The Investment Column: Land Securities offers little to excite

Land Securities' figures yesterday underscored how eccentric stock markets can be. Shares in Britain's biggest landlord raced ahead on the publication of interim figures pretty much in line with analysts' expectations, leaving those very same analysts wondering what all the excitement was about.

They were quick to point out that the outlook for Land Securities has not improved, making it hard to see why the shares were building on the 10 per cent outperformance against the rest of the market seen so far this year. Stripping out the results of selling investment properties, pre-tax profits fell to pounds 115.5m from pounds 118.2m. Proceeds of pounds 161m were received on the sale of properties, resulting in a profit of pounds 13.4m over financial year-end valuations. The most significant deal involved the sale in August of Land Securities' flagship London building at 33 Grosvenor Place for pounds 130m to a German investment fund.

Land Securities explained the pre-tax shortfall on the effects of financing the development programme - interest incurred as part of the cost of carrying out the development programme is not capitalised.

Expenditure on properties, expected to peak in the second half, reached pounds 108m during the period, of which almost pounds 80m related to developments and refurbishments.

Work has been completed at 25 Victoria Street in central London, on shopping centres in Livingston and Wallsend and on several retail developments. Large shopping schemes are also planned in Canterbury, York and Sunderland.

Of more concern is the pedestrian growth in rental income, the lifeblood of any property company. In Land Securities case, this rose by a sub-inflationary 1.5 per cent to pounds 214.3m.

With the shares, up 7.5p to 726p, trading well above the last published net asset value figure, investors are anticipating robust growth in rental income, of which there is precious little sign.

Although occupational and investment demand in the property market have improved as confidence increases, Sir Peter Hunt, the chairman, describes rental growth as "patchy".

Like other property companies, Land Securities is seeing some rental growth in certain parts of the market such as retail warehouses, out-of- town shopping centres and regional shopping malls. But Sir Peter warns that rental income growth is slow and will be nothing like what was experienced in the 1980s. For good measure, Sir Peter's cautious tone is backed up by a paltry 3.5 per cent increase in the dividend to 7.35p. UBS has tweaked its 1997 pre-tax forecast pounds 1m higher to pounds 230m, but has cut its estimates by pounds 5m for each of the following years to pounds 240m and pounds 250m, respectively. High enough.