London Portfolio review
Progress on our key objectives for 2009/10
Preserve income by applying asset management skills
- Secured £31m lettings, including higher occupancy at Dashwood, EC2; 30 Eastbourne Terrace, W2; and New Street Square, EC4
- Achieved largest letting of second-hand space in the London office market since 2003, at Thomas More Square, E1
Complete asset sales and recycle capital
- Achieved total sales of £411.4m
- Remained patient on acquisitions but restarted £649m development programme in London
Adjust development pipeline in line with market
- Held 20 Fenchurch Street, EC3, and now seeking partners with eye to starting project
- Held Park House, W1, ready for planned construction start in May 2010
Achieve planning success, especially around Victoria, SW1
- Secured planning permission for 84,600m2 of space in SW1, part of our Victoria Transport Interchange development project
- Secured planning permission for 61,890m2 of space at Arundel Great Court, WC2
Spot opportunities to create value through the cycle
Make progress on development at Ebbsfleet, Kent
How we create value
Despite continued anxiety around the financial and economic environment, London reasserted itself as a centre for property investment this year. Currency movements, high levels of transparency and London’s fundamental qualities as a capital city helped to draw significant interest from global investors. We saw rising investment values as a result.
As expected, rents were slower to respond to growing confidence and we continued to see a softening of rental values across London over the year as a whole. As we moved into the second half, continued occupational demand combined with a reduced construction pipeline started to limit the availability of prime office buildings. Consequently, tenants now have less choice and rental value growth is returning.
The valuation of the portfolio resulted in a positive valuation surplus of 9.1% over the year, most of which came in the six months to 31 March as a result of significantly improved market conditions.
Rental value in our like-for-like portfolio fell by 9.3% in central London over the year as a whole, virtually all of which was attributable to the first six months of the year. Rental values declined just 0.5% in the second six months as we moved through the turning point in the cycle.
Voids across the like-for-like portfolio increased from 4.9% in March 2009 to 6.1% at year end. This movement resulted from lease expiries, some of which related to pre-development properties where we are creating the opportunity to deliver new, larger buildings into an improving market.
On the basis of ungeared total property returns, our London offices underperformed the IPD Quarterly Universe by 2.3%. The total return on our London offices would have been 1.2% higher if we adjusted for capital extracted from Queen Anne’s Gate through a bond issue. The other factor impacting negatively on performance was static or falling valuations on pre-development and other properties with short unexpired leases, although these same properties are expected to provide us with a good source of opportunity as we move into the next stage in the cycle.
Table 42: Net rental income
|31 March 2010
|31 March 2009
|Like-for-like investment properties||226.4||232.5||(6.1)
|Proposed development properties||5.5||5.7||(0.2)
|Acquisitions since 1 April 2008||1.1||0.5||0.6|
|Sales since 1 April 2008||11.1||44.7||(33.6)
|Non-property related income||2.6||1.9||0.7
|Net rental income||288.3||326.6||(38.3)
Sales and acquisitions
Our long-term development strategy ensured we had comparatively little completed space coming onto the market in the downturn. Dashwood, EC2, our 14,820m2 office refurbishment completed in October 2008 is now 88% let. In 2009, our development completions totalled just 4,470m2 and related entirely to our development at 30 Eastbourne Terrace in Paddington which completed in May 2009 and is now 38% let.
- One New Change, EC4
One New Change is taking shape and will complete in October 2010. This fabulous addition to London will comprise 19,900m2 of retail space and 30,840m2 of office space which will be completed to shell and core. On the retail side, we worked relentlessly to achieve lettings and now have 90% of space pre-let or in solicitors’ hands. Recent retail lettings include Next, All Saints, Reiss, Hobbs and a new Jamie Oliver restaurant concept. Given the potential recovery in the office market, we saw no need to over-incentivise office lettings and remain confident that we will complete agreements – at the right level, with the right occupiers – once the building is completed. The office element was 38% let at the year end.
- Park House, W1
This scheme covers an entire city block of just over an acre on a prime Mayfair site with frontage onto Park Street, North Row and Oxford Street. It will provide 15,140m2 of offices, 8,140m2 of retail and 5,380m2 of residential in 39 units. The total development cost, including land and finance costs, is £412m of which the remaining capital expenditure to complete the scheme is £179m (excluding capitalised interest). Construction has started for delivery in late 2012.
- 62 Buckingham Gate, SW1 (formerly Selborne House)
This scheme will provide 23,450m2 of office accommodation, together with street-level shops and restaurants. Demolition has started, and we expect to complete the scheme in 2013. We are investing significant time in refining the way the building will sit within its environment, particularly the relationships between offices, retail, leisure and residential.
- Wellington House, Buckingham Gate, SW1
The new scheme will create a residential development of 5,540m2 providing 59 units. The total development cost, including land and capitalised interest, is £55m. Demolition has started and delivery is scheduled for 2012.
- 20 Fenchurch Street, EC3
The changing dynamics in the office market lead us to believe that both Land Securities and the City of London will gain substantial benefit from this landmark development. It is a bold, aspirational scheme that will provide truly world-class space. We estimate construction time at three years. We are currently exploring the options to develop this scheme in joint venture in order to diversify leasing risk and leave us capacity to bring forward a range of other projects.
- Arundel Great Court, WC2
In November 2009 we secured full planning consent for a 61,890m2 mixed-use development. Recent lettings have secured income on the site until the end of 2012, with the earliest delivery of the scheme not anticipated before 2015.
- Victoria Transport Interchange, SW1
In February 2009 Westminster City Council resolved to grant planning consent for our 84,600m2 development. This will occupy an island site close to Victoria station, the capital’s busiest transport hub with approximately 115 million users travelling through it each year. The site, which is mainly let until September 2012, is opposite our Cardinal Place development and will comprise six buildings arranged to open up new accessible public spaces, with a mix of office, residential, retail and restaurant space and a new public library.
- The higher than normal level of lease expiries due from 2013, particularly in the City market;
- A number of key assets coming to the end of their economic life at the same time;
- Prospective occupiers using the end of leases to rationalise their estates; and
- Increasing emphasis on corporate responsibility, which is requiring many occupiers to choose buildings with excellent sustainability performance.
Key objectives for 2010/11
- Outperform IPD
- Submit further planning applications to ensure we can meet demand for offices in a supply-constrained market
- Let up balance of office and retail space at One New Change, EC4
- Achieve retail lettings at Park House, W1
- Achieve success with our nascent residential development programme