Landsec CEO Rob Noel plays the long game with a call on development amid uncertain prospects for the UK market

It says a lot about a market when a real estate developer decides to scale back; people paid extra attention when Rob Noel, the CEO of Britain’s largest listed property company, said in 2014 that Landsec would not extend its commitment to speculative development in central London office developments beyond the end of 2016. From 2017, it would be pre-let development only.

Rob Noel

Rob Noel was appointed Chief Executive of Landsec in 2012, two years after he joined the company as head of its London portfolio. In the preceding eight years, he was part of the senior management team and a Board member of Great Portland Estates, a position that followed a decade at property services group Nelson Bakewell.

Landsec Head Office - 100 Victoria Street, London
The bold decision came well before the current mixed picture for the UK real estate market. While the market appears to be approaching the end of the current investment cycle and economic growth slows amid uncertainty over how the country will exit the European Union, Landsec’s latest results, published last month, showed healthy leasing activity and only a slight drop in the value of its GBP 14.1 billion of assets. Inevitably, it begs questions over Landsec’s development strategy.
“When we reckon we can build speculatively and get an adequate return for the risk that we’re taking, of course, we’ll start again,” Noel said. “At the moment, as the UK goes through an uncertain trading period, you should require far greater returns from development risk than the market is offering, so the view that we have taken is that it’s not the right thing to do. We are never shy of making a move, but we will make it when we think it’s the right thing for shareholders, not just because people want us to do it.”
Noel, who has been CEO of the company since 2012, seems, therefore, to be charting a course for the developer and owner of GBP 14.1 billion of assets so that it can weather the current period of uncertainty and is ready for the next investment cycle. Landsec’s portfolio is split between its London properties – mainly office buildings – and its ‘destination’ assets of mainly retail properties.
Future Deutsche Bank Headquarters - 21 Moorfields, London
Landsec has cut its leverage, sold secondary retail properties to improve the quality of the portfolio, realised record prices for new developments and refinanced debt more cheaply and for longer. While Noel delivered the final speculative development in its programme last year, Landsec also committed to a further GBP 600 million of projects for which it has tenant commitments. These include 21 Moorfields, the future headquarters of Deutsche Bank in the City of London.
Pausing speculative development has been a big market call by Noel since projects can be a major engine of growth, highlighted by how a programme started as far back as 2010 continues to feed through positively into Landsec’s results. Full-year figures released last month showed a 9.9% increase in earnings per share, little change in the value of its portfolio and led the company to lift the annual dividend by 14.7%.
“Landsec is fundamentally very strong,” Noel said. Starting a new development speculatively risks “getting your legs cut off from under you” so “committing now is not wise. You might get a couple of extra basis points of performance, but if a project goes wrong now, the downside is greater than the upside.”
Noel recalls how in 2011, as the newly recruited Managing Director of the company’s London portfolio, he made another bold call that came under question. He activated the developments at 20 Fenchurch Street, Ludgate Hill, New Street Square and various projects in Victoria with no tenants in place. The strategy was to deliver the buildings in 2014 to 2016 to take advantage of the favourable conditions resulting from the dearth of development in London following the global financial crisis.
It proved to be a winning strategy. It allowed Landsec to capture rising rents and generate higher returns. Landsec sold its remaining 50% interest in 20 Fenchurch Street – better known as the Walkie Talkie tower – in August last year to a Chinese investor for GBP 641 million, a price that reflected a record net initial yield of 3.4%.
Noel says the long timelines required for projects of scale and the super-tanker-like nature of the company mean he has to remain calm in the face of the criticism that comes his way over Landsec’s development strategy.
“It’s easy for critics to change their minds overnight, but when you are steering a balance sheet of any scale, you tend to have to move with more notice when you are going risk on or risk off,” he said.
“With development, it’s about when you deliver, not when you start,” he explained. “You have to be pretty sure when you are delivering your schemes that the occupational market is going to be healthy enough for you to be able to lease well so that you are being adequately rewarded for the risk that you took when you started.”

Opening of Westgate Oxford shopping centre

Opening of Westgate Oxford shopping centre

The long-term development timelines are also reflected in the company’s philosophy as a sustainable business, which involves nurturing closer relationships with customers, communities, its staff and business partners.
“If any of these stakeholders do not support your business, it will not be sustainable, and you will eventually die,” Noel said. “If I have one ambition for this company, and I’ve been banging on about it for years, it’s that Landsec is a sustainable business.”
He cites Westgate shopping centre in the city centre of Oxford as an example of how this pays off. Oxford City Council conferred with its peers in Leeds about their experience with Landsec over Trinity Leeds, which opened in 2013 as the first major shopping centre development in the UK after the global financial crisis.
“They then trusted us to come up with the right outcome for their city. This led to a collaborative planning process, the result of which was that from a standing start we were able to deliver a shopping centre in 6 ½ years – which is pretty well unheard of,” Noel remarked. Landsec developed Westgate with the Crown Estate as an investment partner, opening it in October last year.
One of Landsec's most ambitious developments, later sold to LKK Health Product Group Limited - 20 Fenchurch Street, London
Landsec had cash on hand and loan facilities totalling GBP 1.1 billion at the end of March, giving it the firepower to act when the time is right. One future opportunity lies in the company’s smaller shopping centres dotted around London, which offer the potential for redevelopment, he said.
“They are perfectly good community centres, but they are based on one or two floors and actually occupy quite large areas of London where they could be much more densely built up,” he said. “Effectively, they are future development opportunities with the majority of the increased density likely to be residential-led in most sites.”
In spite of the prudent strategy and healthy results, Landsec’s shares trade at a substantial discount to net asset value. It is not alone as investors have marked down prospects for the UK real estate market, particularly for companies like Landsec with exposure to the Central London office market, due to the anticipated loss of occupier demand resulting from Brexit. Share prices reflect expectations that building values will fall substantially, something that has yet to occur in the underlying direct property market. Another factor for a large company like Landsec is the behaviour of non-specialist fund managers, Noel observes.
“Generalists only really come in when there’s been a very clear bloodbath or when there’s an inherent growth story in the sector. They’ve been largely absent in the UK as a marginal buyer of shares since the referendum, but they are returning now,” he said. “I would argue that shares in a conservatively geared business at a 30% discount to their NAV (net asset value) are good value. The read-through yield from our portfolio is relatively high compared with the direct market for our quality assets – around 6%.”
Another bold call on development may help.