Land Securities (Landsec), the £4bn plus property investment group, last week reaffirmed its intention to reduce exposure away from office developments towards higher-yielding residential assets.
The UK FTSE 100 property investment group is forecasting a positive trading market, expecting to achieve 20% earnings per share growth, up from the current 50p per share to around 60p by 2030. The company says it will achieve these results by cost savings and this strategic change. The company will from now on pay dividends every six months in line with its announcements of financial results.
The Covid pandemic was a big factor in the changes brought to the commercial property market, changes that Landsec is now reacting to.
One of the biggest impacts of the Covid pandemic was the move to working from home (WFH) which has occurred for a large proportion of the workforce, and also the shift to more online shopping.
The Office for National Statistics (ONS) data show that over 80% of UK office employees want to continue with the 'hybrid' system of working - home and office working. Despite more employers demanding a return to work, at least for 3 days of the week, there is still a large contingent of office staff doing home working. The question for every employer and every commercial property investor is, will this working pattern continue, and if so, what will the ultimate impact be on the market for office space?
The office market has gradually improved as Covid fades into the distance but another issue affecting, especially secondary grade office stock, and similarly with retail, is the issue of environmental efficiency.
The impact of Minimum Energy Efficiency Standards (MEES) on Commercial Properties is of increasing concern, especially where significant new investment may be required to bring properties up to standard, and indeed some will become unviable as a result.
From 1 April 2023, MEES extended to existing tenancies of most commercial properties. This restricts a landlord's ability to continue letting property with an F or G rating. See the Non-domestic private rented property: minimum energy efficiency standard - landlord guidance setting out the detailed MEES regime. The government is proposing a phased introduction of the EPC standard “B” by 2030 and with EPC “C” by 2027 set as an interim target.
If the government is to meet the country’s Net Zero target by 2050, much of the existing office and retail property stock will require significant retrofitting. This will mean improving ceiling, wall and floor insulation, fitting HVAC systems and heat pump installations, and perhaps intelligent building management systems (BMS). Other measures might include energy-efficient LEDs, water and waste reduction strategies, and the integration of renewable energy solutions.
Over the next five years Landsec intends to reduce its build programme of office-led co-developments while moving more of its capital towards its residential projects. This move, it says, will release around £2bn of its £6.5bn office-led assets.
The company says it’s embarking on this strategy will result in a shift from offices to residential "where the volatility in returns is lower". "The next phase of the company's strategy will see it move towards higher income, higher income growth and lower cyclicality."
The strategy move will include: "establishing a £2bn+ residential platform, capitalising on the opportunity to build meaningful exposure to a structural growth market where rents are closely correlated to inflation via the delivery of the existing pipeline... plus selective acquisition opportunities."
Following a recent post-Covid strategy review, the company has made disposals totalling over £3bn, redefining to a high-quality portfolio of office-led, retail-led, and residential-led assets.
The company is forecasting a 4% like-for-like net rental income growth this year. It has said that in the short term it aims to free-up £350m from pre-development assets, while continuing to invest in some retail through other acquisitions like the Liverpool ONE development, and while exiting £800m from retail and leisure park assets.
According to Knight Frank, Landsec is joining a growing trend for corporate property investors to get more exposure to the UK's residential “Living Sectors”. The sector represented around 25% of the total of real estate acquisitions in 2024.
Around 50% of corporate investors surveyed for Knight Frank's NextGen Living Report are looking to increase exposure to the residential sector by around 80% by 2029. According to the survey around £45 billion in total has been earmarked across the market for a surge in new residential investment, identified by Knight Franks’ survey respondents.
Landsec sees the change in strategy as adding "balance" in its overall portfolio targeted by the end of this decade. It aims to create a property portfolio spanning high end retail, residential and offices.
A spokesperson for Landsec had said:
"Whilst the predominant use of space in each of these areas differs, there is increasingly more binding them together than setting them apart, as the way in which modern cities are used continues to evolve, and the lines between traditional uses of successful urban places continue to blur."
You can learn more about the new Landsec strategy by watching the Capital Markets Update on the company’s website here:
https://webcast.landsec.com/2025-capital-markets-update
With the coming of the Renter’s Rights Bill the UK rental market could be reaching something of a watershed. Coming soon, are big changes in 2025, meaning that life is becoming tougher for the traditional small-scale buy-to-let investor. New, more challenging letting rules might create greater opportunities for corporate residential investors who are less affected by individual tenancy issues.
The steadily rising demand for rentals, rent price inflation and the Renters’ Rights Bill underpin these corporate strategy changes. A looming shake-up of the market looks on the cards, though it has to be said that these corporate landlords still occupy a miniscule segment of the market compared to the traditional buy-to-let sector.
According to Nationwide’s figure, UK house prices picked up by 0.4% in February which brings the annual growth rate to 3.9%, down from 4.1% a month earlier. Meanwhile, data from the ONS shows that rents also rose by 3.9% over the 12 months to December 2024.
Tags:
Comments