Two of the UK’s biggest real estate investment trusts are poring over their lists of what to sell, what to keep and what to buy as the investment market deals with a downturn.
Half-year losses for British Land and Landsec this week underlined a tough start to the financial year for the FTSE 100 companies – one likely to worsen given an economic downturn that has become even more pronounced since the end of September.
Now the companies are looking to shed assets that have served their purpose and eye “bigger and better” targets – but will do so in a market in which buyer and seller price expectations are often far apart.
At British Land, which posted a £34m loss for the six months and a 2% year-on-year fall in the portfolio valuation, good news including a big prelet to law firm Reed Smith was offset by what chief executive Simon Carter acknowledged as “a material deterioration in the economic environment”.
The company published its results a day after Landsec, which lost £192m over the same six months and saw a 0.6% drop in valuation from a year earlier.
Both are mapping out plans to offload assets. British Land has sold stakes in its Paddington Central and Canada Water schemes this year, and Carter told equity analysts that some of the company’s “more mature London office assets” are likely to find more suitable owners.
“We have created some great space, it leased really well but it is then a bit dry for us but really in demand by investors,” he said. Carter added the most likely targets for recycling that capital were retail parks and urban logistics, areas of the portfolio that the REIT has been building out.
“What we are beginning to see is a little bit of distress from funds facing redemptions – it is too early to see anything from the banks,” he said of the expected sellers of retail parks. “There are motivated sellers as well. We have seen pension funds, with the big increase in interest rates, whose liabilities have shrunk and many have moved into surplus and are looking to lock in those surpluses… to move from growth assets, equities, real estate, and are pretty motivated sellers.”
He continued: “We are seeing opportunities in the retail park space and we are well positioned to underwrite those. We will remain disciplined on returns – we are probably not at the bottom yet in terms of those – but if we can buy assets at yields that fully reflect the increase in interest rates and buy significantly below replacement cost, that is pretty interesting for us. And on urban logistics, I think there will be opportunities to buy some sites where we can put some good density on them.”
At Landsec, chief executive Mark Allan said a £4bn disposal target set two years ago remained in place. Asked if the company would have to “bite the bullet” and sell at sub-optimal pricing, as it was suggested the company did with its sale of 21 Moorfields, EC2, he suggested waiting for a bounceback in values was not an option. 21 Moorfields was sold in September to Lendlease for £809m, a 9% discount to March book value.
“When you are selling assets, particularly in this type of market, the worst thing you can do is compare the offers available in the market to a historic valuation,” Allan said. “Doing that leads you to not make decisions and leaves you rather flat-footed as an organisation. We have shown through 21 Moorfields that is not how we want to view things.”
Allan added that Landsec’s plans to sell into multiple markets – “retail parks, hotels, more London offices” gives it the advantage of tapping different pools of capital. “That will give us resilience in terms of being able to progress disposals because we are not reliant on a deep pool of investor demand for a single type of asset, but it also gives us live valuable information on how investment markets more widely are looking at the different sectors in terms of pricing.”
But while British Land eyes its next investments, Landsec will hold off on reinvesting the proceeds from its own sales until “bigger and better” opportunities for acquisitions are in sight.
“While the investment markets are still functioning… 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 this sort of market is going to present are going to be more significant in 12 months or so.”
And investors expecting Landsec to follow its biggest rival into logistics were advised not to hold their breath.
“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 a 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.”
Additional reporting by Pui-Guan Man
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