Landsec has been hit hard by the disruption from the pandemic on the back of its exposure to leisure, retail and offices.
Its share price has fallen by roughly 36% since the beginning of March to around 525p at the start of trading today, from a high of around 830p.
So the landlord will be hoping that its new growth strategy, which focuses on central London, will get the business back in top form.
As Landsec’s chief executive Mark Allan charts a new course for the REIT, EG takes a closer look at some of the key points.
A £4bn disposal strategy
The landlord aims to embark on around £4bn of capital recycling over the next six years, representing a third of its £12.8bn portfolio according to March book values. Hotels, leisure and retail parks collectively amount to £1.6bn of this, across 51 properties.
However, it will not start with these, but with some of the “drier” London offices where the landlord has “already added significant value”.
“Over time we are likely to move to the sub-scale sectors,” said Allan. “This isn’t rigid, but reflective of where we see the strongest demand and pricing.
“As the emergence from the pandemic and rate of recovery for hotels and leisure becomes clearer, I would expect prospective investors in those sectors to underwrite things on a more effective basis, which would lead to stronger pricing.”
He also emphasised that the leisure and retail park disposals were a “medium-term” objective, and that there was no rush to offload these. “We have to make sure we get the assets right to secure best value,” Allan said.
Developments in limbo
Not all of Landsec’s existing development projects will proceed. Allan said that the landlord has “maintained optionality” to either progress or stop six of them.
This was because those projects represent “too much risk” for the time being. He described it as a “wait and see” situation for some of those until the medium-term view becomes clearer.
“Developments have a real opportunity to add value in the longer term, but in the near term we need to be cognisant of the risks associated with Covid,” said Allan. “We are not putting lots of capital into development now with the hope it will be positive on a two to three-year view.”
He added: “We will prioritise those with the best risk-adjusted return… where we have the highest level of confidence in occupational demand.”
In the long term, mixed-use urban regeneration is expected to amount to about 25% of the portfolio in the next five years.
Ultimately, the landlord’s plan is to reduce its portfolio to three categories – central London, “urban opportunities” and regional retail – by 2026. Regional retail is forecast to make up around a sixth of the portfolio by that point.
Where retail is concerned, the landlord is looking at opportunities to repurpose spaces in Oxford, Leeds, Cardiff, Bluewater and Glasgow.
Housing on the horizon
While Allan as keen to avoid narrowing down its expansion strategy to specific sectors, residential development is “no doubt” on the cards.
Owning these developments, or selling them to housebuilders, are equally under consideration.
Urban logistics, healthcare and senior living were also name-checked as sectors that will “almost certainly” feature in its strategy, although Allan said these are not decisions that need to be made “today”.
“We need to [allocate] our capital to where we have the competitive advantage, and that’s [in] bringing mixed-use developments to life, first and foremost,” said Allan. “This could possibly mean investing capital in residential or urban logistics, but we can take those decisions in a few years’ time, as those projects come to fruition.”
Becoming a “value-add” business
As part of its repositioning, Landsec is shifting its focus to a value-add strategy to become a “total return” business, away from income as a key driver for growth.
“If you focus too much on income… you could start to make decisions like holding onto assets for longer than you should,” explained Allan. “We want to match our capital to value creation – income is a key part of value, but it should not be the driving [factor].”
In doing so, its operational gearing will increase and financial leverage is set to reduce, as it takes on more leveraged operating risk. The range for financial leverage has been reset to 25% to 40%, give or take five percentage points at the top and bottom of this, compared with its previous 35% to 45% range.
“In my view, Landsec has been too wary of operational risk in the past,” Allan added. “It needs to get much closer to its customers.”
New lease terms
A key part of its retail strategy will involve a new approach to leasing. Allan said that while there is not a “one-size-fits-all approach”, he expects to see a rise in inclusive rents; an increase in the proportion of rents based on turnover or performance levels; and shorter terms where flexibility is concerned.
This will in turn be offset by a “more collaborative and proactive relationship” with its tenants.
“In the conversations we’ve been having, we have not heard a single retailer say that they didn’t want to work collaboratively with us or didn’t want to share information,” said Allan. “That’s something that will take time to evolve… but I take it as a significant positive.”
Rents at Landsec’s regional shopping centres are thought to have fallen by around 20% to 25% below March’s ERV – 30% to 45% below where they sat at peak level.
Bringing in more talent
Allan said the business has around 95% of the talent needed to drive its strategy forward, but is keen to bring in more expertise.
“On the retail side, we have brought people into the business from a retailer background rather than a retail property background, which has helped shift the mindset – we will look at doing more of that,” he said.
Where urban regeneration is concerned, Allan said there is a “real skill in envisaging what a community will look like”.
He said: “We have a lot of the technical skillsets for this, but the visionary skillset is something we will look to augment.”
For Allan, the landlord has much to improve on when it comes to the company’s approach to culture.
“I don’t believe Landsec’s culture has yet got the best out of its people,” said Allan. “Too many people describe Landsec as an oil tanker.”
Allan observed that Landsec has employed fewer people than the businesses he has previously worked at, despite having a more liquid portfolio.
“This has led to too much bureaucracy in the business and an overly cautious approach to decision making,” he said.
How demand for offices might look
The future for offices remains undefined while the sector adjusts to the changing appetite for office working in the pandemic. However, Allan has noted that early conversations with tenants indicate there could ultimately be more scope for redevelopments in the secondary space.
He pointed to three key trends: more remote working, a move away from densification, and an increased willingness to share spaces with other occupiers.
“All of this links back to a view that demand will be strongest for the most modern, healthy, sustainable and adaptable workplaces, where people can create the environments they want to attract the talent they need,” said Allan.
“This will accelerate obsolescence in the more secondary, tired workspaces around London. That in time will lead to opportunities for redevelopment, whether into other offices or mixed-use.”
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