Land Securities’ chief executive leaps from behind his desk, bounding across his seventh floor office overlooking Trafalgar Square as he welcomes City A.M. – after years of stagnation, the country’s biggest property developer is on the move again – and it certainly seems to have put a spring in Francis Salway’s step.
Last week, the FTSE 100 firm opened its £540m City shopping complex One New Change, as well as restarting its £500m prestige tower on 20 Fenchurch Street (dubbed the Walkie Talkie) with joint venture partner Canary Wharf. In June it sold its Oxford Street Park House office and apartment building to Barwa, a Qatari-backed property business for £250m, who will take ownership of the development when it is completed in 2012.
Land Securities, which owns 29 retail parks across the country and a raft of London offices with a combined value of £9.5bn (with £5.3bn of this in the capital), wants to put the three years of pain due to the financial crisis and the resulting slump in commercial property behind it.
“London offices are through their low period in the economic cycle, since the spring rents have started to rise,” says the Land Securities boss.
A tall, thin yet deeply enthusiastic man, Salway is perched on one side of a meeting table in his office. Beside him is the City A.M. award he picked up the night before at our awards celebration at the Grange St Paul’s Hotel; his prize was for leading the best property firm in the country.
He has a slightly professorial air, and indeed, while studying for professional exams he wrote a book on land values, The Depreciation of Commercial Property. It was published in 1986 and remains required reading among developers.
He explains that a number of factors have come together to reverse the tumbling rents that have been a feature of recent years. One element is timing. He says: “In the late 1980s boom, a lot of companies signed a lot of 25-year leases, and in the late 1990s expansion a lot of 15-year leases were signed. We know that they will come up for renewal in the next five years or so.”
He adds that a lot of firms that had been putting off moving for the last two years now feel more confident about the economy, and are beginning to make plans. He says: “A big company like a lender, an insurer or a forex trading business, with about 2,000 staff, looks at moving three or four years before their lease is up.” All of which means that demand is recovering.
Over the last year, he says, City rents have moved up from around £45 per sq ft to £50-plus per sq ft. Salway also says that institutions “are looking to invest in commercial property again” because of the low yields on offer from government gilts due to historically low Bank interest rates and quantitative easing.
All of this helps to explain the number of projects that are being completed and in particular the developments that have been taken off ice.
The aim of Salway’s One New Change shopping centre, located opposite St Paul’s, and which boasts more than 60 shopping and eating outlets, was to build the first strong, 7/7 retail centre in the Square Mile.
Salway says: “Retailers have struggled to get their bigger outlets into the City. In other developments retailing has often been an afterthought.”
The key market for the centre is the City’s 340,000 workers “as well as the amount of tourists we saw during our research phase coming over the wobbly [Millennium] bridge from the Tate Modern to St Paul’s,” says the developer.
Some observers wonder whether New Change’s seven-day shopping will also hit rival outlets in the West End or Islington. Salway says this might be the case but that this is very much a “secondary market” for the centre.
The change in the weather for commercial property has breathed new life not only into Land Securities’ Walkie Talkie, but rival British Land’s Cheesegrater skyscraper, which was also restarted last month. The 150m-high, 690,000 sq ft Walkie Talkie will be in competition with the Cheesegrater for clients. Firms like Chicago insurer Aon, Schroders, Bank of America Merrill Lynch and Bloomberg are all understood to be looking for new properties in London.
Salway will not confirm names but says that “our sales teams are already having those conversations”. But he does not expect any prelet deals to be announced until 18 months before the tower is due to open in 2014. By the time the Walkie Talkie is built he expects space in it to be selling at around £60 per sq ft.
The developer says: “As firms come out of their old buildings they want to move into new offices that are more efficient, that will be able to attract good quality staff, and will say something about that company as a brand. We design buildings with flair that capture the imagination. When I show people around our buildings I can see that look on their faces.”
Both British Land and Land Securities sensibly reannounced these tempo-setting deals as a joint venture with a cash-rich foreign investor rather than as the sole developer in charge of the project relying on bank loans.
Land Securities has gone into partnership with rival Canary Wharf Group to build the Walkie Talkie, but behind this firm the China Investment Corporation, Qatar Holdings and Morgan Stanley Real Estate all have a stake in the building.
Critics argue that although property developers’ say the crunch may be easing, they still cannot convince banks of that.
Salway denies that the developer could not get funding – it has £2.4bn in cash and bank debt at hand, he says – but argues that he wants to fund other London offices and retail outlets outside the capital and that this is the best way to use its resources. Land Securities will still retain a 50 per cent stake in the tower.
The developer says: “It is true that London has become enormously attractive to foreign investors over the last 10 to 15 years. They like it because it is a global financial centre, they like its reliable legal system. But they are on the whole looking for a partner with local expertise. Some foreign investors will be quite active and set up their own teams here. Others will be more passive.”
Although the developer employs just 700 full-time staff, when it has a full roster of projects its funding provides work for a supply workforce of 10,000. Many other people work indirectly for it in places such as One New Change.
Land Securities returned to profit in May when a rise in asset values helped push it to a pre-tax profit of £1.1bn, from a loss of £4.8bn the year before and a £973m loss in 2008.
Salway was under intense investor pressure to turn around the firm 18 months’ ago. It was said that chairman Alison Carnwath gave him six months to improve things (she later said this was exaggerated). But whatever happened, it certainly worked. The developer responded by cutting costs and selling off its outsourcing unit Trillium to Telereal for £750m in 2009, until the market began to turn. Salway says: “The decline in capital values was the sharpest and steepest in our industry since records began in the 1920s. That put pressure on everyone in this sector.”
During the recession capital values fell 44 per cent from their peak in June 2007 to their trough in July 2009. Even though prices have risen since then, they remain roughly 35 per cent down on what prices were in the summer three years ago.
But the market is moving again. And investors are again interested in the story commercial property has to tell. And that means Salway and his team can begin to get back to what they came into this industry for – to cut deals and put up new buildings that capture tenants’ and the public’s imagination.
And that, at least, is progress.
CV | FRANCIS SALWAY
Work: Trainee surveyor at Richard Ellis; investment director at Standard Life; Land Securities chief operating officer and chief executive of the development division; now group chief executive
Education: Rugby School; Christ’s College, Cambridge, where he read land economy; College of Estate Management in Reading
Family: Married, two teenage children
Lives: Tunbridge Wells, Kent
Hobbies: Walking, climbing, tennis. Likes to set himself a big challenge every year. In June, he climbed Mount Kilimanjaro, Kenya, with his wife.