- Investors look past fall in valuations
- Rental growth drives higher earnings
- Firm targets 8% to 10% return on equity
Property investors finally seem to be getting the message that despite a drop in values due to the rise in interest rates, the UK commercial real estate market remains in rude health.
Results from Land Securities (LAND), or Landsec for short, showed a reported loss of £622 million for the year to March due to a downward revaluation adjustment of £848 million, but a rise of 10% in EPRA earnings per share and a 4% rise in the dividend thanks to strong leasing activity and 6% growth in rents.
The shares added 15p or 2.4% to 635p, propelling Landsec up the FTSE 100 leader board.
IT’S ALL ABOUT EARNINGS
In the words of chief executive Mark Allan, the last 12 months saw ‘the most striking difference in performance between occupational markets and investment markets that I can remember.’
‘In investment markets, rapidly rising interest rates led to a sharp slowdown in transaction activity and falling asset values as valuation yields rose, whereas from a customer perspective, strong demand for Landsec's best-in-class space drove consistently strong leasing, rising occupancy levels and growing rents across all parts of our portfolio.’
Therein lies the key to understanding property stocks – dividends are paid out of earnings, not valuations, so regardless of the accounting hit to the P&L (profit and loss) account from rising interest rates, continued demand for high-quality commercial space will keep driving rents and earnings up.
Leasing activity increased, with £48 million of new lettings completed or ‘in legals’ (in the hands of solicitors), ahead of valuers’ assumptions, and overall occupancy rose 1.1% to 95.9% with the West End office portfolio effectively fully let.
UNLOCKING OPPORTUNITIES
Whether it is offices or retail space, occupiers are only interested in the best buildings in the best locations with the best amenities meaning they need to be handy for train or tube stations and in areas where people want to stay after they have finished work.
As a result, the firm sold £1.4 billion of mature central London offices and increased its exposure to the West End and Southwark, and Allan expects to sell several more assets this year to build up a war chest for future acquisitions.
Thanks to its ‘strong operational performance, continued pace in execution on strategy, and proven ability to unlock complex opportunities, underpinned by high-quality portfolio and strong balance sheet’, Landsec expects to increase its earnings yield and deliver an 8% to 10% annual return over time.
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