Landsec to shed £1bn of hotels and retail parks to fund new developments

Landsec plans to sell more than £1bn of hotel and retail park assets over the next 18 months to fund its development pipeline and opportunistic purchases. Speaking as the FTSE 100 REIT revealed a near-£200m loss for the first half of the year, chief executive Mark Allan said he was eyeing assets to reach its 2020 target to make £4bn of disposals over six years. So far it has sold £2.5bn, including £1.4bn of City offices. However, that sales push has slowed in recent months. Disposal strategy In the six months to the end of September, Landsec “did not make any material disposals”, its latest results confirmed. Since then it has sold “one of our two smallest outlets and a number of non-core U+I assets”, taking total disposals for the year to date to just £85m. Allan said: “When we set out our plan to sell £4bn of assets three years ago, we said we would focus on the sale of £2.5bn of offices first, as yields were at an all-time low and therefore most at risk of moving out. “With our timely disposal of £1.4bn of offices last year, we have sold £2.2bn of our £2.5bn target at an average yield of 4.4% and a modest 4% discount to book value.” Most of these – 86% – have been large City HQ buildings. “As a result, our City exposure is down from 42% three years ago to 24% now,” Allan said In place of the Square Mile, Landsec has built up its focus on the West End and Southwark. But Allan’s team is now pivoting to other “subscale sectors”, chiefly retail parks and hotels. Allan said deals are likely to progress in the second half of the year, “assuming no major economic shocks”. The subscale portfolio is roughly split into equal thirds between retail parks, hotels and leisure parks. “We have a small portfolio of retail parks, and there is good liquidity in that market. So you should expect to see some progress from us over the next six to 12 months in selling individual retail parks,” Allan said. Leisure assets Alongside this, Landsec will dispose of its £500m hotel portfolio, which includes a number of Ibis and Novotel hotels in regional city centres and at Heathrow. “Hotels are trading very well, and investment activity in the hotel sector is pretty healthy,” Allan said. “So I think you should expect to see some progress on hotel disposals over a similar time frame.” Following this, the REIT will look to dispose of its leisure parks. “That is probably the only area that is going to be slightly longer-dated in terms of disposals,” Allan acknowledged. “Because those are cinema-anchored in the main, and concerns over consumer spending and the outlook for cinemas are going to make that challenging to achieve in the near term.” However, the chief executive is confident that the early phases of disposals will provide enough cash to fund investment and developments scheduled for 2024. “There is about £1bn across the hotel and retail parks portfolio that we can sell, and that will certainly be plenty to fund the opportunities that we are pursuing for the next two to three years,” Allan said. Development pipeline He said the REIT’s two major development projects poised to start in 2024 – Mayfield in Manchester and Finchley Road in London – would go ahead “if conditions are supportive”. However, he added that a benefit of Landsec’s urban regeneration pipeline is that “it doesn’t cost us a lot to hold on to”. Landsec has detailed planning for the first phase of its £2bn Manchester scheme, and was granted planning for Finchley Road in March. “This urban and mixed-use part of our business could start to see meaningful investment and activity during the course of the next 12 months,” Allan said. “But of course the environment we are in has changed in terms of the cost of capital and the returns we will be making, so the way we are approaching these projects is also starting to change a bit.” He added that Landsec was reworking its masterplans for its medium-term projects, including the £850m Buchanan Galleries scheme in Glasgow and the 1,700-home regeneration of Lewisham Shopping Centre. He said: “You will see a lot more of us retaining parts of the existing assets, retaining the income, reducing the carbon footprint of doing that, and making much more surgical development interventions, rather than a more typical development approach of flattening what’s there or building something completely new.” To send feedback, e-mail piers.wehner@eg.co.uk or tweet @PiersWehner or @EGPropertyNews Photo © Landsec