No property recovery yet, warns LandSecs

Hopes that green shoots are beginning to sprout in the commercial property market were comprehensively dashed yesterday by Land Securities, Britain's largest real estate company, which revealed a £4.7bn fall in the value of its investments. The collapse in the value of its properties caused Land Securities to record the biggest ever loss in the sector, of £4.8bn for the year to the end of March.

The company said its portfolio of properties was now worth £9.4bn, a third less than a year previously. Its retail properties, which fell in value by 37 per cent, fared only slightly worse than its stock of London offices, which were down by 34 per cent.

Francis Salway, the property giant's chief executive, warned there were few signs of any improvement. "This year the UK commercial property sector saw the sharpest fall in capital values on record as the full severity of the economic downturn hit the sector," he said. "While the market may see some pockets of stabilisation for certain asset types, we expect conditions to remain challenging in a weakening economic environment, with vacancy rates rising and rental values weakening, putting pressure on rental income."

John Cahill, an analyst at KBC, described Land Securities' figures as a "cold dose of reality".

The company reported an increase in voids – properties standing empty of tenants – from 3.5 per cent last year to 4.6 per cent today. It added that almost 4 per cent of tenants are currently in administration – of those, only one in seven is currently paying rent.

Like other real estate companies, Land Securities has raised funds this year, bolstering its balance sheet with a £756m rights issue in February, and with a further £1.1bn from disposals.

Some of the additional funding has already been used to pay down debt, but Mr Salway said further reductions in borrowing would be necessary as the ratio of the company's loans to the value of its assets continued to rise.

One effect of the heavily discounted rights issue has been to exaggerate the fall in the company's net asset value. Land Securities' adjusted diluted net asset value per share fell by 66 per cent to 593p over the year to the end of March. The company has also cut its dividend by a little over 10 per cent.

Analysts warned that Land Securities' figures suggested the commercial property sector remains mired in recession, unlike residential property, where some tentative signs of progress have been seen.

Barratt Developments, the housebuilder, said yesterday that it had seen a sharp increase in reservations in recent weeks, without being forced to discount heavily, though it warned the outlook for the residential market remained uncertain and challenging.