Landsec’s Mark Allan tells EG that as the landlord’s new chief executive, “there will not be a better time” to rethink the company’s strategic direction, while Covid-19’s “profound” impact on real estate unfolds.
The value of the landlord’s portfolio has dropped by 8.8% – £1.2bn – to £12.8bn in the year ending March.
Allan, who joined the landlord four weeks ago from developer St Modwen, said that Covid-19 is “forcing businesses to think radically and boldly about what this will mean for the long-term”.
A strategic review is now underway, with an outcome expected in the autumn. There are no plans to appoint an external consultancy to oversee the process.
Shares in Landsec fell by 12.8% to 551.8p in the hours following the announcement, in which Allan also warned that the economy may not recover to pre-coronavirus levels until 2022.
While Allan has learned not to second-guess movements in share prices too much, he theorises that that “starkness” of his outlook for real estate might have surprised some people.
“We are not going to suddenly flick a switch and be out of lockdown – this will be an issue we will grapple with for many months yet,” he says. “Looking forward it is clear we still have a significant impact to be borne across our portfolio, over the next number of months.”
As part of a “severe but plausible” downside scenario, Landsec outlined that rent receipts from its retail and specialist tenants could fall by 75% alongside a 20% reduction from its office tenants, over the majority of the next 12 months. Rental yields may also expand by up to 70bps.
However, at this stage Allan is not yet able to specify whether the new strategy will involve any further diversification away from retail, offices or leisure, or if there will be changes to management structure.
“It is still too early to say what the strategy will involve, but nothing has been ruled in, or out,” he says. “We won’t have a strategy grounded purely in what we own today and the sectors we’re in, but equally we won’t simply go and do a load of new things just because we think it’s a good idea.
“We will try and position the business as best we can to benefit from long-term structural trends that are being accelerated by Covid-19, but need to be realistic about what we can achieve, what skills we have in the business and make the most of those, and bring those things together.”
In doing so, Allan says that the strategy will try to incorporate learnings from outside of real estate, and outside of the UK, where it can. “There’s a real risk for businesses to be too inward-looking when it comes to strategy, and to look for answers within your own organisation, when there are great things to learn from other businesses, both real estate or non-real estate.
“We need to look internationally as well, but to be careful about the fact that these concepts may not travel particularly well, [in terms of] different cultures.”
For Allan, harnessing data and data science to drive decision-making is an area that real estate in the UK needs to catch up on, to reach the standard that other countries have set; proptech will “also be a big feature of the built environment that we will need to play a clear part in”.
Sustainability is another key aspect that Landsec will factor into its strategy. The REIT has already outlined its aim to become a net zero carbon business by 2030.
“It is easy to forget about climate change in the context of Covid-19, but it will be the defining challenge in the next few decades,” says Allan.
“This crisis will pass but climate change will still be in front of us at that point. These are things we will need to address in our strategy, as issues that will influence the way our customers and partners are thinking about life in the future.
“We need to understand how we can fit into that and be part of the solution, rather than seeing those things as risks or problems.”
Despite expecting less rent to be collected in June than in March, Allan reiterates that Landsec can “comfortably” cope with a temporary shortfall. He pointed to its 30.7% loan-to-value ratio and £1.2bn cash and facilities headroom, as well as its “strong” London offices portfolio.
“We have come into this in a strong position – nothing I can take credit for, having only arrived four weeks ago, but leverage has been carefully managed for a long period of time.”
For Allan, rethinking the landlord’s strategic objectives will brighten the light at the end of the tunnel. “This crisis, like all crises, will pass,” he says.
“There will be major opportunities that will come from it, for those that are strong enough to be able to [withstand] it. Our focus is to come out of this in the strongest position possible.”
See also – Landsec boss: capital will come back after this crisis
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