Landsec is set to slow its pace of capital recycling, with disposals expected to surpass investment into new acquisitions.
Chief executive Mark Allan said the company will press ahead with plans to sell £2bn of properties, as part of its stated goal from 2020 to offload around £4bn of assets. It has made about £2bn of disposals in the past two years.
However, the business will hold off on reinvesting the proceeds until “bigger and better” opportunities for acquisitions are in sight. Allan said the focus over the next 12 to 18 months is on positioning the business so that it can capitalise on those opportunities.
“While the investment markets are still functioning – there are still buyers out there – the rate at which transactions are happening is slowing down,” said Allan.
“In the past we have focused on reinvesting proceeds from disposals very quickly into new growth opportunities and matching the capital coming in [with] the capital being deployed.
“We don’t see a lot of urgency to deploy capital particularly quickly, and we think the opportunities that this sort of market is going to present… are going to be more significant in 12 months or so.”
The new reality
In signs that rising interest rates are starting to dent values, the value of the owner’s City offices portfolio dropped by 9.7% to £1.7bn in the six months ending September. It marked the steepest decline in its overall central London portfolio, which fell by 4.4% to £6.7bn. Total portfolio value fell by 2.9% to £10.9bn.
Allan highlighted that the “adjustment to the new reality” is “well underway” in real estate, if not yet fully reflected in September book values.
“It is clear we are very unlikely to go back to the ultra-low interest rate environment of the past decade or so,” said Allan. He added that volatility in the past six weeks has been “particularly high”.
However, Allan underlined that Landsec’s choice to steer clear of expanding into sectors “in vogue” where record-low yields are now rapidly correcting, such as industrial and logistics, has ensured the company is in a solid position to endure market challenges.
“In our view, the sectors that are most at risk of continued repricing remain the ones where yields compressed the most before the start of this year, while sectors we should have already repriced arguably overshot in doing so – prime retail being a very good example – [which] look to us to be much more resilient,” he said.
Allan said retailers are scaling down their store estates to focus on fewer but larger stores, with some taking double or triple the space but “not paying much more than total rents or other occupancy costs that they had been paying before”. He added that rents are some 35% below their peak.
Turning down a party
Expansion into logistics was considered two years ago while the company’s strategy was devised, but Allan said it ultimately “couldn’t identify where our competitive advantage would be”. The owner instead moved into mixed-use urban regeneration, while sticking with prime retail locations and central London offices.
“Perhaps relationships to retailers over time could be a source of advantage in that space,” said Allan. “But when we looked at values it did feel like a little bit like we would have been turning up in the early hours of the morning to a party that started at nine. So we chose to steer clear.”
The REIT’s loan-to-value has reduced to 31.1%, from 34.4% in March, with no refinancing required until 2026. Adjusted net debt fell to £3.4bn, from £4.2bn.
Allan maintained that the owner’s is “on track”, with plans to spend £135m on decarbonising its portfolio. He said 43% of its offices are rated EPC B or higher, meeting the required 2030 benchmark.
He expects to increase this to around 50% by 2025, reaching 100% of EPC B or better by 2030. The landlord is also “firmly on track” to start the first retrofits of air source heat pumps next year.
Separately, Allan said more initiatives to improve efficiencies are underway after an organisation-wide review began six months ago, although he declined to provide further details. Recent leadership changes include the departure of Colette O’Shea as CFO earlier this year.
“It’s incumbent upon us, particularly in these sort of markets, to make sure that we are as efficient and streamlined as a business as we can be,” said Allan.
Shares in Landsec were largely static at 623.6p in the early afternoon at time of publication.
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