Land Securities is one of the first property companies to convert to Reit status and is confident shareholders will continue to see the levels of outperformance they have come to expect
It is an exciting time for Land Securities. As well as having ambitious plans to grow the different areas of its business, the FTSE 100 giant is also one of the first property companies to convert to Real Estate Investment Trust status and has become the world's third largest Reit.
Embracing the Reits legislation, which came into force at the start of 2007, will benefit both shareholders and the company itself because it removes the double taxation problems, according to Francis Salway, the group chief executive.
"Until now, companies paid tax on their activities - and then their shareholders paid tax on any dividend or gain in the share price," he says. "Reits removes taxation within the company and makes ownership of a share in a Reit similar to direct ownership of property in tax terms."
Paying a conversion charge equal to 2% of assets - around £300m - means the company will now enjoy annual tax savings on income of £75m and this will be passed on to shareholders in the form of increased dividend payments.
"We also expunge our latent capital gains tax liability by converting to a Reit," adds Salway. "This means that decisions about whether or not to hold a property will not be constrained by having to think about the CGT that might crystallise."
Salway also believes that Reit status will make the company more appealing to two distinct groups of investors: private investors in the UK and large US investors who usually only invest in countries which have Reit status.
Wealthy people have invested in property for centuries to access long-term value creation, he points out, but this hasn't really been an option for smaller investors as you can no longer buy a property for, say, £10,000.
Buying into the Land Securities Reit, however, will not only give them exposure to a broad cross-section of London offices and shopping centres across the UK, but also to a team of highly skilled property industry professionals.
"We certainly expect our US shareholder base to grow significantly over the next few years," says Salway. "Private investors in the UK will also be drawn to Reits as an alternative to the pooled property funds that have been so popular in recent times."
Anyone who does buy into the Land Securities story will get exposure to an industry powerhouse that owns and manages approximately six million m2 of commercial property and provides services to more than 2,500 private and public sector clients.
Its landmark buildings include the Bullring shopping centre in Birmingham, New Scotland Yard and even the building on which the famous Piccadilly Circus lights are mounted in the heart of London.
The core areas of interest for Land Securities are retail property across the UK, London offices and property outsourcing, where it manages the occupied estates of major companies and government departments.
So how does Salway view the prospects for these sectors?
Returns from commercial property - and that's direct property, not company shares - have been about 15% per annum over the past five years, he points out, with the vast majority being generated by a re-pricing of property.
"We think this is unlikely to continue, so you have to look at what the prospects are for rental value growth," he explains. "London offices have extremely good short-term prospects, with vacancy rates coming down and a booming financial services economy. This is giving us growth in rents of 8%-10% per annum."
And retail? "This has been a little bit trickier because there have recently been winners and losers among retailers," he adds. "However, there are still a number of retailers who are taking additional space to grow their profits."
A lot of the focus for Land Securities in both the retail and London office market is on redeveloping existing sites. "We believe this is potentially a higher return area and so we have a development pipeline with a total spend of £3.7bn," says Salway. "This part of the business has really driven returns over the last 18 months."
Having the ability to successfully carry out city centre redevelopment projects, particularly navigating a safe path through the various planning rules and regulations, is one of the keys to success for Salway and his team.
"You do need skill to secure planning consents for large scale schemes, and we have had considerable success in this area," he adds. "For example, we've just secured permission for a site of over two and a half acres next to St Paul's Cathedral for a modern retail and office project."
The company has also been very active in the Kent city of Canterbury, where it has rebuilt an eighth of the area within the medieval walls. "We were even able to move Next from a small unit of 1,500 sq ft to a store of 35,000 sq ft in the city centre - modern retailing in a medieval city centre," says Salway.
As well as redeveloping existing sites, Land Securities also uses its industry knowledge to take the reins of poorly performing buildings.
"This is where previous owners haven't had success in leasing it out or where we believe the space can be configured more efficiently," explains Salway. "A recent example is an office building in London that had been vacant for 18 months. We had almost 50% let within four months because we offered a flexible leasing package."
The third and final core part of the business is property outsourcing, which is carried out by its Land Securities Trillium arm and boasts an impressive line-up of clients, including Barclays Bank and the Department for Work and Pensions (DWP).
Trillium carries out a wide variety of services for clients. "It's classic outsourcing," says Salway. "For example, we have a call centre so that if somebody has a leak, they phone us and we will get it dealt with straightaway. Companies don't have to employ people to deal with such issues because we manage it for them."
Currently, property outsourcing accounts for about 17% of the overall group's operating profits, but Salway wants to see that rise to between 20% and 30% over the next few years. "This part of the business differentiates us from our peer group," he adds. "It is also a less competitive area in which to be involved."
On a wider scale, Salway says the priority for the next couple of years is to keep delivering the levels of outperformance that existing shareholders have come to expect - as well as welcoming new investors attracted by its Reit status.
"Our primary goal is to drive above average financial returns from the assets that we own because delivering the right return on capital is our responsibility to shareholders," he adds. "By focusing on three core sectors, we have a substantial market presence in these areas and a strong skills base which will all contribute to us delivering that outperformance."
The overall proposition offered by Land Securities, says Salway, is pretty straightforward.
"The best way to describe what we offer is exposure to top quality property assets in the UK and a highly respected and expert management team," he says. "We have clearly enjoyed success and our aim is to grow the size of the business in our three core sectors and build on the relationships we have with those occupying our buildings."
