Landsec fails to outmanoeuvre rival

In some ways, Land Securities (LAND) remains the mirror image of its closest competitor British Land (BLND). The pair posted their results one after the other this week and both recorded a drop in gross rental income, flat net rental income, and a valuation hit due to higher interest rates.

For both companies, the valuation hit in these results was not as bad as the walloping they recorded in their results for the year to 31 March, a period in which the 'mini' Budget sent interest rates soaring, but it was still enough to widen their pre-tax losses. Both own a multi-billion pound mix of different types of buildings – with a heavy focus on London offices but with some regional shopping centres thrown in – and both are ploughing ahead with a 'recycling' strategy: selling assets with low rental growth potential and buying ones with higher potential.

Both are also recycling at a similar speed. Since chief executive Mark Allan took charge at Landsecs in April 2020, the real estate investment trust (Reit) has sold £2.5bn worth of buildings with a plan to sell a total of £4bn by 2026. Over the same period, it has bought £1.12bn worth of assets, including a 75 per cent stake in Media City in Manchester for £426mn and the former Reit U+I for £269mn. British Land has sold and bought a similar bulk of assets over the same period.

However, there are some key differences. Landsec is a FTSE 100 Reit, while its rival fell out of that club and into the FTSE 250 earlier this year. British Land owns London warehouses, a larger retail park portfolio, and a 50 per cent stake in a 53-acre Canada Water redevelopment. Landsec has no exposure to London warehouses and is much more exposed to development beyond London, particularly with its acquisition of U+I. It also has less money tied up in joint ventures, giving it more control over its bigger portfolio.

There are tentative signs that Landsec's strategy is working better. Where its peer has an EPRA vacancy rate of 6.7 per cent and a net initial yield (annual net rent as a percentage of property value) of 5.4 per cent, Landsec's EPRA vacancy is just 4 per cent and its yield is marginally higher at 5.7 per cent. Then again, analysts are predicting near-identical sluggish growth, with adjusted earnings per share not forecast to increase until 2025. We remain cautious despite its discount to net asset value and dividend yield. Hold.

Last IC View: Hold, 632p, 16 May 2023