Landsec chief Mark Allan has set out plans to forge ahead with major London office projects this year and predicted growth in office and retail rental values, as it contends with the “new reality” of higher interest rates and tougher credit conditions.
Allan said that last year earmarked the “most striking difference” in performance between occupational and investment markets that he can remember. He pointed to strong leasing, rising occupancy and growing rents, alongside a slowdown in deal activity and rising yields on the back of increasing interest rates.
Rising interest rates have put pressure on EPRA NTA per share, which fell by 11.9% to 936p during the year to 31 March. The value of its portfolio fell by £848m to £10.2bn as valuation yields rose, led by a 15.4% drop in City office values and 8% fall in West End offices. The REIT made a pretax loss of £622m.
However, EPRA earnings were up 10.7% to £393m on the back of solid operational performance. EPRA earnings per share rose to 53.1p, from 48p in the previous year.
Allan expects rents in London and major retail locations will grow by a low to single mid-digit percentage this year.
The central London business posted its second-strongest year of leasing ever, said Allan. Around £48m of rent is either signed or in solicitors’ hands, with terms 5% ahead of expected rental value.
Allan underlined a similar trajectory for retail, adding that he expects the sector to return to structural growth from next year. He said retail still “looks very attractive” and that Landsec will stay “proactive in allocating capital” to the sector.
“We are now most of the way through the reset of retail rents,” he said, adding that the “vast majority” of leases signed some five years ago, at top of market rents, have either already reset to lower rents or will be this year.
Retail yields are also expected to come down in the longer term, with Allan predicting that they will start to reprice within the next three years.
Allan highlighted a “substantial correction” in rates in the years after launching its turnaround strategy in 2020. The owner has so far reached around 60% of its £4bn disposals target. It is aiming to offload more properties in the “subscale” sector including hotels, retail parks and leisure parks.
Although the REIT will focus on selling its properties rather than acquisitions in the near term, Allan expects it will start to seek buying opportunities this year.
“I expect we will sell more before we start to buy more, but we very much expect over the course of this year to be turning buyer and pursuing some pretty interesting opportunities,” he said.
In the meantime, the forecast for rental growth has given Landsec confidence to commit capital to its development programme, said Allan. He added that business is now moving into a position where it can “tangibly” start to invest meaningful sums into projects by the end of its current financial year.
Those include its residential-led shopping centre revamp at Finchley Road, NW3, and the Mayfield regeneration project in Manchester, where it will fund 100% of the first “third” of the scheme.
The pipeline also includes two office developments that Landsec is planning to commit to this year: the refurbishment of the 27-storey Portland House building in Victoria, SW1, and its Timber Square project in Southwark, SE1.
In terms of sustainability, Allan said that 38% of its London portfolio is either EPC A or B-rated, which is expected to rise to 44% this summer, and that the business is on track to meet its 2030 targets.
Although investment deal volumes remain low, Allan pointed to “encouraging signs” that valuations “have begun to stabilise” for top quality assets. Further market divergence is therefore predicted.
“We will see the bottom, and start to see meaningful growth in prime real estate during the course of the year ahead,” he said. “I suspect for secondary properties, where there really isn’t the tenant demand to support the valuations, we will continue to see value slide.”
Allan added: “[There] always used to be an adage in property that it was all about location. I think what we’re starting to see again, after a decade of ultra-loose monetary policy and very low interest rates, [is] that reality of property markets [coming] back.”
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