APR-JUN 2007 Vol 3 Issue13

CASCADING-New Case                                     

 

EFFICIENT MANAGEMENT OF BUSINESS CYCLE

Land Securities is the UKís leading property company. It is quoted on the London Stock Exchange and is a member of the FTSE 100. Land Securities owns more than £12 billion worth of property across the UK. The company is responsible for over seven million square meters of commercial accommodation. Its main objective is to maximize returns for shareholders on the money they have invested through buying, developing and managing commercial property. It must ensure that the income it generates through these activities will provide a healthy return on the original investment. Land Securities leases buildings to occupiers at rental levels which are influenced by market forces.

These are determined by how much floor space is available at any given time and the level of demand from potential tenants who wish to occupy the space. Empty space means the asset is not generating income which could potentially impact on the return to the Land Securitiesí investor. Fully let buildings mean healthy income generation. The commercial property market is cyclical. Land Securities relies on high levels of occupation of its properties to make sure maximum returns are made for shareholders.

The Business Cycle

The UK economy has experienced an unusually long period of growth over the past few years, following a period of serious decline in the early 1990s. Businesses have generally enjoyed a robust period of growth on the back of strong growth in sales. However many economists and financial analysts are now predicting that UK is about to experience a downturn with the worst predicting a global recession.

The property cycle

why is it different? Land Securitiesí main business is acquiring, developing and managing commercial property. Commercial property does not react in the same way as other goods and services to the business cycle. The property cycle is longer. When Land Securities is developing a property it generally takes three years to finish a project. Negotiations take a lot of time. The legalities of obtaining planning permission and building the development take time. Added to this is the process of buying, renting or selling the property which can also take time. Property is an inflation hedge as property prices generally move in line with inflation. When inflation is high rental growth also tends to be high. Theoretically, when other businesses are trying to cut back to offset the difficulties of recession, Land Securities buys property and land at much lower prices. When the economy is booming, property prices rise and Land Securities takes advantage of this positive economic environment to sell property. The profit made releases capital in order to be ready for further investments in the next downturn in the economy. The assets in any business are more important to long term financial stability than short-term profits. So Land Securities must concentrate on growing a large asset base through buying property in a downturn. This allows it to buy at a relatively low price, develop to meet demand and sell at peak times. Land Securities is a Public Limited Company quoted on a regulated exchange and owned by shareholders. The shareholders provide capital to buy properties and Land Securities works on behalf of the shareholders to increase the asset value of the business through its commercial activities of buying, selling, developing and managing property. Shareholders are individual investors, other businesses, or pension funds, who all look for a good return on their investments.

Land Securities Retail Operations

Land Securities owns many shopping centres, the majority of which lie in major city and town centres in the UK. The Bull Ring in Birminghamís Davidís Shopping Centre in Cardiff; White friars in Canterbury, and the White Rose, Leeds are a few examples. Land Securities recognizes it is important to anticipate trends and has identified certain destinations with a lot of consumers who want to shop there but with insufficient shops to satisfy that demand. As a result Land Securities will invest in these destinations, through development, to improve the retail offer. This helps maximize the number of visitors who return time and again to help the city or town gain in reputation. Providing quality developments that attract prestigious retailers and other services can increase the prosperity of a whole region. The demand from retailers for quality space that offers a pleasant experience for shoppers and workers is high. Projects like out-of-town shopping malls are difficult to develop. This is due to issues with planning permission and government regulation on developments that require increased car use. Demand is strong and inevitably this drives up the price of the available space. Office space is a more risky prospect but as a result can be very lucrative. Finance and business users have different needs and the number of people they employ can change quickly. This can create uncertainty and therefore asset values may fluctuate more.

Monitoring the environment

Land Securities has a rolling five-year plan and is therefore always looking forward. At the end of each six month period the plan is reviewed, updated, and implemented by the Board of Directors. The planning cycle draws upon information from inside and outside the business. The directors use a five year financial business planning process together with a system called Ďbalance scorecardí. This is essentially a scorecard that uses financial and non-financial criteria to assess all aspects of the organizationís performance. As part of the business planning process each property is reviewed to make sure that it will provide a return on the investment made by the company, which can either be a return on the amount invested to buy the property or a return on any money that has been invested in the development of a property. This means that each investment property needs to have a long-term plan, based on detailed research and analysis, to help the Board evaluate the future prospects for that property. If the research shows that the returns are slowing the directors may then decide to sell that property. An essential part of planning is also to look closely at economic forecasts. Many retail businesses have struggled and are reporting or warning of lower profits. This could be a problem for Land Securities. It might face large retailers reducing demand for floor space to cut costs as sales fall or retailers going bankrupt. Land Securities did a review and found that retailers generally have adopted a strategy of taking additional floor space to grow total sales.

Managing risk and investment

Land Securities seeks to achieve long-term sustainable returns for its shareholders. It knows that to do this it must consider inherent risks. Risk management and the ability to take measured risk is the secret to the success of any business. Land Securities have a clearly defined risk management process, covering a broad spectrum of business risks. Land Securities formally reviews the performance of each of its properties at least once a year. Risk factors might include property that is unoccupied, leases due to expire, progress on rent reviews and tenant defaults.

DISCUSSION QUESTIONS:-

Q1. What is the difference between business cycle and property cycle?

Q2. Discuss how planning and risk management factors using environment monitoring contribute in the success of Land Securities.

Case Analysis to Previous Issue Case

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