Landsec, the leading UK REIT, said continued strong leasing in its offices and retail portfolio as the investment markets stall means it is well-placed for a "new market reality" as it swung to a loss in full-year results for the year ended 31 March.
The REIT posted results that clearly underline how the tougher economic environment and rising interest rates, particularly since the Liz Truss government's mini Budget, have hit real estate values and investment transactions over the last year. They also point to how markets have shifted for the listed sector in recent times.
Landsec posted a loss before tax of £622 million as a result of a minus £848 million, or minus 7.7%, movement in portfolio value. That meant an average 50 basis point yield softening offset an overall 3.6% estimated rental value growth, leaving EPRA net tangible assets per share down 11.9% to 936p and total return on equity at minus 8.3%.
Those results masked strong growth in underlying earnings. Landsec said EPRA earnings per share was 53.1p, with underlying EPRA EPS up 4.4% to 50.1p, driven by strong leasing and 6% like-for-like rental income growth.
Total dividend is up 4.3% to 38.6p per share, in line with that increase in underlying earnings, while net debt was down £0.9 billion due to the sale of £1.4 billion of mature offices, mostly in the City of London.
Mark Allan, chief executive of Landsec, said the last year had seen the most striking difference in performance between occupational markets and investment markets that he could remember.
"In investment markets, rapidly rising interest rates led to a sharp slowdown in transaction activity and falling asset values as valuation yields rose, whereas from a customer perspective, strong demand for Landsec's best-in-class space drove consistently strong leasing, rising occupancy levels and growing rents across all parts of our portfolio."
At a results call with the media Allan said the REIT has had its second strongest leasing ever, after the previous year.
"But it is very much tenant demand concentrated at the highest quality end of the market. In offices it is the best located amenity-rich space. In retail it is about fewer, bigger, better stores in the best locations that can provide seamless experience and what shoppers demand from the online side of business too."
Looking ahead Allan expects more of the same.
"We envisage rental growth of low to mid single-digit range in the current year. In the investment market there are some encouraging signs that valuations have begun to stabilise for best-quality assets. We will see the bottom and meaningful growth for prime real estate in the year ahead. But for secondary locations we will see values continue to slide."
Allan said that two-and-a-half years into its new strategy the market has seen a very substantial correction.
"We have sold where we felt we could not specifically add value, particularly London mature assets. That has raised significant capital to invest in interesting opportunities."
In central London offices, Landsec has signed or has in solicitor's hands £48 million of rents, 5% of ahead of expected rental value. Allan says the development programme has three assets completed this year that are 68% let and these are leasing at 11% above estimated rental value in "very strong evidence of the flight to quality".
That is very similar in retail, Allan says. "We are most of the way through the reset of retail rents to lower rents. This sector will return to structural growth and we are proactive in allocating capital growth to this sector."
In the third strand of its business, mixed-use urban neighbourhoods, Allan says the REIT has had to build momentum in the pipeline and it is now ready to commit substantial capital at two projects in particular. Those are the residential-led repurposing of a shopping centre in Finchley Road, London, where it has a resolution to grant planning, and in Manchester where it has reached agreement to fund 100% of the first third "or so" of the giant Mayfield project. "We will commit capital by the end of this financial year."
Allan spoke about the opportunities it is targeting: "We have a very strong balance sheet and will be proactive in freeing up balance sheet capacity again. We will sell more before we start to buy more but we will buy again this year and we will invest in our pipeline near term."
Allan said the REIT had largely completed itsplanned mature assets disposals and so the focus now would mainly be on the subscale assets in hotels, retail parks and leisure parks.
The investment opportunities are the "great pipeline particularly London offices where people have held back on new developments" and retail "looks very interesting".
Landsec said it had sector-leading balance sheet strength, with group loan to value down 2.7 percentage points to 31.7% and weighted average debt maturity up from 9.1 to 10.3 years.
Landsec sold £1.4 billion of mature offices, crystallising an average 10% internal rate of return discount to last year's book value, taking total City office disposals over last two years to £1.7 billion and increasing West End/Southwark assets to 74% of the London portfolio,
In retail it continued to deliver strong leasing momentum with £38 million of letting signed or in solicitors' hands on average 9% ahead of ERV and occupancy up 110bps to 94.3%.
In mixed-use urban neighbourhoods it progressed preparations on the rest of a 10 million square foot pipeline and sold or exchanged contracts to sell over half of around £180 million of non-core U+I assets since acquisition in December 2021, 16% above book value.