Sanford C. Bernstein’s Pan-European Strategic Decisions Conference – 16 September 2009
UK commercial property and Land Securities
Francis Salway Chief Executive – Land Securities Group PLC Recent trends in listed and direct real estate markets in the UK Listed market FTSE Real Estate • 80.9% off peak (Jan 2007) to low point (March 2009) Index • 64.7% off peak to now
• 84.9% up from low point to now
Direct market Capital values • 44% off peak (June 2007)
Rental values • 8% off peak (April 2008)
Source: IPD Listed sector ‘forward looking’ of capital values…capital values ‘forward looking’ of rental values Page 2 Issues underlying downturn in UK direct commercial property markets
1. Investment property pricing bubble
2. Economic downturn
3. Lack of availability of credit
Page 3 Issues underlying downturn in UK direct commercial property markets
1. Investment property pricing bubble (25)%
2. Economic downturn (20) – (25)%
3. Lack of availability of credit (5) – (10)%
(43) – (50)%
How much will be recovered? Page 4 Factors supporting a recovery in UK direct commercial property markets
Positive factors Speed and severity of re-pricing Positive yield gap relative to ‘risk free return’ Weak sterling Positive balance of buyers to sellers
Positive outlook for capital values Page 5 Factors supporting a recovery in UK direct commercial property markets
Positive factors Speed and severity of re-pricing Positive yield gap relative to ‘risk free return’ Weak sterling Positive balance of buyers to sellers
Risk factors Unwinding of over-lending by banks Size of gap between contracted rents and ‘mark to market’ rents
Positive outlook for capital values … but not without risks Page 6 Yield pricing for commercial property relative to ‘risk free’ rate and finance costs
12 Gap 12 Gap 10 year gilt yield 5 year swap rate 10 10 Equivalent yield Initial yield
8 8
6 6 percent 4 percent 4
2 2
0 0
-2 -2 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Source: IPD
Gilts June 2009 15 year average Swaps June 2009 15 year average
Yield gap 5.29% 2.25% Yield gap 4.27% 0.80% Significant positive yield gap Page 7 Commercial property lending UK bank lending to commercial property
250 14 Bank lending to property, £billion, (lhs) Property share of total lending, % (rhs)
n 12 200 % 10
150 8
6 100
4 50 bank lending to property, £billio bank lending property, to 2 lending, total of share property
0 0 Q1 1987 Q1 1988 Q1 1989 Q1 1990 Q1 1991 Q1 1992 Q1 1993 Q1 1994 Q1 1995 Q1 1996 Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 Source: Bank of England
Lending to commercial property significantly above levels seen in early 1990s: a risk factor … and an opportunity Page 8 Turnover of UK commercial investment property Investment volume by quarter n 20
15
A 10 4+ A -f 2. ol 5-f d old de de c cl lin ine e 5
0 UK commercial property market invetsment, £billio invetsment, market property commercial UK 2000.Q1 2000.Q2 2000.Q3 2000.Q4 2001.Q1 2001.Q2 2001.Q3 2001.Q4 2002.Q1 2002.Q2 2002.Q3 2002.Q4 2003.Q1 2003.Q2 2003.Q3 2003.Q4 2004.Q1 2004.Q2 2004.Q3 2004.Q4 2005.Q1 2005.Q2 2005.Q3 2005.Q4 2006.Q1 2006.Q2 2006.Q3 2006.Q4 2007.Q1 2007.Q2 2007.Q3 2007.Q4 2008.Q1 2008.Q2 2008.Q3 2008.Q4 2009.Q1 2009.Q2
Source: Property Data Limited.
The issue of lower transaction volumes has been overstated, and in real terms volumes have been rising since Q3 2008 Page 9 Trends in rental values Real growth in rental values
30
20
10
0
percent -10
-20 All property rental value growth - real
-30 All retail rental value growth - real
London office rental value growth - real -40 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 H1 2009 Source: IPD, ONS
No bubble in rents except London West End office market – recovery potential Page 10 Central London office market London office vacancy rates
25 City West End 20
15 percent 10
5
0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Jun-09 Source: PMA
London office vacancy rates currently below levels in 1991 and 2003 Page 11 Central London office market Construction starts in City and West End
3.0 City
f West End 2.5
2.0
1.5
1.0
0.5 starts, rolling 6 months, million sq rolling 6 months, starts,
0.0 Q2 2000 Q2 2000 Q3 2000 Q4 2001 Q1 2001 Q2 2001 Q3 2001 Q4 2002 Q1 2002 Q2 2002 Q3 2002 Q4 2003 Q1 2003 Q2 2003 Q3 2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1
Source: PMA
Construction starts have tailed off significantly Page 12 Retail property Retail market investment portfolio voids
10
8
6 percent 4
2
0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: IPD
Retail void levels higher than in early 1990s Page 13 Retail property Retail sales growth
12 Like-for-like Total
9
6 percent 3
0
-3 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Source: BRC
Retail sales more resilient than expected in downturn Page 14 UK commercial property market trends Comparison to early 1990s Early 1990s Current cycle (to date) All property Capital values -27.1 -44.2 Rental values -21.7 -8.0
Retail Capital values -19.0 -45.7 Rental values -7.0 -5.7 Void rate 6.0 7.1
London offices Capital values -51.2 -47.0 Rental values -56.9 -24.4 Vacancy rate 20.9 9.6 Source: IPD, PMA Current cycle compared to early 1990s: offices stronger, retail weaker; impact of over-lending by banks not yet known Page 15 Drivers of capital value change: rental values and yield shift
30 ERV growth Capital growth 20
10
0 percent
-10
-20
-30 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 H1 2009 Source: IPD
Divergence between rental value and capital value trends from 2002 Page 16 Land Securities – key facts
£9.4bn portfolio
Focus on London offices and retail
Retail – 25 shopping centres and 21 retail parks
London offices – 9.7 million sq ft
Strong development capabilities
Efficient debt structure not linked to specific assets , but benefiting Piccadilly Lights, W1 from asset security
A leading multi-focus company: liquidity for shareholders, market presence for occupiers Page 17 Land Securities – key assets London Portfolio
Piccadilly Circus Cardinal Place Lights New Street Square
Queen Anne’s Gate One New Change
36% of London Portfolio in West End offices and 18% in retail Page 18 Land Securities – key assets Retail Portfolio
Team Valley, Newcastle Buchanan Galleries, Glasgow
White Rose, Leeds Bullring, Birmingham
Westwood Cross, Thanet St David’s 2, Cardiff
N1, Islington, London Cabot Circus, Bristol 25 shopping centres and 21 retail warehouse parks Page 19 Land Securities – property yields(1)
Range of Gross Income Equivalent equivalent Yield(2) Yield(3) yields(4) % % %
Shopping centres and shops 9.0 8.0 6.9-10.3
Retail warehouses and foodstores 8.3 7.9 6.9-10.7
London retail 5.6 5.8 5.0 - 7.7
London office 8.1 7.3 6.3-10.5
Total portfolio 8.1 7.5 5.0-10.7
(1) Total portfolio excluding only the development programme and proposed developments (2) Gross income yield topped up for unexpired rent free periods (but not for future stepped rental increases) (3) Net nominal equivalent yield calculated on the gross outlays for a purchase of a property (valuation plus purchaser’s costs) (4) Excludes properties under £10m
Yields at historically high levels Page 20 Land Securities – balance sheet management
Approximately £4.0bn of disposals since April 2007
Rights issue to raise £756m (net) in March 2009
Devonshire House, W1 Group LTV at 31 March 2007 of Sold in 2007 at 3.9% yield 38.0%
Group LTV at 31 March 2009 of 52.0%
Whitefriars, Canterbury Sold in 2007 at 4.1% yield 27% reduction in net debt in 2008/9 financial year Page 21 Land Securities – liquidity management
£3.7bn net debt with average duration Expected debt maturities (nominal) of 9.9 years £m
2500 Cash holdings of £2.2bn (as at 31 July 2009) 2000 1500
Weighted average cost of gross 1000 debt of 4.4% 500
0 No event of financial default under 2010 2011 2012 2013 2014 5-10 10-15 15+ principal debt structure until 100% LTV year ending March years or 1.0x ICR Security Group Non-restricted group Joint ventures
Well positioned on debt maturities and loan covenants Page 22 Q1 Interim Management Statement
Trends in property values in line with our February Rights Issue expectations
Investment property sales in the quarter £357.4m at 2.7% below March 2009 valuation
Positioned to take advantage of opportunities that will arise as the market turns
Portman House, Oxford Street, W1
Substantive progress, improved sentiment Page 23 Positioning a business for the recovery phase
1
e g a t S Stage 1 Capital values Attractive level of gearing increase
Stage 2 Occupier demand Attractive development 2 improves / rental opportunities – especially e g in London West End a values increase t S office market
Land Securities – c.50% LTV gearing and c.£750m investment capacity Page 24 London offices Adding value through development
London office development 1800 completions
1600
1400
1200
1000 Park House, W1
800
600
Square feet (‘000s) 38% pre-let 400
200
0 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14+ - year to 31 March - Selborne House, SW1 A good track record on timing of London office developments Page 25 Retail Adding value through asset management and tenant mix
Turnover rent per square foot
£60
£50
£40
£30
£20
£10
£-
Outgoing Incoming Gunwharf Quays, Portsmouth 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9
Understanding retailer performance to optimise shopping centre values Page 26 Creating a property business from a blank sheet of paper
High quality portfolio PortfolioPortfolio priced priced in inline line withwith market market transactions transactions
Development opportunities Gearing at c.50% LTV for recovery in occupational Gearing at c.50% LTV markets
Land Securities – well positioned for market recovery Page 27 Important notice
This presentation may contain certain ‘forward-looking’ statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements. Any forward-looking statements made by or on behalf of Land Securities speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. Land Securities does not undertake to update forward-looking statements to reflect any changes in Land Securities’ expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Information contained in this presentation relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance.
Page 28 Contacts
Edward Thacker Abby Guthkelch Investor Relations Manager Investor Relations Executive Tel: +44 (0) 20 7024 5185 Tel: +44 (0) 20 7024 5255 Fax: +44 (0) 20 7024 5011 Fax: +44 (0) 20 7776 9305 Email:[email protected] Email: [email protected] Web: www.landsecurities.com Web: www.landsecurities.com
LAND SECURITIES GROUP PLC, 5 STRAND, LONDON WC2N 5AF Page 29