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UK property giant Landsec suffers 'huge impact' from COVID-19 lockdown

SNL Image
The "Piccadilly Lights," which is owned by Landsec, shines down on an almost Piccadilly Circus in west London amid the coronavirus crisis lockdown.
Source: AP Photo

The two months of lockdown imposed by the U.K. government to delay the spread of the new coronavirus has had "a huge impact" on Landsec, one of the country's largest listed property companies, CFO Martin Greenslade said during a full-year earnings call.

The pandemic contributed to a plunge in the value of the company's portfolio in the 12 months to March 31, cost the company millions of pounds in rental income, and created significant uncertainty around its outlook for the year ahead.

"COVID-19 has had a huge impact on the business over the past two months," said Greenslade. "In the coming year, our income will naturally be impacted by the ability of occupiers to pay, which we've recognized by setting up our £80 million rent relief fund. It is clearly very difficult to predict the level of rent collection we will achieve in June, but it is likely to be lower than March."

Landsec, until 2018 the U.K.'s largest listed property company by market capitalization, owns a £12.8 billion portfolio of London office; retail; and specialist assets consisting of hotel, leisure and other properties. The company's retail, leisure and hotel properties, which account for just under half of the portfolio's total valuation, have been particularly hard hit by lockdown measures.

Valuers CBRE estimated that the impact of the pandemic accounted for £380 million of the almost 9% plunge in the value of Landsec's portfolio, which fell by £1.18 billion in the 12 months to March 31. The decline in the value of Landsec's portfolio was accounted for entirely by its retail and specialist assets, as its office portfolio saw a 1.1% increase in value.

"Our leisure and hotel assets were generally closed with turnover-related rental income severely impacted," said Greenslade. "In retail, shopping centers remain open for essential trading only and footfall all but disappeared."

Still, the virus has had "a significant impact" across all of Landsec's areas of business, Greenslade added. "We have kept our office assets open, but the level of usage is well below 10%. Our development program has been delayed as our contractors adapt to implementing social distancing on site."

The virus hit Landsec's net income by £5 million in the 12 months to March 31, it said. The company also had to make a £23 million provision for rent for the 2020 financial year that was not collected in 2019.

Recovery time

Landsec CEO Mark Allan, who only took up his position in April, said the company expects its assets to be significantly impacted by the pandemic for some time to come.

"All parts of our portfolio will be affected by ongoing social distancing restrictions for a considerable time yet," he said. "Office usage will remain significantly below capacity as we and occupiers grapple with the challenge of moving people into, out of, and around our buildings safely.

"Shopping centers are likely to be similarly restricted for a considerable time, severely affecting footfall and in-store sales," he added. "Retail parks and outlets, where there is more outside space, should be slightly less affected but will still take time to recover."

Tim Leckie, real estate equity analyst at JP Morgan Cazenove, described Landsec's earnings call as "sobering" and "lays bare [the] challenges facing the UK real estate sector."

"Landsec's conference call, in our view, should serve as a wake-up call to investors perhaps looking through the COVID-19 impacts ending with the lifting of lockdown," Leckie said.

Landsec has seen its share price gradually sink in recent years as its exposure to retail, which previously made up about half its portfolio value, has discouraged investors wary of the damaging impact of e-commerce on brick-and-mortar stores. The company's share price has fallen by about 50% in the last five years, which has also seen the U.K.'s protracted exit from the European Union test investor sentiment.

Landsec held the title of the largest listed property company by market capitalization in the U.K. for many years, before industrial and logistics landlord Segro PLC surpassed it in 2018. Segro, which has grown rapidly off the back of rising demand for warehousing space from e-commerce companies, now has a market capitalization double that of Landsec.

British Land Co. PLC, which along with Landsec is considered a fixture of the U.K. property scene, has suffered a similar decline to its old rival. The companies have a similar portfolio composition of London offices and large retail assets.

CEO Allan said Landsec will be working to determine the long-term outcomes of the coronavirus crisis for the property sector, and "to anticipate and act on them."

"This is in many ways an ideal opportunity to step back and consider our long-term strategic direction," he added. "And that is exactly what we will be doing, not only from a COVID-19 perspective, but more broadly, seeking to position the business to benefit from long-term trends, while also building on the heritage and existing capabilities of Landsec."