Our strategy & performance
Our strategy is designed to provide a sustainable and reliable return through the market cycle.
How we aim to match our activity to the movements of the market.
Our strategic objectives
To deliver our strategy we have set clear objectives that relate to specific financial and operational outcomes:
- Deliver sustainable long-term shareholder returns
- Maximise the returns from the investment portfolio
- Manage our balance sheet effectively
- Maximise development performance
- Ensure high levels of customer satisfaction
- Attract, develop, retain and motivate high performance individuals
- Continually improve sustainability performance
Our approach is to buy assets and to start to develop early in the cycle; manage assets actively to ensure they meet occupiers’ changing needs and generate strong income; and sell at the right time to maximise profit and recycle capital. Across the portfolio, we have a clear plan for every asset. We are risk aware, not risk averse.
We work hard to anticipate and respond to changes in our markets. We make understanding our customers’ needs our top priority, so we provide the space they need to succeed. And we also look beyond our buildings, working to ensure our activities meet the expectations of everyone from investors to local communities and government, shaping the future for good.
Our strategic choice
We aim to create and protect value by being the company people prefer to work with and for. To succeed, we need local authorities and communities to trust that our activity benefits their area. We need occupiers and investment partners to trust us to deliver space on time and to plan. And we need the public to trust that our sites are safe and we use natural resources carefully. Acting with integrity in this way helps us to attract and retain great people. It also makes sound commercial sense.
We focus on two geographically-defined sectors of the UK commercial property market – offices, retail, leisure and residential in central London, and retail and leisure assets located outside London. We believe being active in these two sectors rather than one provides us with greater financial stability as they work to different cycles.
We aim to own high quality assets – with enduring appeal to occupiers – that can generate strong income through the cycle. And we carefully time our development, buying and selling activity in line with the cycle. See the Q&A below for more on market timing.
We are currently the UK’s largest Real Estate Investment Trust (REIT) on the basis of equity market capitalisation. Scale enables us to make large acquisitions and develop a number of major assets at the appropriate time. We can acquire sites then wait to deploy our capital at the most advantageous point in the cycle.
We choose to buy and develop in thriving locations, or places with excellent potential, where an underperforming building or plot of land can be transformed to generate income and value. Placemaking – the long-term regeneration of an area into a thriving location – is an increasingly important part of what we do.
We have been following a broadly net debt neutral financial approach as we move through the cycle. So we aim to broadly balance the proceeds we receive from sales with outgoings on acquisitions and capital expenditure for developments. This approach creates strong competition for capital within the Group, so only the best options are pursued and financial gearing reduces steadily as we move through the cycle.
We are risk aware not risk averse. Our main risk is that space in our developments will be left unlet – or let at low rents – if the market turns unexpectedly and supply outstrips demand. We mitigate this through the quality of our new buildings, developing early in the cycle, and using our excellent market knowledge and occupier relationships. We also respond to the long-term risks affecting our industry, including climate change, environmental regulation and resource constraints, including energy supply.
We aim to make sound, long-term investments in our buildings so their performance meets changing regulation, they continue to attract strong demand from occupiers and they generate sustainable returns in the years ahead.
Q & A
Why is there a property market cycle?
If demand for space is greater than supply rents tend to rise, leading to higher property values. In turn this encourages developers to create more supply. At a certain point the supply of new space is likely to outstrip demand - particularly if economic and financial factors also serve to limit demand. Rents and property values may then fall quickly.
What challenges are created by the cycle?
Given that large properties take time to build, the main challenge for developers is to secure lower construction costs and then time construction so that buildings complete at the right point in a rising market, while demand is strong. In terms of investment (owning property), companies must understand occupiers' changing needs so their space attracts tenants and produces good income through the cycle, even when supply is high and demand low.
Do the cycles in the London offices market and the retail market differ?
The London offices market sees marked periods of over- and under-supply, and demand can move from one phase to another quite quickly. We usually develop speculatively in London, that is, without commitments from tenants to take the space, with our decision to move ahead based on confidence in our ability to read the supply/demand balance. Speculative development is necessary as potential occupiers generally start to look for space up to two years before moving, while large schemes can take more than two years to complete. The retail market is less volatile as it is fundamentally driven by long-term structural changes within the sector, such as the effect of the economy on consumers or the impact of online retailing. It is harder to predict demand or create competition for space within a new retail scheme, so we reduce risk by achieving significant pre-lettings before commencing construction.
What is your strategic response to the cycle?
We manage assets actively through the entire cycle, ensuring voids are kept low and lease lengths are maintained so we maximise rental income. We sell assets when we see better opportunities to use the proceeds to create value elsewhere, particularly if an asset may not perform so well when the cycle turns. We aim to buy assets when values are falling or low. We start to develop early in the cycle so we benefit from lower construction costs, and we aim to deliver completed schemes while demand from occupiers is rising and levels of available space are low. We monitor changing conditions carefully and aim to stop our speculative development programme well ahead of over-supply in the market.
How do you manage gearing through the cycle?
Our gearing is a measure of our debt relative to the value of our assets. It has a multiplier effect, with high gearing generating higher returns in a rising market and greater losses in a shrinking market. Our objective is to have higher gearing at the bottom of the market cycle and then to keep debt relatively constant, so that rising property values then reduce gearing as the market improves. As the market nears the top of the cycle we may also sell further assets to reduce debt so we can take advantage of buying opportunities when values have fallen. Selling quickly at scale can be challenging so it is important we read the market well and act decisively.
How do you know where you are in the cycle?
Being an active player at the heart of the market enables us to see what’s changing and assess the likely impact on future supply and demand. We get out and about to talk to people, and we analyse new data carefully, particularly information on lease expiries, occupier intentions, construction costs and new development starts. We also look closely at changing patterns in rental values and their likely effect on investment in development.