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Landsec, one of the UK’s largest listed landlords, plans to sell £2bn worth of office buildings and scale back office developments over five years as it pivots towards residential property.
The FTSE 100 group, a major London office landlord with large holdings around Victoria, wants to reduce offices from about 65 per cent of its nearly £10bn portfolio to closer to a third by 2030, while boosting retail and housing to roughly a third each.
The strategic shift by one of Britain’s best known commercial landlords, announced on Thursday, follows a wider trend in the industry. Investors increasingly see less potential to make big returns from high profile office buildings and are attracted to the steady inflation-linked income from sectors such as housing.
However, chief executive Mark Allan insisted the company still had confidence in the office market despite headwinds from hybrid working after Covid. “This is not a call of us saying we don’t like office,” he said.
He said the move to prioritise other sectors and sell off good quality office blocks to fund new residential projects followed from a decision to focus on generating “income and income growth” for its investors.
Allan said he wanted to be “speculating less on asset values and trading in and out of the portfolio” to reduce the company’s vulnerability to market cycles.
The sharp rise in interest rates that started in 2022 sent commercial property into a sharp downturn, particularly for office properties also battling uncertain corporate demand after the pandemic.
European property prices have fallen by an average of 23 per cent since the peak, with office values falling 38 per cent, according to real estate analysts Green Street. Dealmaking fell about 45 per cent before starting to recover last year, led by hotel and apartment deals, according to index provider MSCI.
The market has shown signs of recovery. Covent Garden landlord Shaftesbury Capital’s portfolio value increased 4.5 per cent last year to £5bn thanks to rising rents, it reported on Thursday, while London office specialist Derwent saw vacancy fall and property values stabilise by mid-year and rise nearly 2 per cent in the second half.
Allan said there was still strong demand for the best quality offices, supporting high rents, but that the returns for investors were less attractive because of the higher costs of construction and of keeping tenants.
The company’s offices are 98 per cent occupied, it said in November.
Scarcely any big London office buildings have changed hands in more than two years. Landsec is counting on the market reopening in order to pull off its plan to reallocate resources to housing.
Landsec wants to devote resources to its three large residential projects located in Lewisham, Manchester and north London. Each has potential to build thousands of homes alongside retail and other uses on land previously developed for other uses, such as outdated shopping centres and car parks.
The company could also look to buy existing blocks of flats to quickly achieve economies of scale. It currently owns only a few hundred homes.
Allan has also taken a big bet on shopping centres after a brutal run for physical retail, which saw property values decimated by the rise of ecommerce. He said he was looking for more deals to buy up the country’s top 30 or so retail destinations, following the £490mn acquisition of majority control of Liverpool One.