Crown Estate looks to development to revamp real estate portfolio

The Crown Estate is gearing up to reshape its real estate portfolio with a circa £500m development pipeline over the next few years, while outlining expectations to invest up to £1bn on decarbonising and improving its portfolio. Net revenue profit grew by around 16.1% to £312.7m during its 2021-22 financial year. The value of the Crown’s overall portfolio rose by 8.3% to £15.6bn, mainly driven by growth in its marine investments. The value of that portfolio has grown by 22% to £5bn, boosted by growth in its offshore wind operations.  The capital value of the Crown’s London portfolio stayed flat at £7.7bn during its 2021-22 financial year, on the back of improved trading conditions. However, it underperformed its MSCI West End benchmark at 3.5%, compared with the benchmark’s 5.7%. Chief executive Dan Labbad said void rates in central London’s retail and leisure thoroughfares are expected to increase over the next 12 months, although that will not cause “surprise or concern”.  “What we are more concerned about is moving to adapt not only to short-term inflationary pressures… but the structural shifts in products and services that customers are looking for,” he said.  “[Taking on] development now allows us to reshape the portfolio, aimed at those new markets, as opposed to being left with a legacy development portfolio targeted at old markets. “The way retail and offices will work on the street will evolve and change. Our focus is on getting that right, because there’s no point improving profitability for 10 minutes, when in an hour you’ll find you have an obsolete product or service model for your clients.” Disciplined approach The move to restart the development pipeline comes after it was paused during the pandemic, with the Crown’s assets put under review.  Some 10 to 15 “blocks” have been identified across the core London estate for development. Labbad pointed to “a lot of activity” in workplace leasing and a “real eagerness” from customers to get back to business. He added that while rising build costs remain a “concern”, these will not prevent the development pipeline from moving forward in the medium term, although the Crown will undertake a “disciplined” approach to capital deployment. The estate is also seeking to start a regional mixed-use pipeline outside of London. “We are looking to rotate some of the capital in our portfolio [for] those developments,” said chief financial officer Robert Allen. He added that the Crown is in talks to sell four of its regional properties.  Its regional portfolio, which comprises 17 properties, posted a net revaluation gain of £300m during the past financial year. This was mostly boosted by its retail parks as well as capital value gains at its sites at East Hemel and Cambridge Business Park. The landed estate produced a total annual return of 12%, above a bespoke benchmark of 9.9%.  Allen estimated that around £500m-£1bn will be spent on decarbonising and improving the estate’s environmental performance, with a “substantial amount of capital” spent over the next five to 10 years across the portfolio. He described this as a “shifting target”. “Decentralising energy provision in London – providing greener energy centrally – is a core part of what we’re looking at,” added Labbad. “Our pathway will be a combination of facilitating energy provision as well as building efficiency. It’s early days, but we are working through the analysis at the moment.” Taking shape Labbad described the process as “trial and error in a lot of ways”, and that sharing knowledge with other landlords, developers and customers is critical. “We need to all work together as an industry on this, fighting for the same good and sharing knowledge so that we can get there as a collaborative effort, not an individual organisation,” he said. The Crown also aims to deploy capital into growing its rural portfolio. “We are putting a lot of effort into innovating in our non-marine portfolio, which includes rural… and the role it will play in the future,” said Labbad. “We still have a major real estate portfolio… Given the headwinds and volatility around climate change, it’s [about taking it] one year at a time, seeing what opportunities and challenges exist, and the portfolio will take shape from there.” To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews Image © Nils Jorgensen/Shutterstock