Landsec swings to pre-tax loss after valuation hit

Landsec (LAND) is a bellwether for the UK commercial property market. The real estate investment trust (Reit) is one of only a handful of listed property companies in the FTSE 100 and one of only two – the other being its main rival British Land (BLND) – to hold a diversified portfolio of assets rather than specialising in one kind of property.

So when interest rates rose and analysts warned of massive valuation drop-offs across all kinds of UK property assets as the rising cost of debt made buyers wary, it became almost an inevitability that Landsec would fall into the red – which is precisely what it has done.

The £192mn pre-tax loss in its results for the six months to 30 September is in large part due to its portfolio plunging in value by £392mn. Without that heavy hit, investors might instead focus on the 6.2 per cent growth in like-for-like net rental income. As it is, the value of its portfolio is likely to be the chief concern, but the Reit has a plan.

As it put it in its results: “In late 2020, we said we intended to sell a combined circa £4bn of London offices and assets in sectors which were subscale for us over a period of circa six years. Two years later, we have now sold £2bn, including £1bn over the past half year.”

On the face of it, this is a sound strategy. After all, even before the pandemic, it was clear that the company’s overreliance on ‘safe’ and low-yielding assets was not generating growth. In November 2019, we rated the company as a ‘Hold’ because, despite its 31 per cent discount to net asset value at the time, it had just posted a £147mn interim pre-tax loss. Something had to change.

As such, getting rid of those “subscale” properties in order to buy £3bn-worth of “sustainable London offices and mixed-use development over the next five years at attractive returns” as it said it intended to back in May is a shrewd move. The falling value of property right now makes it a good time to buy.

The obvious flipside to this, of course, is that Landsec is also selling into a market where values are nosediving and the value of its own assets have plummeted as a result. In September, the company sold 21 Moorfields for £809mn at a 9 per cent discount to its value just months earlier. Shareholders should expect more discount deals to come. The bargain buys will benefit Landsec; the bargain sales will not. Hold.

Last IC view: Hold, 749p, 17 May 2022