Landsec has said property values are falling and new developments are drying up because of rising interest rates, as some retailers shut shops to focus on fewer but bigger stores in the best locations.
The company, which owns the Trinity Leeds shopping centre and Bluewater in Kent, said higher construction costs and, more recently, a sharp rise in development finance costs would lead to a slump in new developments in London.
The chief executive, Mark Allan, said: “During previous periods of economic uncertainty, new starts ended up around 30-90% below originally expected levels and we believe this could well repeat over the next 12 months.”
He said some big retailers such as Zara, H&M and Next were doubling or tripling their bigger stores in the best shopping centres “with a high-quality fit-out” to offer a bigger range of goods and sizes, and are closing smaller outlets.
He said that because rents had fallen, “some of those brands are taking double or triple the space but paying not much more than the total rent or other occupancy costs than they had been paying before”. Sales in Landsec’s shopping centres are now close to pre-pandemic levels, while rents are 35% lower and property values have plunged 63% since 2017.
He explained: “In a market where there is a squeeze on consumer spending, we’re going to see retailers focus even more on rationalising the tail end of their portfolios and focusing on stores that are profitable, and the profitability of these large-scale stores is very clear for us as an operator to see.”
More shop closures look likely, as he said there is a quarter too much space across UK retail, with some of the shopping malls that were built 40 years ago likely to be repurposed into flats, for example.
The company made a loss before tax of £192m in the six months to 30 September, against a £275m profit in the same period last year.
Allan said rising interest rates will “have a lasting impact on asset values, be it equities, bonds or real estate”, adding that markets tend to overshoot.
The developer wrote down the value of its overall portfolio by a further £323m to £10.9bn, down 2.9%. Its central London assets lost 4.4% of their value, with offices in the City worst hit (down 9.7%) than West End offices (down 4.2%).
Goldman Sachs is predicting a fall of between 15% and 20% in UK commercial property prices between June 2022 and December 2024.
Landsec expects more flexible ways of working to reduce overall demand for office space in the UK, with large HQ-type space hit worst.
It has sold £2bn of London offices and other assets in the past two years as it plans to focus on growth opportunities in cities – half the £4bn it has earmarked for sale. Its largest sale was the £809m disposal of Deutsche Bank’s London headquarters at 21 Moorfields in the City in September. Landsec is also selling its retail parks and hotels.
Similar to retail, offices are a “very much a two-speed market”, Allan said. With the rise in hybrid working, employers are keen to attract staff to the office as much as possible, and want offices close to good transport links such as main railway stations, and in areas with lots of urban amenities and other activities staff can do outside working hours.
