Planning and the business cycle
A Land Securities Group case study

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Page 3: The property cycle - why is it different?

When the economy experiences a boom, businesses see the increased demand for products and services- in response to increased demand prices can rise. Inflation is the enemy of most businesses. It drives up costs and discourages customers from buying items that are too highly priced. It indicates the beginning of a new downturn or recession.

Land Securities' 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.

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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 environmentto 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. Property is a long-term investment, and over the long-term, changes in the business cycle are less likely to impact on property values. In addition, property is a scarce resource since there is a limit to the amount of land in the UK which can be developed which also helps protect the value of property in the longer term.

 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 Birmingham; St David's Shopping Centre in Cardiff; Whitefriars in Canterbury, and the White Rose, Leeds are a few examples. Land Securities recognises it is important to anticipate trends and has identified certain destinations with a lot of consumerswho 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 maximise 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.

Land Securities Group | Planning and the business cycle