Retail continues to drag Landsec down with falls in revenues and valuations and a slip into the red.
The REIT has reported revenues of £369m in the six months ended 30 September, down from £378m a year earlier. EPRA net value per share dipped by 3.2% to 1,269p and a decline in value led the firm to report a pre-tax loss of £147m, compared with a profit of £42m in 2018.
The decline in the value of the REIT’s portfolio increased, dropping by £368m during the period under review to £13.4bn, compared with a fall of £188m during the same period in 2018.
The business delivered an ungeared property return of 0.5%, compared with the MSCI all property return of 0.8%.
Despite the declines, occupancy and like-for-like rental income across Landsec’s combined portfolio were up. Voids were down by 2.1% and rental income increased by £4m or 1,4%, driven by its office portfolio and higher income at its advertising hoarding, Piccadilly Lights.
Outgoing chief executive Rob Noel said the market was facing “unsettled conditions”.
He said the London office market was in good health, with limited supply being more than matched by demand which was helping to sustain rental growth. However, the retail market continues to be challenging, with a number of high-profile company voluntary arrangements and administrations during the period and limited demand for space and poor investor sentiment affecting rental and capital values.
Retail run down
“We expect the retail market to remain challenging as it continues to be impacted by structural change, CVAs and administrations,” said Noel.
“We’ll continue to develop plans for repurposing assets where we see opportunity to create value.”
Retail parks were the poorest performing division of Landsec’s portfolio, with values dropping by 11.1%, rents falling by 2% and yields moving out by 58 basis points. The REIT has been selling off its retail parks over the past few months, with its most recent sale being that of its 208,000 sq ft Poole Retail Park in Dorset. Landsec put the retail part up for sale in May for around £48m. It was bought by NewRiver REIT for £44.7m, an 8% yield.
Retail parks now make up just 4% of Landsec’s portfolio, with ultimate plans to reduce this to zero. It currently owns 10.
“Ultimately I don’t think Landsec will own retail parks in the long term,” said chief financial officer Martin Greenslade. “However, there is no point rushing for the exit along with others who are perhaps more pressured into selling at the moment. We will play that one by ear but I don’t see retail parks as particularly a long-term ambition or strategy of Landsec.”
Regional retail declined in value by 9.4% as retailer difficulties weighed on rental values, which dropped by 3.7%. Yields moved out 36bps.
London offices safe
Strong fundamentals and good demand for grade A space in London offices continues to produce steady income for Landsec, delivering £3m of investment lettings over the period under review and marginally outperforming the MSCI Quarterly benchmark with an ungeared return of 2.1%.
Offices currently make up 67% of the REIT’s portfolio, which will increase in the coming years as more of its development pipeline comes on line.
Greenslade said Landsec expected to make a decision on bringing forward the 400,000 sq ft redevelopment of Portland House, a 1960s office block in Victoria, SE1, within the next six months and its 140,000 sq ft redevelopment at 105 Sumner Street, SE1, earlier than that, but would look at what “political changes to the landscape” there may be.
Landsec said it recognised the health of its business was closely linked to the health of the UK economy and that it was actively monitoring events and assessing the broader economic uncertainties that may result from leaving the EU or the outcome of the General Election.
“With a General Election next month and the UK’s proposed exit from the EU further delayed, we remain alert to market risks,” said Noel. “However, Landsec enters the next six months with confidence; we’re in a strong financial position, have an exciting development pipeline and are agile enough to seize value creating opportunities as we see them.”
The firm provided no update on a successor to Noel.
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