Landsec/British Land: revolution not evolution
Accelerated trends call for an accelerated response
Coronavirus is not the great equaliser some suggested it might become. Great accelerator is more accurate. Societal changes that were once slow and manageable are now sudden and dislocating. Consider Land Securities. The eclipse of physical stores and offices has hit profits hard. Shares down 36 per cent this year fell another 15 per cent on Tuesday.
In lockdown, many products can now only be bought online. Most offices are empty, as white collar staff toil from home. Some of these changes will stick, even if Barclays boss Jes Staley is wide of the mark in speculating big offices are over. Demand for retail and desk space will be permanently lower once the UK reopens fully.
Secular trends including the rise of home working and outsourcing have already chipped away at offices. This is bad news for Landsec, former owner of London’s “Walkie-Talkie” building and its rival British Land, the business behind Broadgate in the City of London. About half of the value of their portfolios is desk acreage.
Office tenants are at least reliable payers. Big banks and corporations are mostly trading through the crisis. Store sales have collapsed. Retailers were responsible for the bulk of Landsec’s missed rent payments in March — covering £15m of a rent roll of £37m. The total value of Landsec’s portfolio fell £1.2bn or 9 per cent last year — mostly from retail sector writedowns.
Shares in both companies trade at about half net book values. Their office properties are vulnerable to falling capital values. Rental prices for City space of close to £100 per sq ft could be a historic peak.
Accelerated trends call for an accelerated response from Landsec and British Land. They must anticipate demand, not chase after it. Lowly Slough Estates rebranded as Segro and built warehouses for the likes of Amazon. It is now worth more than Landsec and British Land combined. The stock of serviced office provider IWG has taken a beating. But demand for flexible office space should be strong once cures and containment cut coronavirus down to size.