Flat second half for Land Securities

This isn’t a surprise: the standard IPD commercial-property index has been moving backwards. More surprising is that the company’s high-quality London portfolio underperformed its benchmark by 2.5 per cent. That’s partly down to the index catching up with Land Securities’ stellar performance last year, but also because the company has been ejecting income-paying tenants in the Victoria area ready for a major development scheme.

This illustrates the company’s big strategic trade-off. Francis Salway, who left as chief executive at the end of March, relaunched Land Securities’ development pipeline back in January 2010. His replacement Rob Noel is just as keen on development; he says it generates stronger returns, “if you get it right”, than buying second-hand assets. The problem is that buying occupied buildings is immediately income-accretive, whereas developments destroy income in the short term (and sometimes in the long term, too – the company’s shopping centres at One New Change and in Cardiff are worth far less than they cost).

Land Securities has also been a net seller of assets over the past year. It has got good prices and freed up capital for the development pipeline while reducing debt, which is sensible in an environment of falling property values. But it will take years to replace the £37m of rental income generated last year by the assets it has sold. Mr Noel admits pre-tax profits (stripping out revaluations) will be lower this year, yet he insists the company can nonetheless maintain its progressive dividend policy.

Brokerage Investec expects year-end adjusted NAV of 820p.