Bottom Line: Land Securities finds solid ground

LAND Securities reports a slight hardening - no more than 1 percentage point - in yields since the start of the year, and that only on top-quality City properties with blue chip tenants. That was enough to send Lands' shares up 6p to 551p, despite a pounds 150m convertible bond issue, while British Land rose 14p to 282p, MEPC 12p to 418p and Slough Estates 12p to 190p.

The reaction raises three questions. First, and most fundamental, how sustainable is the increase? The combination of the slump in prices and the anachronistic structure of the institutional lease has made British property particularly attractive to overseas buyers.

So far, however, their interest has been restricted to first-rate locations, buildings and tenants, and there is no guarantee that it will spill over into less attractive locations or types of property. British institutions may be less discerning, but the amount of property in the hands of banks and receivers means that supply will not be a problem for some time.

The second question is on the impact of over-renting. Tenants in many London offices are paying rents as much as double those currently being set. It will take years until tenant demand recovers sufficiently to close that gap.

The third question is what the impact on share prices will be. The sector has outperformed the market by 20 per cent since the start of the year and many companies - including Lands, Wates City of London, MEPC and Brixton Estates - are already standing at premiums to their prospective net asset values. Investors clearly believe that the signs of recovery in property values are more than just straws in the wind.

Peter Hunt, Lands' chairman and managing director, is taking advantage of these favourable conditions to raise new funds. Even if yields do improve, it should be possible to buy properties yielding more than the 7 per cent coupon payable on the bonds. If it had plumped for a rights issue, it would have needed a yield of about 9.25 per cent to avoid dilution. Short-term, the yield required on a rights issue would have been below the bonds; medium-term, however, the dividend will rise, while the bond interest is fixed until 2008.

The fine terms available underline Lands' financial strength, while the quality of its portfolio was demonstrated by the 2.6 per cent rise in pre-tax profits to pounds 227.5m, a 3.2p rise in earnings to 33.68p and a 5.1 per cent rise in the dividend to 22.85p. The recent strong run means that the shares may be due for a period of consolidation, but at least there are unlikely to be any nasty shocks.