective is to target smaller retailpark assets, and with an emphasis on a higher distributable yield. The Trust return for the year to 31 December 2006 was 18.9% and the propertyreturn was 19.3% compared with the IPD Annual Retail Warehouse UniverseBenchmark of 15.3%. HIF's loan to value is currently low, but it is intended toraise the level of gearing to nearer HIF's target of 50% in order to furtherenhance returns when acquisition opportunities arise. In the year to December 2006: • net assets have increased to £145 million • the net asset value per unit has risen from £1,137 to £1,307 • the underlying property portfolio has increased in value to £149 million (2005: £144 million) despite net property sales of £13 million. British Land Property Advisers Ltd is the property adviser, and Pillar PropertyManagement (Jersey) Ltd is the Fund Manager. The Joint Ventures provide British Land with access to desirable properties(often off market), within a separate entity formed for the purpose, andcontrolled on a 50:50 basis by a board carrying equal representation from eachpartner. The entities are able to raise finance on the strength of their assets,usually with no support from the partners, thereby significantly lowering theinitial equity investments and enhancing returns on capital. The enterprise isshared by the partners, over a specific agreed lifetime for the venture. Key activity since April 2006 included: • In March 2007 a fourth joint venture with Tesco PLC was formed, The Tesco Aqua Limited Partnership. The £650 million portfolio has an initial rent of £29 million per annum from 21 superstores let to Tesco. • The formation in May 2006 of the new joint venture in respect of Zaragoza, Spain, to develop a 2.2 million sq ft out of town shopping scheme. • The acquisition of the outstanding 50% ownership of BL Davidson for approximately £256 million in August 2006. Although some of the Joint Ventures have different year ends from British Land,the accounting periods recognised have now been aligned to the Group's Marchyear end using management accounts, to assist the requirements of quarterlyreporting. The summary details of the principal Joint Ventures in which we have a 50% shareare shown below. Joint Venture JV Partner Portfolio Net Finance BLPortfolio Valuation Rent £m interest £m £m1 £m2-----------------------------------------------------------------------BLT Properties Ltd Tesco PLC 363 15 185 1151 retail park, 8 Tescosuperstores Tesco BL Holdings Ltd Tesco PLC 705 29 315 1952 retail parks, 2shopping centres eachanchored by Tesco,5 Tesco superstores Tesco British Land Tesco PLC 109 5 45 26Property Partnershipdistrict shoppingcentre anchored byTesco Tesco Aqua Limited Tesco PLC 652 29 487 84Partnership21 Tesco superstores The Scottish Retail Land 703 37 430 137Property SecuritiesLimited Partnership PLCshopping centres inAberdeen and EastKilbride BL Fraser Ltd House of 296 14 130 8012 department stores Fraser PLC Eurofund Investments Private 154 - 16 73Zaragoza SL3 Investors Puerto Venecia, out of and Copcisatown shopping scheme Corp----------------------------------------------------------------------- 1 annualised net rent 2 BL share of net assets 3 development project People Individuals are essential ingredients in our long term success. It is importantthat we retain and attract motivated and skilled professionals able to deliverour strategy and work effectively in a small and focused team. The business model is people light and asset heavy - it leverages the work,skill and judgement of a relatively small staff over a large value ofefficiently financed assets. The strategy and business changes introduced in2005 are designed to emphasise the "human value added" in order to liftperformance at the property level, whilst retaining efficient translation toprofits and net asset value via financial and fiscal structure. This is all themore important in a market where outperformance is going to be delivered throughsuperior rental growth and an activist approach to asset selection andmanagement. To accomplish our performance goals and the shift in business model, the Companyis engaged in a process of management renewal and culture change, targeting ahigh performance, open and meritocratic culture where its people are motivatedindividually and as a team to outperform competitors, subject to maintenance ofquality and security overall. During the year that process has included: •reinforcement of the annual appraisal process introduced in 2005 with specific financial and non-financial goals for executives, and alignment of the remuneration structure to support performance against objectives •succession planning for a number of key retirements during the period •recruiting further property professionals to assist the execution of our intensive asset review and management process •expanding our development team in response to the increased programme activity •reshaping the Finance & Tax teams following the major restructuring of the Group's internal corporate structure on REIT conversion. At a time of intense business activity, our staff have responded to thechallenge presented by major changes in the composition of our teams. Our move to a new Head Office is aimed at providing our staff with the modernefficient environment we offer to our customers and we are already reaping thebenefits of improved communication and effectiveness at York House. Corporate Responsibility Our full Corporate Responsibility Report 2006 may be viewed atwww.britishland.com/crReport/2006. It is designed to be accessible and provideeasy navigability for users. The switch to on line reporting, rather thancirculation of full printed copies, is part of our efforts to improve ourenvironmental performance. A summary of the report will be included in our Annual Report and Accounts 2007. Operating and Financial Review In preparing this Business Review we have had regard to the recommendations andguidance issued by the Accounting Standards Board, insofar as we consider theyare relevant to our business model and industry. We have provided herein acommentary on our markets, activities and prospects. Readers will understandthat where we make forward looking statements they reflect our current views;future results will depend on many factors and interactions which may causeoutcomes to differ from those anticipated. Supplementary information regarding the Portfolio Description and theDevelopment Programme are available on our website www.britishland.com This information is provided by RNS The company news service from the London Stock Exchange

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