Landsec has outlined plans to establish a £2 billion-plus residential platform in the next five years as it scales back investment in new office-led development.
In a capital markets update, the REIT said it had successfully executed its strategy set out four years ago and was now moving to the next phase of the strategy to 2030, building on momentum to "rebalance out portfolio towards higher income, higher income growth and lower volatility in returns".
The first stage, in the next one to three years, will be driven by "capturing the growing reversion in its existing retail and office portfolios; reducing overhead costs by a further £12 million from £77 million in FY24; and releasing capital employed in low/non-yielding pre-development assets". It will grow its £3 billion retail-led platform through capital investment and selective acquisitions while exiting its £800 million of retail and leisure park assets to fund its investment in major retail-led places.
But the second stage, over the next two to five years, an increased focus on residential will allow it to build a "meaningful exposure to a structural growth market where rents are closely correlated to inflation via the delivery of the existing pipeline the company has created, plus selective acquisition opportunities".
In tandem, it will scale back capital allocated to new office-led development starts by at least half following the completion of its current pipeline, to "shift development capacity to residential-led projects where returns are expected to be similar but risk is lower".
Landsec said the strategy for the next two to five years would involve releasing £2 billion of its current £6.5 billion capital employed in office-led assets to fund its expansion in residential, where "actual net effective income returns are broadly similar to offices when taking into account the much higher lease incentives in offices, but income growth is higher".
Landsec will move towards a more balanced portfolio by 2030, comprising a "mix of best-in-class retail-led, residential-led and office-led urban places".
Landsec said it will remain focused on "retaining its strong capital base, targeting net debt/EBITDA of less than 8x and an LTV around the mid 30s at this stage of the cycle". This will be strengthened by a reduction in risk profile and cyclicality over time, "reflecting the reallocation of capital from offices to residential, where the volatility in returns is lower".
Mark Allan, chief executive, said in a statement: “The successful execution of the strategy we set out just over four years ago has allowed us to build a high-quality portfolio and deliver total shareholder returns that have significantly outperformed the UK real estate market over that time.
“This next phase of our strategy to 2030 will see us building on this momentum to rebalance our portfolio towards higher income, higher income growth and lower volatility in returns.
“With best-in-class office and retail portfolios, and plans to grow a £2 billion-plus residential platform, our refreshed strategy will see Landsec drive significant shareholder value with the potential to grow earnings by 20% from here.”