Landsec will be targeting "prime catchment, dominant retail assets" first and then London office developments in the West End and Southwark as values stabilise in 2024, while WeWork's troubles are an opportunity for the capital's property sector, its chief executive said.

Unveiling its half-year results for the six months to end of September, chief executive Mark Allan outlined how the UK's second-largest real estate investment is shifting its focus in response to a higher interest rates environment.

Allan said the REIT, after three years implementing its 2020 strategy, has sold £2.5 billion of mostly largely, single-let City and Docklands offices and invested £1.9 billion in profitable development, retail and mixed-use urban schemes.

"There has been a dramatic shift in values since 2020 as rates have moved up. We positioned for higher-for-longer rates last year and now we see that for the best assets in 2024 we will see values stabilise. In terms of customer demand, whether it is offices or retail it is all about best-in-class space where it is very strong and we see no change in this."

The proceeds of its sales drive have been used for recycling into favoured sectors and to keep the balance sheet in "a very strong position" with net debt down by £0.4 billion over three years.

Allan said the business has had two key principles throughout: "Focus on where there we have genuine sustainable competitive advantage, and have a bulletproof balance sheet."

In terms of new opportunities it will target over the coming months, Allan said: "The first place is prime catchment dominant retail which is at an 8% yield with growth coming through. That is most attractive to us. Then development in London offices and then urban mixed-use development. We will also look at committing to new developments in our portfolio but that depends on longer term factors."

In terms of Liverpool One, the major shopping centre which CoStar News revealed in August the REIT is in talks to buy a majority stake in for as much as £350 million, Allan refused to be drawn except to say: "Liverpool One is a prime catchment dominant retail asset."

In terms of best value in the market, firstly Landsec is shifting its London office exposure from the City and Docklands and from single-let headquarters buildings, to the West End and Southwark where 76% of its portfolio is now located.

Allan explained: "Rents and vacancy are better here. We are looking to target an 8% return on equity via income through estimated rental value growth and development. And that has fed through to the increasing value creation of our returns over the last three years."

The £10.1 billion portfolio is now split between 62% central London offices, 18% major retail destinations, 12% "subscale" assets including leisure parks and hotels, and 8% mixed-use urban developments.

The drive to best-in-class, greener offices is also key.

Allan said: "What is striking is if you look at overall vacancy then it stands at 8.8% in the market but bifurcation between the best and the rest is playing out. We looked at vacancy by building and across 6,000 buildings, 40% of all vacancy is in 1% of the buildings and 90% is in 10%. Eighty-three percent of buildings in London are full.

"And we thought the main problems were single-let HQ space and you see that with HSBC, Clifford Chance and Meta all coming out of space. That is why we sold the single-let Deutsche Bank and Deloitte buildings. And more than 80% of all space marketed for subletting is in the City and Docklands."

Allan also says occupancy is very high in central London and its bespoke figures show utilisation increasing at its buildings.

"We look at tap access by people into our offices and year-on-year that is up 22% and up 10% in the last six months growth. We are in best-in-class though with less than 1% of our space marketed for subletting." Allan said Tuesdays, Wednesdays and Thursdays are very busy while Friday remains very quiet.

In mixed-use urban regeneration, Landsec is ready to go on two major developments: the £180 million, 330,000-square-foot first phase of offices at Manchester's city centre Mayfield development and 1,800 homes at Finchley in north London, where it has secured vacant possession. Landsec said it is waiting for market conditions to be right before likely starting in 2024. It is also "enhancing plans" for major developments at Lewisham in London and Buchanan Galleries in Glasgow and will lodge plans soon.

Allan said the REIT is reworking its masterplans to focus on retention.

"We are reworking masterplans in Glasgow and Lewisham and a lot more of this now is retaining parts of existing assets. It is about surgical development interventions rather than a more typical development approach of demolishing and rebuilding. There are better returns and a better carbon impact and in terms of what it delivers for the local community."

Allan said Landsec is reiterating full-year guidance as earnings remain broadly in line with last year's earnings, having absorbed the negative impact of £2.2 billion of sales.

"We have replaced that rental income with EPRA earnings up to £198 million from £197 million in 30 September 2022."

The group reported 34.4% loan to value and "most importantly" 7.2% net debt to earnings before interest, tax, debt and amortisation means the balance sheet is "firmly in our parameters".

Allan said that the strength of the balance sheet and "liquidity of the subscale portfolio" means "we will be selling those assets over the next few months and going after opportunities".

Allan said the REIT will continue to be majorly focused on sustainability and net zero development with 44% either EPC A to B-rated.

In retail there is also a split towards best-in-class centres.

"We look at brand sales performance in our stores and there is consistently stronger performance in best-in-class centres. Rents are now turning positive and the conversion of secondary retail to alternative uses is supporting this trend towards fewer, bigger, better stores and malls focused on experience."

Allan said retail parks and shopping centres each have a role to play. "It is as much about marketing their brand as selling their product."

Allan said in the six months, 13 brands increased the size of stores as they moved to have full-format stores, 25 new brands came into centres looking at the "relative affordability" and 31 existing customers have added new locations, leading to 235,000 square feet being added.

The period only saw £85 million of smaller, non-core disposals but Allan promised the pace would pick up now as it "resumes the focus on subscale" including retail parks, hotels and leisure parks.

Allan also saw opportunity in the struggles of WeWork, the coworking group which filed for Chapter 11 bankrupcy in the US last week, though not necessarily for Landsec's Myo flexible offices arm given it is almost fully occupied.

"WeWork has about 60 properties in London but the centres have been trading very well and so there is not a big shadow vacancy. From a valuation point there has long since been a correction and the fundamental WeWork challenge was it was signing rents that were too high. We are hearing anecdotally of service levels coming under some pressure and that could see demand going elsewhere. But if anything the opportunity will be there for operators in flex to take on some of those occupiers. We are 97% occupied in our our flex space and we will have three new centres opening in next few months so it is not really an opportunity for us."

Landsec reported EPRA earnings per share stable at 26.7p, in line with full year guidance. The total dividend is up 3.4% to 18.2p per share, in line with its guidance of low single-digit percentage growth.

The portfolio slipped 0.9% to a £10.146 billion value over the six months.

Total return on equity improved to minus 2.4%, while it posted a pretax loss of £193 million (after a £375 million, or minus 3.6%, adjustment in portfolio value) resulting in a 4.6% reduction in EPRA net tangible assets per share to 893p. The total return is a slight underperformance on British Land, its peer which posted its half-year results yesterday.

In central London it said £17million of lettings completed or are in solicitors' hands, 3% ahead of valuers' assumptions, and overall Central London occupancy is up 60 basis points to 96.5%, with West End portfolio effectively full at 99.6% occupancy.

It recorded a 10% increase in office attendance versus prior six months, with 27 of 35 lettings in last 12 months seeing customers taking more or same space.

It started two new developments in the West End and Southwark and recently completed schemes are now 83% let or under offer, with lettings 12% ahead of initial assumptions.

At major retail destinations there have been £24 million of lettings signed or in solicitors' hands, on average 6% above ERV.

Landsec has improved the operating margin, as a review of the operating model in prior year and focus on cost led to a "reduction in overhead costs".

It is starting imminently with the retrofit of air source heat pumps at itsfirst two sites as part of net zero transition investment plan, with 44% of office portfolio already EPC 'B' or higher versus 23% for London market.