Land Securities pandemic problems ease

The is no doubt that the pandemic exacted a heavy toll on the prime office and retail landlords, as commuters stayed at home and the likes of Land Securities (LAND) went into full forbearance mode. What was clear from these results that operational performance started to move towards the mean as leasing activity for prime office space recovered, with 95 per cent of LandSec’s prime London office space now occupied.

Overall, Land Sec’s enjoyed a £409m increase in value surplus across its mixed portfolio. The majority of this was driven by a mix of profit on developments, several major lease renegotiations in London, and growth in London office estimated rental values.

The change in performance mix in the London market was worth noting. The company plans to exit or repurpose at least quarter of its retail space, which makes up 15 per cent of its total stock, and to convert it into mixed urban living space or leisure outlets. The company has so far grown its mixed-use pipeline by 50 per cent to £4bn and plans to invest another £1.5bn over the next five years to yield expected returns of £350mn.

Interestingly, management seems to be circling around the question of whether to abandon retail entirely as a declining part of its portfolio. Yet even with subscale retail and leisure assets being prepped for sale – it recognised a £120mn valuation uplift in this area as part of a future disposal process – the change in mix will still mean that retail’s overall proportion should remain stable at 25 per cent of the group’s total portfolio.

Part of the reason for the pause for thought might be that its regional shopping centres have shown signs of resilience as the year progressed. Yields were down by only 1.3 per cent, compared with a more than 4 per cent decline, previously – the adage that shoppers like having somewhere to go seemed to hold true.

Sadly, the recovery of sales to near-2019 levels is not reflected in the rental performance – shopping centre rents are still 40 per cent lower than before and values are down approximately 65 per cent from their peak.          

Land Securities is still trading at a hefty 30 per cent discount to its tangible net asset value. A lot will depend this year on whether it maintains its leasing momentum in key markets. Operationally, it is hard to fault management’s approach, but broader economic issues will have their part to play, too. Hold.

Last IC View: Hold, 721p, 16 Nov 2021