Blow for property groups over dividends

Property companies have been dealt a blow by a government decision to block the payment of stock dividends, which had been hoped would relieve the pressure on balance sheets as the struggling sector looks to conserve cash.

Companies had lobbied to be allowed to meet dividend obligations using shares, as part of a broader cash raising strategy to prevent breaches of gearing covenants, which also includes asset sales, debt renegotiation and rights issues.

The decision comes as British Land will on Thursday become the latest in the property sector to announce an equity raising, with more than £600m set to be targeted in a fully underwritten rights issue.

British Land was on Wednesday preparing its investors for the issue, which will be announced alongside the company’s third quarter results.

UBS and Morgan Stanley are advising on the issue, and are expected to take on some of the underwriting risk alongside a handful of shareholders.

The second largest real estate investment trust (Reit) is expected to emphasise that the equity will be used for future activity as much as to secure its balance sheet.

The company is expected to say that net asset value per share has fallen to less than £8. Shares in British Land on Wednesday fell 5¾p to close at 483¼p.

Monday’s £588m sale of Meadowhall shopping centre in Sheffield to London & Stamford has already helped pay down some of British Land’s debt.

The company has more than £2.7bn in undrawn credit lines, which can be unlocked if it is able to bring in sufficient new cash to address its high gearing levels.

Hammerson and Workspace have already announced discounted rights issues, with the latter also hoping to retain more of its cash by paying out dividends in stock.

Workspace said in its rights issue prospectus that it was seeking authority to pay out its dividend in shares, which it said would enable the company to retain cash that would otherwise be paid out as dividends.

The company will now need to change its plans in light of the decision. The Treasury could still amend legislation in the Budget.

A Reit must distribute 90 per cent of its profits from its property rental business. HM Revenue & Customs told the FT the issue had been considered, but that it had been decided that share dividends were not acceptable.

The Revenue said: “We can confirm that under current legislation the technical view is that a stock dividend does not qualify as a property income distribution for the purposes of a Reit.”