BAA to boost investment in property

BAA, the owner of Heathrow and Gatwick airports, is embarking on a big expansion of its property business which could see investment in rented office space and other airline-related buildings quadruple to pounds 400m over the next three years.

Another option being considered by BAA to unlock value for shareholders is a flotation of its fast-growing discount shopping centre operation, jointly owned with US factory mall specialist McArthur-Glen, which could take place as early as next year.

Sir John Egan, BAA's chief executive, has backed the surge in property spending following the upturn in demand for office accommodation from airlines and the huge increase in rental charges in central London.

Property has become increasingly important to BAA's profits, already accounting for about 30 per cent of the group's earnings of pounds 397m in the nine months to the end of December, though only some 17 per cent of turnover. "This really is one of the areas of the business the City hasn't fully understood, but we are starting to change that," said Gordon Edington, group property director.

Though most of the new development will initially be concentrated on Heathrow, the additional investment will also see a similar growth spurt in Stansted. One advantage is the low cost of land on the periphery of airports compared with city centre sites.

The first step has been to commission a second phase of the BAA's World Business Centre at Heathrow at a cost of pounds 8m. Mr Edington yesterday confirmed that total property investment would double to around pounds 200m over the next three years, while Sir John is understood to be interested in raising it even further. Mr Edington said existing property investments were earning a 15 per cent return.

The possible flotation of BAA McArthur-Glen, a separate division to the main property interests, underlines the success of the American discount shopping mall concept in the UK. Clothing and other manufacturers use the space to sell selected stock, often from last year's range, at sale prices.

Three centres have been completed in Cheshire, Troyes in France and Swindon. Mr Edington said four more malls were in the pipeline, three in the UK and one in Austria. Some pounds 150m will be invested over the next three years.

Subject to approval from McArthur-Glen, BAA would consider floating the business if its value reached pounds 400m.