Stephen Hester, chief executive of British Land, tried delicately not to criticise rival Land Securities – which has just confirmed plans for a three-way split – while justifying the status quo at his own company.
“I don’t want to get controversial,” he said. “They are entitled to do what they are doing.”
Since Mr Hester became chief executive three years ago, he and his fellow directors have examined, but rejected, a demerger of British Land.
He said he was open to new evidence. “If £1 equals £1.50 in form A and 90p in form B and that is not temporary, we would have to pay attention.”
But he pointed out that “the beauty of capital markets is that in every industrial sector there is a range of business models and there is no right or wrong answer”.
The Land Securities move will take months and cost an initial £60m, a further £10m-£15m a year and further millions as it unwinds its £2bn securitisation.
As yet it is uncertain whether the demerger will create any extra shareholder value, a fact reflected in the group’s share performance this week.
Land Securities shares have underperformed the sector by 5 per cent, although they have done considerably better than British Land and Hammerson since the idea of splitting the group up was first floated two months ago.
Martin Allen, analyst at Morgan Stanley, said the combined valuation of the three new companies was unlikely to be any higher in the short term.
Francis Salway, chief executive, believes total returns will improve because the new companies – retail, London offices and outsourcing business Trillium – will be more agile. “It happens to be the case that the market record has been stronger for specialists,” he said. The retail and London businesses are both likely to continue being members of the FTSE 100 index.
There could be downsides, however. The move will need some explaining to shareholders, who have so far shown little outright enthusiasm.
They are likely to question how Land Securities, whose assets include the illuminated billboards at Piccadilly Circus in London, has U-turned from its previous position that a diversified structure gave investors more predictable returns. Retail assets tend to be more stable than London offices, where rents oscillate wildly over time.
One analyst said: “One of Land Securities’ key strengths has been that it was a bellwether, safe as houses, that grannies in Bradford can buy. That may be less so if this goes forward.”
The split is predicated on the unproven theory that overseas property funds prefer specialised companies to conglomerates.
Martin Greenslade, finance director, is unable to put an estimate on the cost of ending the group’s much-vaunted securitisation – done in 2004 – in a post-credit squeeze world.
Mr Hester said: “It is clear that if you give debt investors a chance to get out of long-term interest rates that were locked in at the beginning of the cycle, they will extract a large pound of flesh in tougher conditions.”
The three Land Securities units could be more vulnerable to takeovers, although, with the share price at a 30 per cent discount to net asset value, that may be welcomed by shareholders.
There is little doubt the City has tended to ignore the value of Trillium in the past. “The Trillium sale is not contentious, the bigger question is whether the remaining business should stay together,” says one analyst.
Hammerson, the third-largest property conglomerate, has no plans for a break-up.
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