British Land

8/20/2019 British Land

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EQUITY RESEARCH

Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by research analysts employed by foreign affiliates of LehmanBrothers Inc. who, while qualified in their home jurisdictions, are not registered / qualified with the NYSE or NASD.

PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 6 AND IMPORTANT DISCLOSURESINCLUDING FOREIGN AFFILIATE DISCLOSURES BEGINNING ON PAGE 7

1

Liquidity cause and effectThe property sector is looking for direction and being told that you should not start from here. Short of the collapse of a public realestate developer, it is difficult to imagine much more pessimism being priced into the sector’s 33% discount ratings which equate to45% pre-REIT (i.e. backing out the tax savings), a level last seen in 2000. Then there was a liquidity crisis in real estate shares as flowswent into TMT with a buoyant underlying market. Now there is a liquidity crisis in the underlying real estate market, which is beingreflected in the shares.

British Land repositioningSo where does this leave British Land on the deepest discount in the sector (of the REIT majors) the day after Land Securities decidedto de-merge itself to counteract its low equity rating. BL warned of the over-pricing of the UK commercial real estate market more thantwo years ago and now the timing appears right. The company summarized the causes as being the 100bps rise in gilts yields being toofar too fast, too many momentum investors, and the under-pricing of risk. The business is, however, in pretty good shape.

November 16, 2007

British Land (BLND.L - 950.5p) 2-Equal weight Recommendation Change

1H08: NAV growth warning

Investment Conclusion

In our view, these results have pulled the rug fromunder the soft landing theory. BL's governingdynamics are flat and earnings are positioneddefensively, but this was as close to an NAVwarning as the sector comes. The market isskeptical of the unsold Meadowhall Centre whichrisks further write-downs, the share buy backprogramme and City developments into whatappears to be shortening cycle. With investorskeen to slice and dice diversified REITs, BritishLand is continuing with business as usual. More ofthe same is not helping the poorest performingFTSE-100 REIT this year, in our opinion.

Summary NAV unchanged at 1682p vs. LB est. 1688p Portfolio -0.5% for the six months (Q2 -1.9%) Offices +3.6%, Retail -2.9% DPS 8.75p for the qtr. 35p FY guidance Long leases (14.4 yrs) and long debt (12.7yrs) 70% geared, with debt 100% fixed rate at 5.3% Cap rates +21bps (Offices +25bps; Retail +20bps) Meadowhall -4.8% (£79m) to 4.87% eq. yield Broadgate up 1.2% with ERV £49 - £57psf, eq.

yield 4.77% Our 2008 NAV is cut 3% to 1580p (1624p) Reduced from Overweight to Equal weight

Mike Prew Chet Riley

(44) 20 7102 5734 (44) 20 7102 5895

[email protected] [email protected]

LBIE, London LBIE, London

United Kingdom

European Real Estate

Reuters BLND.L

Bloomberg BLND LN

ADR

Performance 1M 3M 12M

Absolute % -13 -21 -38

Rel. Market % -9 -24 -40Rel. Sector % -3 -7 -10

52 Week Range 1722.00 - 932.00

FY Mar 2007A 2008E 2009E 2010E Currency STG Actual Old New Old New Old New

Net Rental Inc. (m) 561.0 573.6 555.4 603.1 556.8 666.2 588.8

Op. Profits 123.0 251.5 266.5 267.5 267.8 290.2 262.8

EPS (p adj) 43.5 50.5 53.6 52.7 53.2 56.9 52.3

Earnings Yield 4.6 5.3 5.6 5.5 5.6 5.9 5.5

DPS (p) 20.3 35.0 35.0 38.5 38.5 42.3 42.3

Dividend Yield (%) 2.1 3.7 3.7 4.0 4.1 4.4 4.5

NAVps (adj) 1682 1624 1580 1700 1623 1778 1692

P/NAV prem/(disc) -23 -20 -18 -24 -20 -27 -24

Market Data

Market Cap (m) 4868

Shares Outstanding (m) 512.2

Float (%) 100

Net Div Yield (%) 2.14

Convertible No

Shares per ADR N/A

Financial Summary

Net Debt (m) 5968.0

Net Debt / Equity (adj) 70.0

EBITDA/EV 4.6

NAV 3yr CAGR (%) 0.20

EPS 3yr CAGR (%) 6.35

Stock Overview15/11/07

N D J F M A M J J A S O N D J F M A M J J A S O N900

1000

1100

1200

1300

1400

1500

1600

1700

1800

0.25

0.30

0.35

0.40

0.45

0.50

0.55

BRITISH LANDBLND/FTALLSH(R.H.SCALE)

Source: DATASTREAM

Stock Rating Target Price

New: 2-Equal weight New: 1375p

Old: 1-Overweight Old: 1487p

Sector View: 2-Neutral


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EQUITY RESEARCH

2

Refining the modelThe acquisition of Pillar Property in 2005 brought a long overdue injection of fresh management talent and high-quality retailwarehouses into an underperforming, over-diversified portfolio, which has bolstered performance, but now the retail warehouse assetsare falling despite them being the highest quality open A1 usage (this allows for higher value fashion trading). The group has also foundsome risk appetite for office development having missed out on the late 1990s surge in London office rents. It has also lost its pastattachment to assets having been a past ‘hunter gatherer’ and sold £1.9bn of assets, notably the EBRD building for £407m, bringingtotal sales to £6.1bn since 2005.

Figure 1: British Land, Period on Period Statement (1H07A – 1H08A)

Period: hy07a hy08a Delta (%) Comment

Net rental income 274 282 2.9 New lettings offset sales activity, l-f-l rental income +5%

Other net income 55 46 n/a Includes £16m Songbird Dividend, JV and Fund profits £19m, other £2m, FM fees

Admin costs / Depn / Amort -50 -45 n/a Reduction in REIT restructuring costs in 1H08

Operating profits / EBIT 279 283 1.4

Net interest payable -172 -174 1.2 Flat interest charges, current costs of debt 5.3%, £3bn in acquisition lines

Capitalised interest 15 24 62.7 Registering an increase in dvelopment activity

Other non-operating items 0 0 n/a

Pre-exceptional profits 122 133 9.3 Reduction in admin charges and increase in lease activity

Revaluation gains (Investment) 539 -191 n/a Portfolio valuation decline 0.5% (offices +3.6%, retail -2.9%), -21bps yield shift

Revaluation gains (JV) 133 -56 -142.1 As above

Fair value movement in derivatives 0 9 n/a Group uses certain hedges to fix debt, with interest rate rising, non-cash item

Other Exceptionals -228 30 -113.2 Capital reciept from Songbird investment

Disposal profits (losses) 104 40 n/a 3.1% gain based on £1.4bn in asset sales (BL shares)

PBT 670 -35 n/a

Revenue tax -6 -1 n/a Benifitting from REIT status, some residual tax charges

Deferred tax -86 34 n/a Net tax credits

Net Profit 578 -2 -100.3 Operating profits increasing, revaluation affects net result , partially offset by tax credits

Cost of dividend -29 -90 n/a Quarterly dividend in line with guidance

Retained earnings 549 -92 -116.8

Adjusted EPRA Earnings 124 145 17.3 Adjusted earnings discount exceptionals, non-cash items and revaluations

Average shares on issue-m 519 517 -0.5 Decreasing as a result of share buy back programme, £125m for 9.8m shares

Stated EPS (p) 111 0 -100.3

Adjusted EPRA EPS (p) 22 28 n/a

DPS (p) 6 18 n/a Consistent with FY 35p dividend guidance, with 50% coming from PID

NAVps (fd. adj.), Mar-07 1682 1682 0.0 Represents 3% fall from 1q08 NAV declaration of 1730p Source: Company data, Lehman Brothers estimates

Meadowhall: £79m write down to 5% yieldBL should have de-geared more before the investment market closed, but the failure to find a buyer for Meadowhall risks tainting the£1.6bn centre with concerns of a further write downs even after a write down of £79m after a 24bps hike to an equivalent yield of 4.9%.The proposition of British Land retaining a 25% equity stake and the management contract may have hindered the process and it may,with the benefit of hindsight, have been better to abandon the sales process after the centre flooded in July.

The NAV pegged at 1682p (N/C)With a reduced number of shares after £125m of stock was retired, the NAV stayed at the March level of 1,682p, having peaked at1,730p in June. The appraisers, Knight Frank, have marked up cap rates despite a lack of deal evidence with a ‘buyers strike’ to reflectpricing uncertainty. The capital return from the portfolio was -0.5% with the IPD Benchmark at -0.9% although having underperformedthe higher level of secondary assets attracting debt driven buyers on the way up, to outperform in a credit crunch on the way down isonly to be expected, in our view. CBRE have also independently indicated that this trend continued from September through toNovember with Retail Parks +50bps to 4.5%, Shopping centers +25bps with London offices +50bps (to City 5% and West End 4.25%).

This could be the short sharp valuation shock of 50bps we had anticipated In April, and has un-nerved the equity market.

A portfolio yield of 4.9% vs. Land Secs 5.2% As with other recent REIT valuations the estimated rental value (ERV) of 4.2% increase over the six months largely offset the 21bpshike in the portfolio’s net equivalent yield which rose to 4.9%, although Land Securities recorded 5.2%. London Offices includingdevelopments saw outward yield shift of 25bps and values rise +3.7% driven by 8.7% ERV growth. Retail did poorly with RetailWarehouse Parks’ yield +18bps and values fell -1.9%, Superstore +15bps and -2.4%, and Shopping centres +24bps and -4.5%. Thegroups’ key sub-sectors of London Offices and Out of town Retail, showed annualised ERV growth rates of 18.2% and 3.3%respectively in 1H08, with the portfolio 99% occupied with a weighted average lease term (WALT) of 14.4 years.

2.6 million sq ft London Office developmentsThe committed development programme is carried at a value of £1.1bn with £1bn of costs to complete with an estimated yield on costof 8% concentrated in the London office market with 57% leased or 67% including space under option. Imminent completions include201 Bishopsgate (420,000 sqft) and The Broadgate Tower (400,000 sqft), London EC2, with 75% pre-let, and at Ludgate West, London

EC4, an agreement to lease has been exchanged over 88,000 sqft, representing 69% of the whole. In 2009 developments atRopemaker Place (593,000sqft), London EC2 and Osnaburgh Street (490,000sqft), Regent's Place, London NW1 complete with TheLeadenhall ‘cheese grater’ Building (612,000 sqft), London EC3 completing in 2011 anticipating a longer cycle. 67% of the constructioncosts have been fixed covering key material and labour.


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EQUITY RESEARCH

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Based on an average 2.5 year build to completion and a nominal 8% WACC we derive a PV surplus on costs of c£686m (132pps), or34% on combined costs and stated market value. The current estimated yield on cost is 7.2% (our estimates) and £95m in developmentsurpluses have been booked during the period, sheltering the remainder of the portfolio. The group achieved 537,000sqft of lettings(with a further 100,000sqft under options) on average 17 year leases further crystallised value. We do not include the medium termprojects (Euston Station and Broadgate 2020, etc.) which carry considerably more risk (construction inflation, letting and planning etc.)and arguably Leadenhall, EC3, (612,000sqft) should be discounted more heavily, with delivery in 2011 likely to hit a demand ‘pinchpoint’ in our view, although competing schemes appear to be falling away or being delayed. Around 67% of the near term programmehas been insulated from construction cost inflation and c67% of the programme has been pre-let (including options) and Ludgate West,127,000sqft, at 69% pre-let has been forward-sold at current book value, with the letting risk passing to the new owners.

At Bishopsgate, BL has pre-let 124,000sqft to Hendersons who will relocate from 4 Broadgate (which will be redeveloped underBroadgate 2020 doubling the current size to c400,000sqft but planning remains at early stages) and terms have been agreed for afurther 223,000sqft to Mayer, Brown and Maw (the 55,000sqft lease assignment if exercised would reduce the rent-free to compensate),de-risking the development significantly. Terms have also been agreed for 155,000sqft at the Broadgate Tower. A pre-let at today’srates probably represents a 10% discount in PV terms, given the consensus range of agent’s rental growth forecasts, but we think theright approach in the current environment. We summarise the development programme below, noting the 132pps development surplusif the programme is delivered to the market successfully. The downside risks remain city supply dynamics after 2009, the supply pinchpoint in our view, and construction inflation; however, the pre-let strategy and timing of the bulk of the development programme addssome comfort.

Figure 2: British Land, Current development programme (as at 31 Mar)

Property

Principal

use

Area

(000sqft) Finish

Current

MV (£m),

Mar 07

Devt

Cost

(£m)

Notn'l

interest

(£m)

Sales*

(£m)

Total

cost

(£m)

Yield

on

Cost

(%)

ERV

(£psf)

Est.

ERV

(£m)

Cap

Rate

(%) MV (£m)

Est

Surplus

(£m)

Near term / committed developments:

Broadgate Tower/ 201 Bishopsgate Office 822 Oct-08 369 174 17 560 7.6 57.5 42.5 5.0 851 291

Ludgate West Office 127 Nov-07 71 20 0 -100.0 91 0.0 55 0.0 5.3 100 9

Ropemaker Office 593 Jun-09 175 211 29 415 7.7 60 32.0 5.3 610 195

Osnaburgh St, Regents Pl. Office 380 Sep-09 77 214 19 -51.0 259 8.3 62.5 21.4 5.3 407 148

Leadenhall, EC3 Office 612 Mar-11 114 368 46 528 6.8 65 35.8 5.3 682 154

Puerto Venecia, Zaragoza* Retail 2159 Dec-09 77 88 8 -21.0 152 6.4 10 9.7 5.5 177 25

Giltbrook, Nottingham Retail 199 Jun-08 10 44 3 -2.0 53 6.3 37 3.3 5.3 63 11

*50% interest

Totals 4892 Aug-09 893 1119 122 -174.0 2058 7.2 49.6 144.8 5.3 2890 832.0

Net present value 2.5 years average build 8% 686.3

Per share (p) 160.3

Per share discounted (p) 132.2

Forward / Expected sales

Osnaburgh St, Regents Pl. Resi 110 Sep-09 51.0 Included above

Ludgate West Office 127 Nov-07 100.0 Included above

Residual Value unadjusted Taken

Surplus

(£m) P/share NPV

Surplus B/F (2h07) 832 160 132

Carried through balance sheet:

2008 0 832 160 132

2009 19 813 157 129

2010 44 769 148 122 Source: Company data, Lehman Brothers estimates

Gearing 70%Despite asset sales, gearing nonetheless remains high with a 44% loan to value (LTV) or 70% equity gearing, and interest cover 1.8times, but both have been improving over the past two years. New bank loans of £950m have been arranged in spite of the paralysedfinancial markets. British Land now has £3bn of committed bank lines, with £275m due to expire in the next three years. Within theselines, nearly £2 billion are presently undrawn. The entire balance sheet was refinanced to give 100% fixed interest rates, the lowest costof debt (5.3%) in the sector with an average maturities of 12.7 years, with the £2bn of additional undrawn committed financing at thesame coupon.

NAV warningThe group believes that ‘the likely scale of price correction is limited by real estate's defensive cash flows and risk adjusted prospectivereturns - but it remains hard to predict as other markets move and investor sentiment is volatile. Given the limited current transaction

data available to valuers, there could well be uneven price changes and yield movements across different valuers and companies (forcomparable assets) into which little can be read until clearer hard evidence is available. Hence the price correction seems likely to takemore than one quarter to be accomplished, in our view.


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EQUITY RESEARCH

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Medium-term prospects.The share buy-back programme does not appear to have worked, however, the £125m so far expended has been financed from thezero yielding partially pre-let Ludgate West site for c. £100m. The group intends to press ahead with the remaining £125m and maycatch the bottom of this run on the shares – time will tell. Given the quality of the retail asset despite the repricing and continuing growthfrom the London office portfolio, the shares are now underperforming all its FTSE-100 REIT peers and SEGRO, the international flexiblebusiness space operator. The business is liquid and typically easy to sell short, but Land Securities is the liquidity focus of the sector,which BL has underperformed by 10% YTD. Higher gearing counts against BL, but is probably one of the businesses’ best assets givencurrent financing rates, in our view. The dividend yields 3.7% against Land Secs 4.3% and the underlying portfolio fell 0.5%, whereasLand Secs increased by 0.9%. The merits and demerits if Land Securities demerger are debatable, but the business has bought an

option. We believe that British Land is business as usual – better than before admittedly, but when REITs increasingly have significantcatalysts for change, British Land does not.

Figure 3: FTSE100 Real Estate returns (May 2007 – November 2007)

Source: Datastream, Lehman Brothers research

Earnings EstimatesWe have adjusted our earnings estimates to reflect recent asset sales, the share buy-back programme and have rolled forward ourestimates based on the current interim results. The earnings stream is predominantly driven by the delivery of the developmentprogramme (and successful lettings thereof), which should be significant post 2009 show we show a relatively flat earnings profile in theshort term.

In our earnings estimates we do not make any adjustments for the capital distributions that might arise from the group’s Songbirdinvestment and carry the recurring dividend assuming 6% annual growth. In 1h08 the capital distribution from Songbird was £30m, butthese are lumpy and unpredictable (along with £33m in 2007) and dividends totalled £16m, which are more predictable. With regard tothe share buy-back, we capture the £125m already taken and the group has advised they will recommence. If (almost wholly) funded by

the forward sale of Lugdate West with zero loss of income, the group is effectively buying back the 3.7% yield for free. We assume thatcash is used to retire the stock and we amend our funding costs to 5.3% to recognise the fall in overall, fully hedged, funding costs.

Our rental income profile (ex development) is predominantly driven by the contribution of rental increases (average 4% in 2008), theincome security of the indexed property and the reversion held within the existing lease contracts. We adjust for recent sales and baseour forecasts of an annualised net passing rent of £518m. In addition, we have adjusted our estimates to account for £5m in lost incomefrom the demolition at the Leadenhall site and we start to recognise development income, specifically from the Willis Building, Lime St,EC3, which we estimate to be £19m pa. The net effect is a relatively flat rental income profile over the next two years before the deliveryof the development programme is monetised. After a period of heavy development there is usually a time lag, between the cessation ofinterest capitalisation at post completion and the full revenue recognition from leasing activity which partially (but not significantly)decreases adjusted earnings in 2009/2010. Adjusted earnings rise on average c10% pa over the next two years as the developmentprogramme is rolled out and let. Until clearer guidance is given we are increasing dividends by the same amount annually on the basisthat the growth and distribution patterns remain the same (Figure 4.)

15/11/07

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

50

60

70

80

90

100

110

120

Brit Land (income reinvested)

Land Secs (income reinvested)

Liberty In (income reinvested)

Hammerson (income reinvested)

Source: Thomson Datastream


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Figure 3: British Land - Summary Revenue Statement, 2007A–10E

2007 2008 2009 2010

March year end (£m) H1 H2E H1E H2E H1E H2E A E E E

Net rental income 282 299 301 303 304 313 561 581 604 617

Other net income 46 53 52 53 55 56 87 99 104 111

Admin costs / Depn / Amort -45 -46 -47 -47 -48 -48 -212 -91 -94 -96

Operating profits / EBIT 283 306 306 308 311 320 436 589 615 632

Net interest payable -174 -175 -175 -175 -181 -186 -350 -349 -350 -366Capitalised interest 24 28 28 21 18 5 37 52 49 23

Other non-operating items 0 0 0 0 0 0 0 0 0 0

Pre-exceptional profits 133 159 159 154 149 139 123 292 313 288

Revaluation gains (Investment) -191 -574 6 132 135 139 1,052 -765 138 274

Revaluation gains (JV) -56 -136 0 26 26 26 224 -192 26 52

Fair value movement in derivatives 9 0 0 0 0 0 0 9 0 0

Other Exceptionals 30 0 0 0 0 0 -272 30 0 0

Disposal profits (losses) 40 5 0 0 0 0 143 45 0 0

PBT -35 -545 166 312 310 304 1,270 -580 478 614

Revenue tax -1 -6 -6 -6 -5 -5 -18 -7 -11 -11

Deferred tax 34 21 0 -5 -5 -5 1,201 55 -5 -10

Net Profit -2 -530 160 302 300 294 2,453 -532 461 594

Cost of dividend -90 -90 -99 -99 -109 -109 -106 -180 -198 -217

Retained earnings -92 -620 61 203 191 185 2,347 -712 264 377

Adjusted EPRA Earnings 145 155 161 156 151 142 226 301 317 293

Average shares on issue-m 517 513 513 513 513 513 520 1,030 1,026 1,026Stated EPS (p) 0 -103 31 59 58 57 472 -104 90 116

Adjusted EPRA EPS (p) 28.2 30.3 31.3 30.5 29.4 27.6 43.5 58.4 61.8 57.0

DPS (p) 17.5 17.5 19.3 19.3 21.2 21.2 20.4 35.0 38.5 42.4

Source: Company data, Lehman Brothers research

2008 2009 2010

Figure 4: British Land – Balance Sheet, 2007A–10E

2007 2008 2009 2010

Mar year end (£m) H1 H2E H1E H2E H1E H2E A E E E

Gross Property 13,234 12,944 13,232 13,575 13,886 14,066 14,047 12,944 13,575 14,066

Net investment in JVs 743 718 719 733 748 764 770 718 733 764

Net investment in Funds 871 821 820 831 842 853 840 821 831 853

Other investments 236 236 236 236 236 236 267 236 236 236

Intangible assets 45 38 30 23 15 8 50 38 23 8Trade debtors 210 210 210 210 210 210 95 210 210 210

Interest rate derivatives 0 0 0 0 0 0 88 0 0 0

Other debtors 0 0 0 0 0 0 25 0 0 0

Cash and Short-term deposits 453 453 453 453 453 453 198 453 453 453

Total Assets 15,792 15,419 15,700 16,061 16,391 16,589 16,380 15,419 16,061 16,589

Trade creditors 484 484 484 484 484 484 85 484 484 484

Interest rate derivatives 0 0 0 0 0 0 19 0 0 0

Other creditors incl. corp tax 42 42 42 42 42 42 642 42 42 42

Short term borrowings and overdrafts 117 117 117 117 117 117 54 117 117 117

Long term borrowings/ debentures and loans 6,385 6,593 6,813 6,966 7,100 7,108 6,617 6,593 6,966 7,108

Obiligations under lease liabilities 0 0 0 0 0 0 30 0 0 0

Deferred tax liabilities 143 122 123 127 132 137 179 122 127 137

Other non-current liabilities 0 0 0 0 0 0 7 0 0 0

Total Liabilities 7,171 7,358 7,578 7,736 7,875 7,888 7,633 7,358 7,736 7,888

Net assets 8,621 8,061 8,122 8,325 8,516 8,701 8,747 8,061 8,325 8,701

Adjustments 75 161 162 166 171 176 115 161 166 176

Adjusted, diluted NAV 8,696 8,222 8,283 8,491 8,687 8,877 8,862 8,222 8,491 8,877

Per share data:Basic (adj.) 1,686 1,593 1,605 1,646 1,684 1,721 1,692 1,593 1,646 1,721

NNNAV (adj. fd.) 1,745 1,605 1,617 1,657 1,695 1,731 1,694 1,605 1,657 1,731

Adjusted NAV (fd.) 1,682 1,584 1,596 1,636 1,674 1,710 1,682 1,584 1,636 1,710

Source: Company data, Lehman Brothers research

2008 2009 2010

Figure 5: British Land – Gearing ratios, 2007A–10E

2007 2008 2009 2010

Mar year end (£m) H1 H2E H1E H2E H1E H2E A E E E

Net debt 6,049 6,257 6,477 6,630 6,764 6,772 6,473 6,257 6,630 6,772

Revalued gross assets less cash 13,652 13,312 13,600 13,953 14,275 14,466 15,459 14,029 14,686 15,230

Adjusted net assets 8,647 8,173 8,234 8,442 8,638 8,828 8,816 8,173 8,442 8,828

Loan-to-value ratio (%) 44 47 48 48 47 47 42 45 45 44

Net debt to equity adj. (%) 70 77 79 79 78 77 73 77 79 77

Source: Company data, Lehman Brother research

2008 2009 2010


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EQUITY RESEARCH

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Valuation: Revising price target to 1375p (1487p)We have referenced the share target price to liquidation valuation, purchasers' costs and current REIT status. Our target price is basedon our assessment of NAV and allows an embedded 5-10% structural discount that the market applies to the business (50pps), whichwe believe is related to the financial structure, but this is abating with the company reconstituting some of the securitisations with lesscomplex ones. We think that the Meadowhall shopping centre may result in a further price reduction of £125m (after £75m writedown)and we also adjust for this in our target price calculation by 30pps. Our adjustment for the overhead allocation of the business is afurther 40pp and 90pps for valuation tolerance. We forecast a year-end NAV of 1,580p. The shares trade at a 40% discount against thesector average discount of 30% and at 12 months, 42% discount versus a sector discount average of 33%.

Analyst Certification:

I, Mike Prew, hereby certify (1) that the views expressed in this research Company Note accurately reflect my personal views about any

or all of the subject securities or issuers referred to in this Company Note and (2) no part of my compensation was, is or will be directly

or indirectly related to the specific recommendations or views expressed in this Company Note.

Other Team Members:

Barkow, Peter (LBIE, London) (44) 20 7102 6466 [email protected]

Company Description:

It is an investment and development property company concentrated in the UK retail and office sectors and, although we believe theasset quality is generally high and lease lengths long compared with its peer groups, we view the portfolio as mature, which haspreviously only delivered sub-benchmark growth. The company has, however, entered a period of change recently, selling a number ofdry assets. In July 2005, it acquired Pillar Property, a co-investment fund manager and in doing so, indirectly gained access (principally)to a prime retail warehouse portfolio and significant intellectual capability. The financial structure is complex and, we believe,constrained with encumbered assets estimated at £7.4bn; however, significant progress has been made to pre-position the companyand it has recently committed to a £250m share buy-back programme.


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Important Disclosures:

British Land (BLND.L) 950.5p (14-Nov-2007) 2-Equal weight / 2-Neutral

Rating and Price Target Chart:

Currency=STG

Date Closing Price Rating Price Target

24-Aug-07 1277.00 1619.00

24-Aug-07 1277.00 1 -Overweight11-Apr-07 1571.00 1748.00

11-Apr-07 1571.00 2 -Equal weight15-Jan-07 1582.00 1851.00

Date Closing Price Rating Price Target

22-Nov-06 1585.00 1716.00

15-Sep-06 1362.00 1661.0016-Aug-06 1352.00 1581.00

12-May-06 1284.00 1 -Overweight

FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.

Lehman Brothers Inc. and/or an affiliate trades regularly in the subject company's shares.

Valuation Methodology: We have referenced the share target price to liquidation valuation, purchasers' costs and current REIT status.It is based on our assessment of NAV and includes an embedded 5-10% structural discount that the market applies to the business(50pps), which we believe is related to the financial structure, but this is abating with the company reconstituting some of thesecuritisations with less complex ones. We think that the Meadowhall shopping centre may result in a further price reduction of £125m(after £75m writedown) and we also adjust for this in our target price calculation by 30pps. Our adjustment for the overhead allocation ofthe business is a further 40pp and 90pps for valuation tolerance. We forecast a year-end NAV of 1,580p. The shares trade at a 40%discount against the sector average discount of 30% and at 12 months, 42% discount versus a sector discount average of 33%.

Risks Which May Impede the Achievement of the Price Target: British Land is an investment and development property company

concentrated in the UK retail and offices sectors and, although we believe the asset quality is generally high and lease lengths longcompared with its peer groups, we view the portfolio as mature, which has previously only delivered sub-benchmark growth. Thecompany has, however, entered a period of change recently, selling a number of dry assets. In July 2005, it acquired Pillar Property, aco-investment fund manager and in doing so, indirectly gained access (principally) to a prime retail warehouse portfolio and significantintellectual capability. The financial structure is complex and, we believe, constrained with encumbered assets estimated at £7.4bn;however, significant progress has been made to pre-position the company for REIT conversion in 2007, which increases its value.


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Important Disclosures Continued:The analysts responsible for preparing this report have received compensation based upon various factors including the firm's totalrevenues, a portion of which is generated by investment banking activities

Company Name Ticker Price (14-Nov-2007) Stock / Sector Rating

British Land BLND.L 950.5p 2-Equal weight / 2-Neutral

Guide to Lehman Brothers Equity Research Rating System:Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal weight or 3-Underweight (seedefinitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industrysector (the “sector coverage universe”). Below is the list of companies that constitute the sector coverage universe:

British Land (BLND.L) Brixton (BXTN.L)Derwent London (DLN.L) Deutsche EuroShop (DEQGn.DE)Eurocastle (ECT.AS) Fadesa (FAD.MC)

Gagfah (GFJG.DE) Gecina (GFCP.PA)Great Portland Estates (GPOR.L) Hammerson (HMSO.L)IVG Immobilien (IVGG.DE) Land Securities (LAND.L)Liberty International (LII.L) Mapeley (MAY.L)Metrovacesa (MVC.MC) Minerva (MNR.L)Rodamco Europe (RDMB.AS) SEGRO (SGRO.L)Unibail (UNBP.PA)

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutralor 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system.Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratingsalone.

Stock Rating

1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universeover a 12- month investment horizon.3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a12- month investment horizon.RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm

policies in certain circumstances including when Lehman Brothers is acting in an advisory capacity in a merger or strategic transactioninvolving the company.

Sector View1-Positive - sector coverage universe fundamentals/valuations are improving.2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.3-Negative - sector coverage universe fundamentals/valuations are deteriorating.

Distribution of Ratings:Lehman Brothers Equity Research has 2118 companies under coverage.39% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as Buy rating,29% of companies with this rating are investment banking clients of the Firm.44% have been assigned a 2-Equal weight rating which, for purposes of mandatory regulatory disclosures, is classified as Hold rating,36% of companies with this rating are investment banking clients of the Firm.12% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as Sell rating,23% of companies with this rating are investment banking clients of the Firm.

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British Land

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