Stocks continue to push forward and British Land faces office conundrum

Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

“More people are returning to work, a greater number of shops are preparing to reopen and society has quickly become accustomed to social distancing measures. This shift in behaviour sends a positive signal to markets as it helps to remove layers of uncertainty which have been hanging over share prices,” says Russ Mould, Investment Director at AJ Bell.

“Markets saw a bounce back in April and have been nudging ahead, albeit at a much slower rate, in May. This trend continued on Wednesday with UK and European markets extending yesterday’s rally. Admittedly Brexit issues, US/China relations, political unrest in Hong Kong and fears over a second wave of coronavirus could knock markets off track at the click of a finger, yet for now investors are regaining their appetite for stocks.

“Last night the S&P 500 index in the US briefly flirted with the 3,000 mark for the first time since early March just before global markets collapsed.

“The world getting back on its feet has given a lot of encouragement to investors, also helped by hopes over various potential vaccines being developed in the fight against coronavirus.

“The only problem is that markets might be getting over-optimistic about the pace of corporate earnings recovery. If financial results don’t match expectations in the coming months then the stock market rally could come under threat.

“In the UK on Wednesday, investors flocked to buy financial stocks with St James’s Place and M&G the top risers on the FTSE 100 index. Housebuilders were out of fashion with Taylor Wimpey, Persimmon and Barratt Development among the biggest FTSE fallers.

“Among the mid-caps, travel operator TUI extended yesterday’s rally with another 25% gain. That means its share price has now risen by 90% since 22 May’s market close. Investors lucky enough to have bought low should be pleased at the gains but they might be even happier if they could actually go overseas for a fortnight by the sea.”

British Land

"The largely unspoken fear in today’s results from property investor British Land is that the coronavirus impact on its retail assets could be mirrored in its office block holdings.

“Given nearly all non-essential shops, food and drink and leisure outlets remain closed, the collapse in value of this part of the portfolio is entirely unsurprising, as are difficulties in getting rent from tenants in these sectors.

“At the moment the company has robust enough financial foundations to withstand a further significant collapse in the valuation of its assets. For now the value of its offices are holding up and most of its tenants are paying rent on time.

“However, this may change as recession begins to have a more widespread impact. In the longer term demand for offices may be affected as working from home habits built up over the pandemic prove hard to break.

“Already corporate leaders, including the CEO of Barclays Jes Staley, are publicly noting they might not need the same level of office space in the future as they eye the savings that could be achieved by reducing their footprint.

“It remains to be seen whether home working will pose the same existential threat to office real estate as online retail has to physical shops but it is a clear risk facing British Land, given offices account for substantially more than 50% of its holdings.

“The search for a new CEO is reportedly on hold for now as current incumbent Chris Grigg tries to put out the fires sparked by the current crisis. His eventual successor faces the extremely tough job of revitalising the portfolio.”

These articles are for information purposes only and are not a personal recommendation or advice.