The UK economy may have surprised on the upside since the referendum but with the serving of Article 50 just days away, the chief executive of the UK’s biggest listed propco is taking nothing for granted.
“Uncertainty for business affects decision-making and our market really relies on businesses wanting to expand and wanting to move,” says Rob Noel. “One of the things that businesses tend to do when they are in uncertain times is to rein their horns in. What concerned me was that we would have a drop off in demand, in particular in the London office market.
“Now I have to admit that over the last six months it hasn’t dropped off as much as I thought it would, but then the notice has not been served yet. Whether we are in a phony war or not, who knows.”
The Land Securities boss was of course one of this sector’s most vocal remainers in the run-up to last June vote. But he is more optimistic today – provided politicians play ball.
Speaking from Land Securities’ new offices in Victoria, SW1 – and yes, his own is on the shop floor and not in a glass-walled enclave – Noel casts an eye to the Westminster end of Victoria Street.
“I have got three pleas for government as we go into these negotiations with the EU. One is, please make sure you keep the environment for business, all businesses, as stable as you can because it will just encourage investment. Secondly, make sure business can get access to skills. And, thirdly, please get behind the property industry in delivering homes.”
He is optimistic that his pleas for support won’t fall on deaf ears – despite the industry’s reputational problems. “I think the government does recognise now that the property industry is effectively an essential provider of infrastructure,” he says. “The government is perfectly well aware that business and the economy requires fit for purpose infrastructure to work well and also that the provision of that infrastructure is a great employer.
“The slight problem we have as an industry is we are not a vote winner; we are not that politically expedient for them so they tend to tinker with our environment whether it’s taxation, local or otherwise. Business rates are a great example, stamp duty another example of where every time they tinker it makes our activity more risky and therefore we require a higher return in order to do that activity so less activity is done.”
Optimism is key
It’s in Noel’s nature to be optimistic and in his role requirements too. On the back of the referendum, Land Sec’s share price dropped from 1,197p to, briefly, below 900p. Today it is back up to 1,030p.
Others have fared worse. “No management team is ever happy about a share price and it’s the one thing we can’t control,” says Noel. “What we can do is run a very good business and over time shareholders will either support you or not support you.
“We have great support from our shareholders. Our relative performance is absolutely fine and that tells you really all you need to know relative to our peer group. And as we have gone through the Brexit referendum, our share price has been a lot more resilient than many, which tells you that the shareholders are saying, ‘you know, you positioned your company right’.”
To position the business right, Noel has two options. “We have a portfolio of, at the moment, roughly £14.5bn. And we have two big levers we can pull as a business. One is the amount of debt that we have got on the balance sheet, so financial gearing, and the other is the amount of speculative development we’ve got hanging out there committed, which is effectively operational gearing.
“And really there are times to be full on with those two levers and times to be full back. And in 2014 as we saw the risks in our direct market rising we felt it was time to pull back on the lever which was operational gearing.”
That three-year period has been dominated by heightened macro risk. Economic cyclicality is always a risk, uncertainty caused by the potential of Scottish independence has never gone away. At one stage a Labour government committed to a mansion tax appeared a probability and, of course, the referendum was decisive.
So LandSec took further action. “We thought the political risks were rising as well so it was time to think about bringing our financial gearing down. So if you look back at what we did between 15 September and 16 March we took our net debt down from just over £4bn to £3bn. Our LTV came crashing down from the early 30s to the low 20s per cent.
“We have got lowest leverage ever and we are totally relaxed about that.”
Risk assessment
Risk of course can only managed not removed. “Now what we don’t know over the next six months is what’s going to happen when the prime minister serves the notice on the commission to leave the EU. We simply don’t know which way the negotiation is going to go; it may be easy, it may be very difficult. And I think that whichever way that goes could affect our market. Our job as guardians of shareholder capital is to set this business up so it can be in a good place. And we are now in a very good place and I am very relaxed about that.”
The next but one president of the British Property Federation is as confident in London’s continuing allure. “Despite everything that is going on London is the world’s global trading place; it has been for a thousand years it will be for the next thousand years.
“If you go and speak to most occupiers and they go and speak to their staff, they ask, ‘guys do you want to work here or do you want to go and work somewhere else?’ They’ll say, ‘no, we’ll work here thanks very much’. But it’s not just about numbers of people and businesses being here, it’s about whether business in general is expanding or contracting. Because Facebook is great, Apple is great, Snap is great but those are four deals in a 250m sq ft market.
Whichever way it does go he believes LandSec is well positioned: “If things turn out to be better than everyone’s expecting then we can crack on and do some more activity. If things turn out worse than people are expecting then there could be some opportunities around and we have the firepower, the balance sheet and the inclination. As you saw when we kicked off the development programme in 2010 in the worst ever market conditions we have got the courage to do that as well.
“People are now slowing down development then we could very easily get back into a period where we could see there will be a supply constraint in the future. At that point we will press the button and start building again.”
And looking further forward, beyond the serving off Article 50, beyond Brexit, what then?
“We’ll look back I think in 10 years’ time and think that was a bit of a blip.”
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