U.K. office and retail landlord Landsec expects its losses from retail tenants entering insolvency processes to increase in the second half of the current fiscal year ending March 31, 2019.
Speaking during a conference call on the company's earnings for the six months ended Sept. 30, CFO Martin Greenslade said the diversified real estate investment trust lost £1 million in net rental income in the first half of the fiscal year due to retailers entering either administration or company voluntary arrangements, or CVAs.
"Taking into account the timing of store closures and changes to rents, I would expect the second-half decline to be around £2 million, possibly £3 million depending on how quickly we can re-let any returned units," Greenslade said.
The U.K. retail sector is experiencing some of its most difficult operating conditions in living memory as retailers struggle with the rapid growth of e-commerce and tackle weak consumer spending growth and intense competition. Several major U.K. retailers have entered insolvency processes since the beginning of 2018.
Landsec's retail portfolio, which makes up about 45% of its assets by value and includes some hotel and leisure assets, weighed heavily on the company's net rental income performance. While overall net rental income increased by £5 million, the £11 million increase from the company’s London portfolio — comprised mainly of offices — was offset by a £6 million decrease in net rental income from the retail portfolio, Greenslade said. Like-for-like net rental income saw an increase of £8 million, boosted by a £14 million increase in the London office portfolio, but dampened by a £6 million fall in retail operations.
"The retail market faces significant challenges with retailers and consumers under significant pressure, but our focus on our experience-led destinations makes us more resilient," CEO Robert Noel said.
Scott Parsons, managing director of Landsec's retail portfolio, said the company's retail parks and regional shopping centers had a challenging time in the period due to the impact of CVAs. Landsec, however, is less vulnerable than other landlords to the raft of CVAs that have hit the market, Parsons said, citing an analysis by the company that found that 60% of its units remained in full rent following retailer CVAs, compared with 40% in the wider market.
Meanwhile, Landsec's office portfolio received a boost with the REIT's announcement of plans to launch a flexible office brand in 2019. The brand will initially offer 36,000 square feet of space at the 123 Victoria St. property in London.
"This is a growing trend, here for the long term. But also importantly, we think there is a gap in this space which is ours to fill," said Colette O'Shea, managing director of Landsec's London portfolio. "We think there is a part of the market that's not being well-served. These are high-growth businesses with 15 to 80 people who want fully serviced flexible office space but also the ability to customize and make it their own. So we're launching our own flexible office product to serve exactly this kind of customers."
Landsec reported £42 million of pretax profit for the six months ended Sept. 30, compared to £34 million in the prior-year period. EPS stood at 30.3 pence, versus 25.7 pence a year earlier.
