Bottom Line: Yields falling flat for Land Securities

A BETTER than expected 34.3 per cent rise in Land Securities' net asset value to 677p a share, as the value of its portfolio rose by 19.6 per cent, is a reminder of how gearing can work in favour of property companies in a rising market.

Meanwhile, at 8.2 per cent, the yield on the group's portfolio is still some 60 per cent below the 5.1 per cent achieved in 1989.

The problem is, as the market began to realise at the start of the year, it may well stay there unless something dramatic happens in the rental market. In 1989, rents were rising so fast that pounds 60-plus a square foot was commonplace in the City. In 1994, Sir Peter Hunt, Lands' chairman and managing director, is pleased to report that rents in one of its office blocks have crept up from pounds 15 to pounds 17. It will take rather more than that before there is scope for increasing rents at annual reviews, while income from the one-fifth of leases expiring before the end of the century will also fall, regardless of whether Lands decides to re-develop or to find new tenants.

Lands' rental income rose only 2.3 per cent to pounds 389.4m, despite pounds 123m of acquisitions, while pre- tax profits rose 3.5 per cent to pounds 237.1m. Both are likely to remain flat - or even fall if Lands decides to borrow for development - for some time. While it did increase its dividend by 5 per cent to 24p, that was covered just 1.48 times by earnings of 35.66p - and even Lands admits it cannot go on indefinitely increasing dividends, without a corresponding increase in earnings.

That means that yesterday's price of 663p, up 2.5p, for a yield of 4.7 per cent and a 12 per cent discount to forecast net asset value, is more realistic than the 800p peak last December.