EXCLUSIVE: Landsec CEO Mark Allan On Strategy, Sales And Social Impact
What a time to take over the biggest job in UK property.
When Mark Allan was appointed Landsec chief executive in the spring, the UK was in lockdown, meaning he couldn’t even meet his new colleagues in person. The company’s share price was as low as at any point since spring 2009, the depths of the financial crisis. Of the two sectors in which Landsec operates, retail was and remains on the floor, and offices are in the first stage of their own existential crisis.
There is a lot of work to do at Landsec, the UK's largest REIT by portfolio value and second-largest by market cap. It has a £12.8B portfolio, but its shares trade at a discount to net asset value of more than 50%.
Within weeks of taking over, Allan, who joined from St Modwen, had announced a strategic review, in which he promised to be bold in assessing where the company should focus in future, with no option off the table.
He is due to announce the conclusions of the review on 19 October, but in an exclusive extended interview at Bisnow’s London State of the Market digital summit, he offered an insight into the company’s future direction. Expect a lot of mixed-use developments, an embrace of the complexity of operational real estate often avoided by the traditional big beasts of the listed real estate sector and a passionate embrace of a set of social values that have historically been rare to the sector.
This last point might seem less tangible than what sectors Landsec invests in, but it has the potential to be seismic. It mirrors a broader change in the financial and business world, driven by consumer demand, for companies to focus on more than just profits.
“The work that we’ve done on ESG, first on sustainability and in more recent years on social value, that will be an increasing part of doing business in the built environment in coming years,” he said.
Allan said focusing only on the bottom line means you’re likely to do worse as a company.
“I’ve been a big believer since my time at Unite in the importance of a business being purpose-led,” he said. “I think you have to be able to articulate not just the returns you are trying to deliver for your investors, but what you are trying to deliver for the communities you’re in, for your customers, your staff, your wider stakeholders. You have to find ways of working that balance those things, not prioritise one over the other, and I think when you see businesses prioritise the financials too much, I think you see them make poor decisions that will destroy value over the longer term.”
Allan admits this is more difficult, but said it is what companies have to do to benefit society and remain viable.
“I think you have to deliver for all of your stakeholders, and sometimes that means it is difficult to work out the right course of action and you have to think about it more deeply, because it’s not just a binary issue. But for me this is vital, and I think the businesses that do this will attract more customers, will attract better talent and attract better partners from a financing perspective, and have better long-term relationships with the public sector. As a business and as a property sector, we need to be better at shouting about the benefits that our investment can deliver to communities for the long term.”
A lot of the attention as to his strategy has focused on retail, and whether he might exit the portfolio, but he has already made some bold moves in London offices, putting more than £750M of assets on the block. Though a big number, that number would reflect a relatively small reduction. Landsec is the largest single property company in London, with a portfolio of more than £8.2B.
Allan said the sales are a way to allocate capital to where it can make the best return for the company.
“I see property as a total return business, so to create value you’ve got to be willing over time to relocate capital out of assets where the ability to add value with the skill set you have is less than with other assets,” he said. “Asset recycling is a function of life in property for me.
“When I look at where we should allocate capital, there are a few different things. I don’t see our job as simply allocating capital, so picking one sector or another and saying returns will be better there than somewhere else. It is about seeing where our competitive advantage is as a business and trying to find the places where our competitive advantages fit with larger macro trends. If you can find that sweet spot you should be able to produce better returns over time.”
It is in his answer about where he sees that competitive advantage for Landsec that you start to get an idea as to the direction the company might be heading. Do not be surprised to see large, urban, mixed-use projects announced, both from within Landsec’s existing portfolio and perhaps beyond.
“You just have to look at the track record of incredibly complex, large-scale, multi-phase developments that have been delivered over many, many years by Landsec as a business, and in recent years by the people who are in the business today,” he said.
“There are opportunities for us to apply our competitive advantage in the areas that we are already incredibly well-known in, and there will be some adjacencies around that: Nothing completely different, but things where we can leverage our scale, our reputation, our development expertise, our ability to add value through our vision. I want us to be bold and not too narrow in our thinking, but not too dogmatic in our thinking about saying, we won’t do this or we won’t do that.”
While Allan would not be drawn on specifics, Landsec has built residential assets in the not-too-distant past, and Allan himself, having led Unite to its position as the UK’s largest student accommodation provider, has deep experience in the “beds” sectors of real estate that are the must-have for every real estate investor today. It would not be a surprise to see rented residential like student accommodation or build-to-rent form some of those “adjacencies” he mentions.
On the future of offices, Allan said he prefers to see the current upheaval about how and where people work as an opportunity as much as a threat — a position that an incoming chief exec has the benefit of adopting.
He admits he is a novice in the world of offices, but said his background at an operational real estate business like Unite gives him an insight into the way companies that own offices will need to manage their assets in future.
“What you have seen in recent years is a transition in property away from being a proxy for fixed income towards being more operational in nature,” he said. “And as a sector, generally property was afraid of that because anything operational translated into more risk and was difficult to price. For me, operational aspects are a way to add value, to take risk, but risk that you understand and risk you can underwrite and manage effectively. So there’s a place for it, in the sector and the Landsec portfolio. There are massive opportunities coming out of this. The way that workplaces and offices operate will be changing.”
Allan said there are multiple reasons Landsec may be poised to take advantage of these opportunities and to stay steady in the short term, including the experience of its employees and the long weighted average lease term of its portfolio.
This belief seems counter to what the public markets are saying. Given the discount at which office companies trade, stock market investors seem to think the changes going on are much more of a challenge than an opportunity.
But Allan said he sees operations as something that simply cannot be ignored.
“Operational real estate, flexible offices, different office propositions for different occupiers across all aspects of our estate has to be something that we embrace. ... The increased operating component of real estate is a reality,” he said. “Yes there are some things trading at a discount, but there are other sectors with a big operational element that are trading at a premium, like student accommodation, self-storage or healthcare. Our job is to articulate how we are dealing with that trend and turning it to an advantage and opportunity. And I’m increasingly convinced that there are going to be some great opportunities as we come out of COVID for businesses that have scale and have capacity and experience to take some risk and try and do things a little differently, and drive forward the future of the office, because it is not going to happen on its own, and we want to be front and centre of that change.”
At St Modwen, Allan won analyst approval for selling off the company’s retail assets and refocusing it on the in-vogue beds-and-sheds sector. He said the scale and composition of Landsec mean there is not such an obvious sector call to make. Along those lines, he didn’t share what the company’s retail strategy will look like in practice.
“Retail is in a difficult place right now and I think everyone knows that,” he said. “Not all retail is the same, and I think where the challenges will come is the focus on shopping centres. We have a fantastic portfolio and for me we need to be realistic about what the future looks like, and make the right decisions based on that outlook. There is no question in my mind that those assets will have a place long term and will remain relevant. What that means in terms of investment and returns is something we’ll need to work through in the months and years ahead.”