London Portfolio review

“We are moving into supply-constrained market conditions in central London offering opportunity for those able to deliver the right property at the right time. Our robust balance sheet and sizeable development pipeline put us in an excellent position.”

  • Robert Noel
  • Managing Director, London Portfolio

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

  • Implemented successful, flexible strategy at One New Change, EC4, with strong emphasis on securing retail lettings
  • Restarted development programme in London to enable well-timed delivery to a supply-constrained market

Make progress on development at Ebbsfleet, Kent

  • Responded to wider market conditions by largely halting development and awaiting appropriate conditions

Outperform IPD

  • On the basis of ungeared total property returns, our London offices underperformed by 2.3%. The total return would have been 1.2% higher if adjusted for the impact of the Queen Anne’s Gate bond issue. The other factor impacting on performance was static or falling valuations on pre-development sites. These sites are expected to provide the portfolio with a good source of opportunity going forward

How we create value

We aim to deliver growing rental income streams, higher investment values and future development opportunities over the long term by:

  • Investing in assets early in the cycle to maximise returns and selling when appropriate
  • Ensuring we understand our customers’ changing circumstances, so we can adapt and evolve our products to meet their needs
  • Using a mixed-use, high quality product to mitigate risk, generate strong demand and achieve improved rental performance
  • Maximising gain from our development work on new schemes through innovative master planning and other strategies

Our market

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.

Over the longer term, the picture is one of increasing supply constraint for prime buildings in key London locations.

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Our performance

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)
Ongoing developments (5.0) (0.3) (4.7)
Completed developments 46.6 41.6 5.0
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)

Net rental income declined by £38.3m or 11.7% to £288.3m largely as a result of our sales programme but also due to lease expiries within like-for-like properties at 123 Victoria Street, SW1 (formerly Ashdown House) and Portland House, SW1. The fall was cushioned by the increase in income from completed developments, particularly New Street Square, EC4 and Queen Anne’s Gate, SW1.

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Our strategy

We expect to see rising levels of demand over the medium term, so our strategy is focused on maximising potential returns as we move through the rental cycle. Our priority is to develop space appropriate for its market at the right time in the cycle so that we meet occupiers’ needs and create value in a supply-constrained environment. We intend to deliver early in the cycle so we gain the benefit of competitive construction pricing, rising rental values and a liquid market in which to make sales, as and when necessary. While a relatively early delivery of developments may lower the ceiling for rents, it also reduces the risk and is likely to provide more stable returns over the long term.

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Sales and acquisitions

During the year, we completed our planned programme of asset sales. Disposals included One Wood Street, EC2; Portman House, W1; 22 Kingsway, WC2; 98 Theobald’s Road, WC1; 40/50 Eastbourne Terrace, W2; and Sardinia House, WC2. All of these properties were acquired by overseas investors. Sales totalled £411.4m and, on average, were at 1.5% below the 31 March 2009 valuation (before disposal costs). The average income yield was 7.9%.

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Asset management

We maintained an intense focus on leasing activity throughout the year, achieving success through our close relationship with occupiers, attractive assets and pragmatic approach. Key leasing activity included:

  • Thomas More Square, E1 – owned with The Cadillac Fairview Corporation Limited – we completed a letting of 17,820m2 of office and support space to News International for a minimum of five years, at a rent of £4.2m per annum. This is the largest letting of second-hand space in the London office market since 2003.
  • Portland House, SW1 – a 26,700m2 office building where 4,400m2 of the space was re-let during the year following lease expiries.
  • New Street Square, EC4 – a mixed-use scheme where terms are agreed to let the last remaining retail unit and the office space is now fully let.

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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.

In terms of schemes in our development pipeline:

  • 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.

We are planning further schemes at 123 Victoria Street, SW1 (formerly Ashdown House), Cannon Street, EC4, Shoe Lane, EC4, and Ludgate Hill, EC4 and aim to submit planning applications during the year to March 2011.

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Looking ahead

The outlook for rents in the London office market is positive. Vacancy rates have peaked at lower levels than in 2003 and there is a very limited supply of new developments coming onstream in the short term. We expect the emergence of a supply-constrained London office market to drive rental values. We are well positioned to benefit from this through our scaleable development programme. Strong demand will be driven by a number of factors, including:

  • 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.

In addition, many prospective occupiers are recognising that rent now represents a relatively low percentage of the total cost of property. Energy efficiency, brand reputation, communications capability and productivity requirements are likely to drive high demand for new and newly upgraded properties in the best locations.

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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

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