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Landsec Puts Prime Retail Top of List for £600 Million Acquisitions Drive

REIT Says Value Falls Have Stabilised at Majority of Portfolio
Landsec sold a £400 million portfolio of hotels in the period. (CoStar)
Landsec sold a £400 million portfolio of hotels in the period. (CoStar)

Landsec said it is putting prime retail top of its list as it nears the end of a £4 billion disposal programme and focuses on acquisitions.

In full-year results to the end of March 2024, the REIT said around 60% of its near £10 billion portfolio is no longer reporting value falls, notably West End offices and prime retail assets, while a period of disposals and strong rental growth means it has £1 billion set aside to invest in its committed development pipeline and new acquisitions in the next 12 months.

Speaking on a media call, chief executive officer Mark Allan said: "There are three key headlines. Firstly the increasing strength of operational performance, with clear demand from occupiers to be in the right locations, which is driving higher occupancy, rents and income. Next, the second half of the year has seen around 60% of the portfolio report stabilising values. We are at a point where rental growth begins to come through to asset values.

"Finally, we have been very active recyclers of our portfolio with £3.1 billion now sold of the £4 billion we had previously targeted. We have our balance sheet in a great place to take advantage of what we see as that trough in values. We have £1 billion of capacity to invest and expect to do that in the next 12 months. The first £400 million is for our committed pipeline but the remaining £600 million we would mainly expect to target into prime retail."

The two near-term development schemes that it is investing in are London's Timber Square on South Bank and Portland House in Victoria.

"We know we can invest accretively in retail and we have increased stakes in assets where we were not sole owner, for instance St David's in Cardiff, and there has been an £100 million in investment across our assets. We are also looking at buying catchment-dominant assets in a strong catchment and there is a relatively small number." Allan put this figure at around 20 assets.

In terms of disposals, Allan said there are non-core assets remaining, while the REIT is pencilling in a sale of its out-of-town leisure parks portfolio in the next two to three years.

Allan was also upbeat about office use.

"In London utilisation of our office estate continues to grow and was up 18% in the year. That is across all five days of the week, albeit the strongest growth is on Tuesday through to Thursday, Office occupiers are planning to occupy space with lower densities. Pre-COVID it was around 115 per square foot and now its 150 per square foot per employee and we do not see that trend changing at all. There is a continued squeeze for the very best space in terms of demand. Most people are taking more or the same amount of space across our portfolio."

Landsec says it will fund new developments mostly through disposals of mature or standalone assets, alongside other, "complementary sources of capital", which will involve bringing on board partners.

It said it has three main sources of funding: its balance sheet headroom towards a slightly higher loan-to-value now rates and values are starting to stabilise; further capital recycling; or attracting other sources of capital.

Allan said: "Around 80% of our portfolio is now invested in 12 places with significant scarcity value, where our competitive advantages in shaping and curating these places mean we expect like-for-like rents to continue to grow."

Landsec reported the combined portfolio value was down 6%, or £625 million, to £9.963 billion, driving a £341 million pretax loss, with value falls stabilising in the second half.

Landsec reported European Public Real Estate Association earnings per share were stable against the prior year's underlying level of 50.1p, in line with guidance, as occupancy growth and 2.8% like-for-like income growth offset rises in interest costs and the impact of £600 million of asset disposals.

The total dividend was up 2.6% to 39.6p per share, in line with guidance of low single-digit percentage growth.

The total return on equity improved to minus 4.0%, with an 8.2% reduction in EPRA net tangible assets (NTA per share) to 859p, as its outlook for return on equity turns more positive as values begin to stabilise.

Landsec said it had maintained a strong balance sheet with a 32.3% group loan to value, down 2.1% over the past two years despite plummeting values in that period.

Operationally, the REIT said its high-quality portfolio of assets was underpinning a positive outlook for returns.

It said the portfolio delivered "continued outperformance in a market increasingly focused on best-in-class space", reflected in 8% uplifts on relettings and renewals and 130 basis points of occupancy growth across London and major retail, driving 2.8% like-for-like net rental income growth.

At its central London assets, which are valued at £6.2 billion, it reported an 1.4% like-for-like net income growth in offices. Overall occupancy was up 140 basis points to 97.3%, £35 million of lettings was signed or in solicitors' hands at 6% above estimated rental value and relettings and renewals qwew 15% above previous rent.

It has seen a consistent upwards trend in office use throughout the year, with unique daily entries across its buildings up 18% versus the prior year, and 81% of lettings in the year resulting in customers taking more or the same space, as demand remains firmly focused on high-quality space in the best locations.

West End values, which are 72% of its London portfolio, up from 48% three years ago, were virtually stable in the second half, with the overall change in Central London values moderating to minus 2.4% versus minus 4.5% in first half. Yields remained stable in the final quarter, as leasing was behind 5% ERV growth, with further low to mid single-digit percentage growth expected for the current year.

At its major retail schemes it is seeing "strong income growth", as rental reversions reach an "inflection point and turn positive". Retail is valued at £1.8 billion.

It reported 6.9% like-for-like net income growth, with occupancy up 130 basis points to 95.4%, and £37 million of lettings signed or in solicitors' hands, 6% above ERV and 2% ahead of previous rent for relettings and renewals.

It is focusing investment in best-in-class destinations, with the sale of its two smallest outlets and accretive investment of £100 million in existing destinations over the next three years. There was an 0.2% increase in asset values in the second half.

In its mixed-use portfolio it has secured planning consent for 1,800 homes at its Finchley Road scheme and a detailed consent for first phase, with site-enabling works starting later this year, ahead of potential start of main project in 2025.

It is progressing "optimisation of plans" for the Mayfield mixed-use development in Manchester and the rest of its portfolio.

The period saw it sell £625 million of subscale and non-core assets since March 2023 including £400 million of hotels post year-end, on average in line with March 2023 book value, materially exceeding acquisitions of £136 million.

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