Landsec is accelerating its shift away from offices towards retail and residential, pledging to recycle £2 billion of capital in the former over the next two to five years into the latter.
In final year results for the year ended 31 March, Landsec said the portfolio again delivered very strong performance with like-for-like net rental income growth of 5%, supporting growth in both earnings and portfolio valuation over the year.
Landsec said it would increase investment in major retail by another £1 billion and establish a £2 billion-plus residential platform by 2030, to be funded by rotating £3 billion of capital out of offices, non-core investments and low or non-yielding pre-development assets. The group will not start any more speculative office development until its two major under-construction projects in London at Thirty High and Timber Square are substantially leased.
Speaking at a media presentation this morning, chief executive Mark Allan said: "There are three headlines. First the results continue to show how important it is to own the right real estate. Occupancy is up quite materially, rents are up, and there no signs of that focus on the very best space in office and retail abating soon. We are reiterating our earnings guidance for the year ahead. Second it is about a steady recovery in investment demand in the sector.
"We are not back to the levels seen before interest rate rises and other events but we are seeing recovery. There is definite confidence that the strength in occupier demand can be underwritten among investors. As such values have stabilised and rents growing is leading to growth in the portfolio value. The third area is using the quality of the portfolio as a springboard to move the business forward with our strategic objectives. Our clear view is growing earnings per share sustainably is critical to delivering long-term value for investors."
Allan said part of that strategic move was patiently building a significant residential pipeline. "We are prioritising that in terms of capital investment." That is almost entirely being done via the build-to-rent market although there is some focus on coliving, he said. Partners will be brought on for the student homes.
Allan said the inflation-linked nature of residential meant he saw it as a better long-term bet for sustainable earnings than the more cyclical office and residential sectors. "We have built a very attractive pipeline of 6,000 rental homes, at Finchley Road, Mayfield and Lewisham. We will invest a billion in these sites to the end of a decade and are looking at investing a further billion with acquisitions of existing rental product in similar locations."
Allan said in terms of its proposed £1 billion investment into retail, around £200 million would be invested into the existing portfolio and around £800 million was earmarked for acquisitions. "So that means another couple of acquisitions along the lines of Liverpool One."
For the large office at 102 Petty France in Victoria that the government confirmed this week would no longer be the home of the Ministry of Justice, Allan revealed Landsec was looking at alternative uses. "We have been expecting this for some some so we don't think this is an office project. It's located at St James's Park so a really quite interesting residential or hotel opportunity and we are looking at those alternative uses given the opportunity to create something of quality and significant value.
Allan was keen to point out that the REIT remained a firm believer in its offices at the prime end and it would not be selling at speed into a tough investment market. In particular it will seek development partners.
"The office capital that has returned to the market in the past six months is in two areas. There is more private equity type money focused on value-add developments and repositioning. That plays quite well into our plans to recycle out of our development assets. At the other end we have got examples of Norges with Grosvenor and Shaftesbury, for instance, looking to invest in really scarce assets in central London. Ultimately we have an £11 billion portfolio and we want to be invested in assets with very long-term growth prospects."
Focusing on the broader performance of offices and retail Allan, said: "Another important part of the results is the strength of our relative outperformance compared to the wider markets. We have close to 98% occupancy in central London offices compared to around 90% in the wider market. On retail that is even stronger as we are back above occupancy peaks before Covid.
"Retail is now 38% of portfolio, with occupancy above Covid levels at 97% and rental growth is accelerating. We are seeing a growth in our London office estate in terms of utilisation. Using turnstile data we see that continues to accelerate post-Covid with an 11% increase in tap-ins to new high levels post-Covid. That compares to relatively modest growth in wider London. There are more people in the office more often and we are seeing a sustained trend for employers to plan for more space per employee. There has been a 25% growth in average space per employee and that trend is continuing."
Office to residential and retail
In its results, Landsec delved into its framework to reduce capital employed in office-led assets by £2 billion to fund the build-up of a £2 billion-plus residential-led platform over the next two to five years. It said it would scale back its office-led development by at least half, to grow its residential development.
"We are very confident in the near-term income growth prospects of our high-quality London office assets, as the focus from customers on best-in-class space and modest new supply in recent years has created 12% positive reversionary potential. Yet, longer term there are fewer supply constraints, and demand and hence rents are likely to be more cyclical. The growth in demand for homes, however, is more structural, as it is underpinned by long-term demographic trends. This means residential income and values have been much less volatile historically and we expect this to remain the case going forward."
In the results Landsec posted European Public Real Estate Association earnings up £3 million to £374 million, thanks to 5% like-for-like net rental income growth and lower overhead costs which it said "more than offset impact from significant disposals" early in the year and a rise in finance costs.
EPRA earnings per share was up 0.4% to 50.3p, in line with expectations and ahead of initial guidance. The total dividend was up 2% to 40.4p per share, in line with guidance.
The profit before tax was up to £393 million, as strong 4.2% estimated rental value growth supported an £119 million or 1.1% uplift in portfolio value. That resulted in a 6.4% return on equity and 1.7% increase in EPRA net tangible assets per share.
Group loan to value was 38.4%. Landsec projected 20% EPRA earnings per share growth potential by FY30, with 2-4% growth expected in full year 2026.
During the period it sold £496 million of non-core assets plus a further £159 million since year-end, on average 1% below the March 2024 book value, with further non-core disposals expected in the near term.
It issued a £350 million, 10-year bond issue at 4.625% coupon and refinancing of £2.25 billion revolving credit facilities at existing low margins.
Analysts at Panmure Liberum said: "With the shares trading at 603.5p, Landsec offers a compelling forward earnings yield of 8.3% (and trades at a 31% discount to FY25 NTA) . We reiterate our Buy rating and 682p target Price."