Derwent London Plc (LON:DLN) have published results today for the year ended 31 December 2023.
Paul Williams, Chief Executive of Derwent London, said:
“We had a strong year for leasing in 2023, achieving over £28m of new rent, on average 8% ahead of ERV. Today we are upgrading our rental growth guidance for 2024. Despite macro uncertainty, businesses are prioritising quality, amenity and sustainability, supporting good demand for the right product in the right location. This plays well to our strengths and reflects London’s diverse and robust occupational market, particularly in the West End. After a year of substantial outward yield movement, investment opportunities are starting to emerge and our balance sheet positions us well.“
Letting activity
· Lettings in 2023 of £28.4m compared to £9.8m in 2022
o 8.0% above December 2022 ERV
o Activity spread across our villages
o Includes £16.0m of pre-lets at 25 Baker Street W1, 13.4% above ERV; office element now 75% pre-let
· 2024 lettings to date of £1.8m, with a further £2.7m under offer
Financial highlights
· EPRA net tangible assets1 (NTA) 3,129p per share, down 13.8% from 3,632p at 31 December 2022
· Gross rental income of £212.8m, up 2.8% from £207.0m in 2022; +1.7% like-for-like
· EPRA earnings1 £114.5m or 102.0p per share, down 4.6p from 106.6p in 2022, H2 6% higher than H1
· IFRS loss before tax £475.9m (2022: £279.5m loss)
· Total return -11.7% from -6.3% in 2022
· Full year dividend of 79.5p, up 1.3% from 78.5p
· Interest cover of 4.1 times and EPRA loan-to-value ratio of 27.9%
· Net debt increased to £1,356.8m (December 2022: £1,257.2m); undrawn facilities and cash2 of £480m
Portfolio highlights
· EPRA vacancy reduced to 4.0% (December 2022: 6.4%)
· £41.5m of asset management transactions, 1.7% above December 2022 ERV
· Portfolio valued at £4.9bn, an underlying decline of 10.6% (2022: -6.8%)
o Development valuations up 8.1% principally due to pre-letting activity at 25 Baker Street W1
o West End properties outperformed, with values down 8.6%
· Portfolio valuation ERV growth of 2.1%, towards the top end of guidance
· True equivalent yield of 5.55% compared to 4.88% at December 2022
· Total property return -7.3% outperforming our industry benchmark3 at -7.9%
· Two on-site major developments totalling 437,000 sq ft on programme for completion in 2025
o 25 Baker Street W1 (298,000 sq ft) and Network W1 (139,000 sq ft)
Outlook
· Our upgraded 2024 guidance is for average ERVs across our portfolio to increase by 2% to 5%
· High quality space to remain in demand, with better buildings to outperform
· Inflation significantly reduced and expected to fall further; yields to respond
1 Explanations of how EPRA figures are derived from IFRS are shown in note 25
2 Excludes restricted cash
3 MSCI Central London Offices Quarterly Index
Webcast and conference call
There will be a live webcast together with a conference call for investors and analysts at 09:00 GMT today.
To participate in the call or to access the webcast, please register at www.derwentlondon.com. A recording of the webcast will also be made available following the event on the Derwent London website.
CHAIRMAN’S STATEMENT
| · A year of operational progress against a challenging market backdrop· Strong balance sheet and long-term strategy means we are well positioned as opportunities emerge· Annual dividend 79.5p, up 1.3%; uninterrupted annual growth since 2007 |
Our long-term strategic approach has ensured that the Group remains well-positioned against an uncertain and challenging backdrop. While our total property return was negative in 2023, we outperformed the MSCI IPD Central London Office benchmark. Our total return was -11.7%, taking the NTA to 3,129p. The Group’s balance sheet remains robust with EPRA LTV of 27.9% and interest cover of 4.1 times, giving us capacity to continue investing in our pipeline.
The occupational market continues to polarise with good rental growth prospects for high quality, sustainable buildings where there is deep demand and constrained supply, particularly in the West End where 72% of our portfolio is located. In 2023, we agreed £28.4m of new leases, on average 8% ahead of December 2022 ERV, which includes pre-letting 75% of the offices at 25 Baker Street W1 ahead of completion in H1 2025. This gives us confidence in the letting prospects for our Network W1 project as well as the next phase of our development pipeline.
The London office investment market has been adversely impacted by higher inflation and the subsequent upward movement in interest rates. We expect to see a rise in the number of motivated sellers, and we have the balance sheet capacity to explore these opportunities as they emerge.
Our experienced management team has a strong track record of value creation across the economic cycle. We recognise the importance of investing in our people and planning ahead. Over the last three years, there have been eight promotions to the Executive Committee with representation from across the business. This diversity of skills and expertise helps position us well as the macroeconomic environment starts to recover.
The Group has been impacted by global inflationary pressures and we have also invested more in the amenity we offer our occupiers. As a result, EPRA EPS is down slightly year-on-year to 102.0p. However, we have substantial reversionary potential from a combination of on-site projects (requiring £223m of capex to complete), underlying rental uplifts and vacant space. In addition, we expect only a modest impact on our cost of debt from near-term refinancing.
I am therefore pleased to confirm a 1.3% increase in the full year dividend to 79.5p in line with our progressive and well covered dividend policy, with the final dividend raised by 0.5p to 55.0p. It will be paid on 31 May 2024 to shareholders on the register of members at 26 April 2024. EPRA earnings covered the 2023 interim and final dividends 1.28 times.
We greatly value and nurture relationships with stakeholders, including the local communities in which we operate. Working alongside external consultants, we have strengthened our commitment to social value, our primary goals and how they will be measured and achieved. At the end of 2023, we published our new Social Value Strategic Framework.
After nine years on the Board, Claudia Arney will step down at the 2024 AGM from her position as a Non-Executive Director of the Company and Chair of the Remuneration Committee. The Board thanks Claudia for her significant contribution to the business and wishes her every success in the future. Sanjeev Sharma, currently a Non-Executive Director and member of the Remuneration Committee, will become Remuneration Committee Chair.
PwC was appointed as the Group’s external auditor in 2014 and, in accordance with the Competition and Markets Authority’s (CMA) requirements, we conducted a competitive tender in 2023. Following a comprehensive process, the Board has approved PwC’s ongoing appointment, subject to annual shareholder approval.
Despite the challenging global environment over the last few years, the Group is well positioned with an outstanding central London portfolio and a strong team.
CEO STATEMENT
| · Strong leasing activity of £28.4m, on average 8% above December 2022 ERV· LTV remains amongst lowest in UK REIT sector, despite 10.6% decline in capital values in 2023· 2023 ERV growth of 2.1%, towards top end of guidance range· 2024 guidance:o ERVs to increase 2% to 5%o Inflation significantly reduced and expected to fall further; yields to respond |
Overview
London is maintaining its long-term reputation as a world-leading city with broad appeal to a diverse range of businesses and investors despite the ongoing macroeconomic challenges. Following its peak at 11.1% in October 2022, CPI inflation declined significantly through the course of 2023, ending the year at 4.0%. The hike in UK interest rates appears to have concluded, with base rate on hold at 5.25% since August. On the assumption that inflation slows further towards the 2% target, the consensus expectation is for a series of base rate cuts in 2024 and beyond.
Market interest rates have responded positively to slowing inflation but remain volatile. The yield on the 10-year UK gilt, which started 2023 at 3.7%, ended the year at 3.6%, having peaked at 4.7% in August. However, since the start of 2024, it has increased again to 4.1%. This reflects both a small rise in inflation in December and more cautious ‘higher for longer’ commentary from central banks.
Combined with the higher cost and restricted availability of debt, sentiment in the investment market was subdued in 2023. Meanwhile, the occupational market has remained strong for the right product in the right location. Businesses are focused on their longer-term real estate strategies and the flight to quality is continuing. With constrained availability and a thin forward development pipeline, rents for the best space are rising.
Strong operational performance
We enjoyed an excellent year for leasing in 2023 with £28.4m of new rent agreed, on average 8.0% above December 2022 ERV. This included 155,500 sq ft of pre-lets at 25 Baker Street W1, 13.4% ahead of ERV as well as 19 ‘Furnished + Flexible’ units leased at an average 9.2% premium to the adjusted ERV.
Key transactions in the year include:
· 25 Baker Street W1: Two pre-lets – to PIMCO and Moelis – at our on-site major development which completes in H1 2025, with total rent of £16.0m; the offices are now 75% pre-let; and
· The Featherstone Building EC1: Four further lettings with combined rent of £4.3m in line with ERV; the building is now 80% leased, with further occupier interest.
Since the start of 2024, new leases totalling £1.8m have been signed, 5.6% ahead of December 2023 ERV, with a further £2.7m of space under offer.
Lease length is an important indicator for the Group. At year end, our ‘topped-up’ WAULT (to break) was 7.4 years (2022: 7.2 years). Overall, our EPRA vacancy rate reduced 2.4% to 4.0% as we leased space across the portfolio in both the West End and the City Borders.
Property valuations
Underlying capital values reduced by a further 10.6% in 2023 and we believe valuations are now approaching this cycle’s lows. The decline in capital values has been predominantly yield driven with our equivalent yield up 67bp to 5.55% in the year. By comparison, our valuation ERV was up 2.1% in the year, towards the top end of our guidance range for 2023 of 0% to +3%. Capital values across the UK real estate sector have declined, with the MSCI Central London Office index down 11.1% and the MSCI UK All Property index down 5.6% in the year.
This headline movement masks a broad range of outcomes, with our higher quality buildings and developments delivering a more resilient performance, supporting the nuanced change we made to our strategy in 2021 to retain our better buildings for longer. The value of our on-site developments increased 8.1% in 2023 and properties valued at ≥£1,500 psf, generally the higher quality buildings, reduced by 7.1%, which is a 350bp outperformance of the portfolio average. By comparison, buildings valued at <£1,000 psf (our ‘raw material’ for future regeneration) fell 14.3%. Impacted by these valuation movements, EPRA NTA per share declined 13.8% to 3,129p.
Our portfolio delivered a total property return of -7.3% compared to the MSCI Central London Office index of -7.9%.
Derwent’s differentiators
At Derwent London, we have long recognised the importance of providing best-in-class space to maximise the appeal of our buildings to occupiers. Modern offices need to be high quality and well-designed to inspire innovation, collaboration and collective productivity. Good design has always been in our DNA, but in today’s market this increasingly extends beyond the individual building to our broader portfolio approach, which includes a commitment to service and amenity as well as net zero carbon ambitions.
With over 50,000 people estimated to work in our buildings, we focus on the end user. Each individual is able to benefit from the full DL/Member offering which provides amenity and service to the whole London portfolio. This includes access to our two strategically located Member Lounges in Fitzrovia (DL/78) and Old Street (the recently opened DL/28), the App and the Experience team.
Given every business has its own unique space requirements, we design our buildings to be as adaptable as possible – ‘long-life, low carbon, intelligent’ – which increases tenant demand while also reducing obsolescence. Our buildings are designed to be desirable over the long-term. We offer a range of leasing options, from large-scale HQ space on long leases to smaller ‘Furnished + Flexible’ units on shorter leases.
Taken together, and as the bifurcation between prime and secondary properties continues to evolve, we expect this relationship-driven approach to result in reduced vacancy, shorter void periods, increased occupier retention and strong rental growth.
London office market
The vacancy rate across central London rose 1.7% in 2023 to 9.1%. However, averages do not show the full picture. West End vacancy is 4.4%, compared to the City at 11.9% and Docklands at 16.7%, while availability of new space rose more slowly than secondary space. We believe that the supply of new buildings has rarely been more constrained, particularly in the West End, which helps to explain why rents here are rising.
According to CBRE, the amount of space currently under construction across London is relatively low with 12.9m sq ft due to complete by 2027, of which 7.9m sq ft (62%) is currently available. Compared to long-term take-up, this equates to eight months’ supply (and 11 months’ supply in the West End) of new space being delivered over the coming four years.
London has broad appeal to a diverse range of businesses, both by sector and by size. We are encouraged by the substantial 74% increase in overall active demand to 9.9m sq ft at the end of 2023, which indicates a rapid rise in interest from a range of sectors.
Take-up in the year was 16% lower when compared to the prior year at 10.5m sq ft, with the West End down 27% at 3.6m sq ft. The City, however, benefitted from a number of high profile pre-lets, including HSBC and Clifford Chance returning from Docklands to more central locations, and year-on-year take-up was in line at 5.3m sq ft. Activity in 2023 was dominated by the banking & finance (31%) and business services (19%) sectors.
Economic prospects are an important demand driver for offices. Growth in jobs, population and the economy, alongside inflation prospects all have an impact. According to CBRE, following a boom in office job creation over the last three years (+415k new jobs), a further c.165k (net) positions are expected to be created over the next five years and there is a continuing increase in the number of companies requiring staff to come back to the office. The demand outlook for London offices remains positive. London real GDP growth of 1-2% pa is forecast to continue outperforming the UK and there is an ongoing increase in the population of c.0.9m to 10.6m by 2035.
Strong balance sheet and capital allocation
The Group aims, over the long-term, to operate with modest leverage and a simple financial structure to ensure resilience through the economic cycle. We believe that having a strong balance sheet has rarely been more important than at present.
We are well positioned. Our EPRA LTV ratio is 27.9% (December 2022: 23.9%) and interest cover is both strong and stable at 4.1 times (2022: 4.2 times). At the end of 2023, 98% of our debt was either fixed or hedged, with an average interest rate on a cash basis of 3.17%. In addition, we have limited refinancing in 2024 and 2025, with an £83m 3.99% secured facility maturing in October 2024 and a £175m 1.5% convertible bond maturing in June 2025.
Over the medium-term, we seek to balance disposals against capital expenditure and acquisitions. This has helped to contain the increase in our net debt and ensure we can continue to invest into our regeneration pipeline, which includes the acquisition of the exciting Old Street Quarter EC1 project which is likely to complete from 2027.
With the investment market slowdown seen in 2023, we completed a lower than normal £66m of disposals. This compared to £173m of acquisitions and capital expenditure on major projects, smaller refurbishments and our second Member Lounge, DL/28.
Sustainability
Our plans for an 18.4 MW solar park in Scotland came a step closer with planning consent now received. We expect green electricity generation to commence on completion in 2025, providing c.40% of the electricity needs of our London managed portfolio. We are also exploring other sustainability-related opportunities across our Scottish portfolio.
In accordance with our stated ambition, we rebased our SBTi-verified targets to align with a 1.5°C climate scenario. Our revised target commits us to a 42% reduction in Scope 1 & 2 carbon emissions by 2030 from our 2022 baseline. We are committed to managing our carbon footprint and building in climate resilience while collaborating across the industry and with our supply chain.
Our strong team
We were pleased to recognise the achievements of our employees, with 18 internal promotions in 2023 which included two promotions to the Executive Committee: Richard Dean, Director of Investment, joined the Committee from 1 July 2023 and Matt Cook, Head of Digital Innovation & Technology, with effect from 1 January 2024. We were also delighted to be recognised externally, being included on The Sunday Times ‘Best Places to Work 2023’ list where we scored highly in many categories against industry and global comparisons, and also winning ‘Employer of the Year’ at both the Westminster Business Council and EG (Estates Gazette) Awards.
Outlook and guidance
We have previously anticipated an acceleration in rental growth for the best buildings. Occupier demand continues to focus on well-located space with best-in-class amenity and service, while existing supply and the development pipeline are restricted. We expect these conditions to become increasingly favourable through 2024 and as such increase our portfolio rental guidance for the year to a range of 2% to 5%, with our better buildings to outperform.
Over the last few years, we have reduced our exposure to buildings which can no longer meet evolving occupier requirements and have invested significant capital upgrading our remaining portfolio. With inflation continuing to reduce and the cost and availability of finance improving, property yields are expected to respond, following a period of substantial increases. We believe we are now approaching the end of this yield cycle, with transaction volumes expected to increase and for opportunities to emerge.
CENTRAL LONDON OFFICE MARKET
| · Take-up 10.5m sq ft; acceleration in Q4 to 3.4m sq ft (Q1 to Q3 average: 2.4m sq ft)· Space under offer up 19% to 3.0m sq ft; active demand up 74% to 9.9m sq ft· Vacancy elevated at 9.1%: West End remains tight at 4.4%· Development pipeline 38% pre-let; eight months’ speculative supply· Prime yields in West End at 4.0% (up 25bp in 2023) compared to the City at 5.75% (up 125bp)· Investment transactions £5.2bn, 59% below 10-year average |
Overview and macro backdrop
The global economy has experienced significant uncertainty and volatility since 2020. The resulting supply chain disruption and global conflicts led to a rise in inflation which started three years ago and peaked in late 2022. In response, there has been a substantial increase in benchmark interest rates around the world, leading to a significant hike in the cost of debt and reduced availability. For the commercial property sector, this has resulted in a material adjustment in property yields.
Softening inflation data through 2023, however, has raised market expectations that the interest rate cycle has peaked, with cuts now forecast in 2024. This is feeding through into lower market interest rates and narrower credit spreads and there are signs of improving credit availability.
Whilst GDP growth in the UK has plateaued for the time being, London is outperforming, with economic growth to 2028 forecast to average c.2% pa. Combined with a positive outlook for both jobs (c.165k net new jobs to be created by 2028 according to CBRE) and population growth (c.0.9m increase by 2035 to 10.6m according to Macrotrends), the macro demand drivers for London offices are encouragingly robust.
In line with long-term trends, foreign direct investment (FDI) into London remains higher than other core global cities including Paris, New York and Hong Kong. Throughout 2023 there was an increase in the number of FDI projects to 103 in London which compares to a reduction in other global cities.
In a continuation of the trend seen over the last few years, businesses are becoming increasingly strategic around their real estate planning and more selective in both the building and the landlord they choose. Against a backdrop of restricted supply of high quality space, landlords that provide great space in the right location, with best in class amenity and service are seeing attractive rental growth as the flight to quality continues. According to Knight Frank, the office now fulfils five key purposes in the post-Covid era, underlining its importance: talent attraction and retention; increased collaboration; cost management and mitigation; corporate brand and image; and employee wellbeing.
London’s broad appeal to a diverse range of businesses continues to serve it well. It is not overly dependent on any one sector and the diversity of scale and occupational requirements supports demand across a wide spectrum, from large global HQs let on long leases to space for SMEs on more flexible terms. In recent years, there has been a convergence in the space needs across business sectors, as the importance of quality has risen and there is a more unified approach to what an office needs to provide.
Location and connectivity have also been important factors in the market and data from a number of agents shows a clear preference among occupiers for centrally located offices. Over the last few years, a significant number of businesses have returned to London’s core markets. The trend is widely expected to continue.
Over the course of 2023, there has been a shift in the number of companies issuing clearer guidance to employees around working policies. A recent study of 400 global companies by VTS found that over the last six months, 60% of European respondents have either ‘mandated’ or ‘encouraged’ more time in the office. Looking forward to 2024, a similar pattern is seen, with 52% planning to further ‘mandate’ or ‘encourage’ more time in the office. On a global basis, only 10% of respondents have adopted a remote-first approach and 1% of companies have gone fully remote.
Occupational market
London is not a homogenous market. Rather, it comprises a series of sub-markets, each with its own characteristics and nuances – it is a tale of three cities. This is particularly apparent when looking at vacancy levels. Overall, central London vacancy is elevated at 9.1% against the 10-year average (10YA) of 5.2%. This compares to the West End at 4.4% (10YA: 3.4%), City at 11.9% (10YA: 6.7%) and Docklands at 16.7% (10YA: 8.9%).
While market dynamics vary by location, there is also a difference in occupier demand between prime and secondary space. As a result, the composition of vacancy is more relevant than the headline. Across London, there is 26.1m sq ft of available space, of which 18.1m sq ft (69%) is secondhand, 4.0m sq ft is newly completed space and 4.0m sq ft is under construction. Applying this to the market, ‘competing supply’ for our high quality portfolio is meaningfully lower than the headlines suggest, supporting our positive outlook for rental growth.
According to CBRE, the pull back by Big Tech impacted take-up in 2023, which was down 16% relative to 2022 at 10.5m sq ft. West End take-up was down 27% to 3.6m sq ft, against a supply-constrained backdrop, but City take-up was up 1% to 5.3m sq ft, buoyed by several large pre-lets, including HSBC and Clifford Chance, both of whom will vacate their existing space in Canary Wharf. However, active demand is high, rising from 5.7m sq ft at December 2022 to 9.9m sq ft at December 2023 suggesting substantial pent-up requirements.
Another important market indicator is the development pipeline, which remains restricted as a result of increases in construction and finance costs, coupled with a more difficult planning backdrop. Across central London, CBRE estimates 12.9m sq ft of space will complete between 2024 and 2027, 31% lower than the total over the preceding four years. 5.0m sq ft (38%) is pre-let and 7.9m sq ft is speculative. Relative to average take-up over the last 10 years (12.1m sq ft), speculative completions equate to just eight months’ supply.
Investment market
Investment activity was subdued in 2023 with investor sentiment impacted by the limited availability and high cost of debt. Transactions in the year totalled £5.2bn, which compares to the 10-year average of £12.7bn.
In the West End, smaller assets (typically sub-£100m) were the most liquid and robust in terms of pricing, with purchasers less reliant on debt financing. In the City, where the average lot size is larger and investors are generally more leverage-dependent, pricing showed greater weakness, in particular for buildings in more secondary locations.
Well-located, value-add assets have continued to find a market, albeit at repriced levels. By contrast, demand for secondary assets and leaseholds remains constrained.
With the pace of inflation continuing to slow in the UK and the hike in interest rates appearing to have concluded, the cost of debt is starting to moderate as lender risk appetite shows signs of recovery. Consequently, there are early signals that investor sentiment is starting to turn a corner. London, and in particular the West End, remains an attractive location for domestic and international investors and is likely to benefit from any positive shift in momentum.
The number of potential investors has started to increase, and we expect 2024 and 2025 will present interesting acquisition opportunities for well-capitalised investors that can move quickly, for several reasons. The number of refinancings is gathering pace, with many borrowers facing both increased debt costs and an equity gap. At the same time, a number of funds are having to deal with ongoing redemption requests which is leading to them selling their more liquid assets.
VALUATION
| · Portfolio underlying capital value movement -10.6%o On-site developments +8.1%, principally due to pre-letting activity at 25 Baker Street W1o Portfolio excluding developments -11.9%o Buildings valued at ≥£1,500 psf outperformed with values -7.1%· EPRA valuation ERV growth 2.1%· True equivalent yield up 67bp to 5.55% |
The UK economy remained sluggish in 2023, with elevated interest rates and inflation impacting confidence. In the real estate sector, higher debt costs and lower investor confidence fed through to a substantial slowdown in investment turnover. In central London, the £5.2bn of transactions was 59% below the 10-year average. Although the second half of the year saw inflation decrease and interest rates stabilise, the outward movement in property valuation yields, which began in H2 2022, continued throughout 2023.
Against this backdrop the Group’s investment portfolio was valued at £4.9bn as at 31 December 2023 compared to £5.4bn at the end of 2022. There was a deficit for the year of £583.3m which, after accounting adjustments of £11.7m, produced a decline of £595.0m, including our share of joint ventures. The portfolio valuation, including developments, decreased 10.6%, following a 6.8% decline in 2022. This takes the writedown since June 2022 to 17.8% and we believe valuations are now approaching this cycle’s lows.
Our portfolio valuation movement outperformed the MSCI Central London Offices Quarterly Index which was -11.1% (and -21.6% since June 2022). This outperformance was driven by the quality of our portfolio, balanced between core income properties and value add opportunities. The wider UK All Property Index was down by 5.6%.
The EPRA initial yield is 4.3% (December 2022: 3.7%) which, after allowing for the expiry of rent-free periods and contractual uplifts, rises to 5.2% on a ‘topped-up’ basis (December 2022: 4.6%).
The occupier market remained more resilient for better quality buildings. Our EPRA valuation rental values were up 2.1%, an improvement on the 1.3% uplift in 2022, and towards the top end of our guidance range for 2023 of 0% to +3%. Leasing activity was particularly buoyant, with £28.4m of transactions during the year.
Our central London properties, which represent 98% of the portfolio, declined by 10.7%. West End values were down 8.6% outperforming the City Borders, where values reduced 15.8%, with the latter seeing greater outward yield movement. The balance of the portfolio, our Scottish holdings, was down 4.9%.
During the year, our two on-site developments were 25 Baker Street W1 and Network W1. Both are in the West End where occupier demand is strongest. They were valued at £394.6m, up 8.1% after adjusting for capex invested during the year and represent 8% of the portfolio. This overall strong performance mainly came from 25 Baker Street where there was significant pre-letting during the year, despite an outward movement in valuation yields. In addition, the valuers released some development surpluses following good progress on site. Both developments are due for delivery in 2025 and require £223m of capex to complete. Excluding these, the portfolio valuation decreased by 11.9% on an underlying basis.
The core income element of our portfolio is largely buildings where refurbishment or redevelopment has been undertaken, providing quality well-designed office space to meet current occupier trends. These properties generally have a higher capital value per square foot and, as illustrated below, proved more resilient. Our lower value properties mostly provide future repositioning opportunities where we can deliver the next generation of high quality space.
Valuation movement by capital value banding
| Capital value banding (£psf) | Weighting by value (%) | Capital value change (%) |
| ≥£1,500 | 22 | -7.1 |
| £1,000 – £1,499 | 23 | -11.4 |
| <£1,000 | 47 | -14.3 |
| Sub-total | 92 | -11.9 |
| On-site developments | 8 | +8.1 |
| Portfolio | 100 | -10.6 |
Derwent London’s total property return for 2023 was -7.3%, which compares to the MSCI Quarterly Index of -7.9% for Central London Offices and -1.0% for UK All Property.
Further details on the progress of our projects are in the ‘Developments and refurbishments’ section below and additional guidance on the investment market is laid out in the ‘Outlook and guidance’ section above.
Portfolio reversion
Our contracted annualised cash rent as at 31 December 2023 was £206.5m, a 1.1% increase over the last twelve months. With a portfolio ERV of £309.6m there is £103.1m of potential reversion. Within this, £44.6m is contracted through a combination of rent-free expiries and fixed uplifts, all of which is straight-lined in the income statement under IFRS accounting standards; our IFRS accounting rent roll at 31 December 2023 was £211.0m.
On completion, our on-site developments could add £33.0m at the current ERV, of which £15.6m or 47% of this is pre-let. There are then £7.5m of smaller refurbishment projects. This is up from £2.7m a year ago, however, c.80% of this came from expiries and breaks in the last four months of the year. These units will be upgraded during 2024. The ERV of ‘available to occupy’ space is £10.9m, the main elements of which are £4.1m at The White Chapel Building E1, £1.8m at The Featherstone Building EC1 and £1.3m at 230 Blackfriars Road SE1. Since year end, £3.3m of available space has been let or is under offer. The balance of the potential reversion of £7.1m comes from future reviews and expiries.
LEASING AND ASSET MANAGEMENT
| Lettings· £28.4m of new leases, on average 8.0% above December 2022 ERVo Includes £16.0m of pre-lets at 25 Baker Street W1, 13.4% above ERV· Strong demand across all villages, split 77% West End and 23% City BordersAsset management· 81 asset management transactions with rent of £41.5m, 3.5% above the previous income· Average 1.7% above December ERVEPRA vacancy rate· Down 2.4% through 2023 to 4.0% |
Lettings
We saw strong occupier demand across all our villages, with total letting activity in 2023 of £28.4m across 50 transactions and covering 340,500 sq ft. This is a significant increase compared to the £9.8m of lettings in the prior year. On average, new leases (including pre-lets) were agreed 8.0% above December 2022 ERV. Pre-lets at 25 Baker Street W1 to PIMCO and Moelis, which together total £16.0m of headline rent, were signed 13.4% above ERV with the remaining open market lettings 4.4% above ERV.
The average WAULT (to break) of new leases in 2023 was 9.9 years, rising to 10.8 years excluding the £3.6m (51,100 sq ft) of ‘Furnished + Flexible’ lettings, and we currently operate 144,400 sq ft of these smaller units with a further 21,500 sq ft on site or committed.
Since the start of 2024, £1.8m of new leases have been agreed on average 5.6% above December 2023 ERV, and there is £2.7m under offer.
Leasing in 2023 and 2024 to date
| Let | Performance against Dec-22 ERV (%) | ||||
| Area sq ft | Income £m pa | WAULT1 yrs | Open market | Overall2 | |
| H1 2023 | 228,000 | 19.3 | 11.0 | 8.9 | 7.3 |
| H2 2023 | 112,500 | 9.1 | 7.5 | 10.4 | 9.5 |
| 2023 | 340,500 | 28.4 | 9.9 | 9.4 | 8.0 |
| 2024 to date | 32,000 | 1.8 | 8.8 | 7.43 | 5.63 |
1 Weighted average unexpired lease term (to break)
2 Includes short-term lettings at properties earmarked for redevelopment
3 Performance against December 2023 ERV
Leasing by location in 2023
| Location | Pre-let income £m | Non pre-let income £m | Total income £m | Total income % |
| West End | 16.3 | 5.6 | 21.9 | 77 |
| City Borders | – | 6.5 | 6.5 | 23 |
| Total | 16.3 | 12.1 | 28.4 | 100 |
Principal lettings in 2023
| Property | Tenant | Area | Rent | Total annual rent | Lease term | Lease break | Rent-free equivalent |
| sq ft | £ psf | £m | Years | Year | Months | ||
| H1 | |||||||
| 25 Baker Street W1 | PIMCO | 106,100 | 103.40 | 11.0 | 15 | – | 37 |
| The Featherstone Building EC1 | Buro Happold | 31,100 | 74.40 | 2.3 | 15 | 101 | 24, plus 12 if no break |
| One Oxford Street W1 | Uniqlo | 22,200 | Conf 2 | Conf 2 | 10 | 5 | 12 |
| Tea Building E1 | Jones Knowles Ritchie | 8,100 | 60.00 | 0.5 | 10 | 5 | 12, plus 12 if no break |
| The White Chapel Building E1 | Comic Relief | 5,000 | 61.903 | 0.3 | 5 | 3 | 6, plus 1 if no break |
| Middlesex House W1 | Zhonging Holding Group | 4,200 | 81.003 | 0.3 | 3 | 1.5 | – |
| H2 | |||||||
| 25 Baker Street W1 | Moelis | 49,400 | 101.25 | 5.0 | 15 | 10 | 24, plus 9 if no break |
| The Featherstone Building EC1 | Tide | 14,400 | 71.00 | 1.0 | 10 | 5 | 15, plus 11 if no break |
| The Featherstone Building EC1 | Avalere Health | 10,900 | 81.003 | 0.9 | 10 | 5 | 5, plus 5 if no break |
| Tea Building E1 | Gemba | 7,100 | 63.803 | 0.5 | 5 | – | 8 |
| Tottenham Court Walk W1 | Sostrene Greene | 6,400 | 54.90 | 0.4 | 10 | 6 | 12 |
| The White Chapel Building E1 | Asthma & Lung UK | 7,000 | 45.00 | 0.3 | 10 | 3 | 7, plus 8 if no break |
1 There is an additional break at year 5 on level eight subject to a 12-month rent penalty payable by the tenant
2 Uniqlo will pay a base rent (subject to annual indexation) plus turnover top-up
3 ‘Furnished + Flexible’ (Cat A+) lettings
Asset management
As the shortage of quality supply across the London office market becomes increasingly apparent, businesses are having to plan their occupational requirements earlier. Consequently, we engaged with several occupiers who have already begun planning for lease breaks/expiries in 2026/27. The opening of our two Member Lounges – DL/78 in 2021 and DL/28 in 2023 – is having a positive impact on these early conversations, with many occupiers valuing the additional amenity and level of service they provide.
Overall, asset management activity in 2023, excluding two short-term development-linked regears, totalled 670,000 sq ft, 30% higher than in 2022 (516,900 sq ft).
The key transactions were:
· Brunel Building W2: Paymentsense took an additional 49,600 sq ft on a lease assignment from Splunk, increasing its occupancy by 150% to 82,600 sq ft. Simultaneously the lease break on their existing space was removed and the term across all five floors was extended to 2036, with a minimum rental uplift at next review. The WAULT on these five floors increased to 12.7 years from 6.9 years.
· 1 Stephen Street W1: As part of a wider asset management transaction, Fremantle agreed the removal of its lease break in September 2024 on levels 3 to 6 adding five years’ term certain alongside a 7.2% uplift in rent in September 2024, and the hand back of level 7. The space will be refurbished this year unlocking a substantial rental uplift. Also within the building, Freud Communications agreed the removal of its lease break in September 2024, adding five years’ term certain to the lease.
· White Collar Factory EC1: rent review on 28,400 sq ft to AKTII settled 15% ahead of the previous rent, and in line with December 2022 ERV.
· Tea Building E1: Monkey Kingdom renewed its lease on 7,500 sq ft at £0.5m, a level 9.1% above the previous rent and 4.3% above December 2022 ERV.
Asset management in 2023
Number | Area ‘000 sq ft | Previous rent £m pa | New rent2 £m pa | Uplift % | New rent vs Dec-22 ERV % | |
| Rent reviews | 28 | 381.0 | 22.1 | 23.4 | 5.8 | 2.4 |
| Lease renewals | 39 | 62.8 | 3.1 | 3.2 | 3.3 | 6.7 |
| Lease regears1 | 14 | 226.2 | 14.9 | 14.9 | 0.1 | -0.3 |
| Total | 81 | 670.0 | 40.1 | 41.5 | 3.5 | 1.7 |
1 Excludes two development-linked regears. 2 Headline rent, shown prior to lease incentives.
The WAULT (to break) across the portfolio was broadly stable at 6.5 years (December 2022: 6.4 years) despite the passage of time, reflecting our leasing and asset management activity. This is split 7.5 years in the West End and 4.6 years in the City Borders.
Our ‘topped-up’ WAULT (adjusted for pre-lets and rent-free periods) was also stable at 7.4 years (December 2022: 7.2 years).
At the start of 2023, 10% of passing rent was subject to break or expiry in the year. After adjusting for disposals and space taken back for larger schemes, 65% of income exposed to breaks and expiries was retained or re-let by year end. This is lower than the rate reported at H1 2023 because units with a passing rent of £6.0m were vacated in the final four months of the year and there was insufficient time to complete our asset improvement plans prior to year end. 1-2 Stephen Street W1 (units previously let to BrandOpus and G-Research on low rents of £43.75 psf and £50 psf respectively) and 20 Farringdon Road EC1 (unit previously let to Indeed at a rent of £57.50 psf) comprised 67% of this and improvement works have already commenced at these units ahead of re-letting.
Vacancy
The portfolio EPRA vacancy (which is space ‘available to occupy’) decreased by 2.4% through 2023 to 4.0% (December 2022: 6.4%) with an ERV of £10.9m. The decrease primarily reflects leasing progress at The Featherstone Building EC1 (58,600 sq ft leased in 2023), The White Chapel Building E1 (15,200 sq ft leased in 2023) and Soho Place W1 (23,100 sq ft of retail space leased in 2023).
Within our EPRA portfolio, there is project space with an ERV of £7.5m which is excluded from the EPRA vacancy rate. This includes space vacated in the last four months of the year where projects are at an early stage. Once complete, EPRA vacancy would increase to 6.8%, a 0.3% reduction compared to the comparable rate at December 2022 (7.1%).
Rent and service charge collection
Rent and service charge collection rates remain high at 98% for the December 2023 quarter.
SUSTAINABILITY
| · Planning consent secured for 18.4 MW solar park on Scottish land· Energy usage increased to 56.7million kWh (+12.5%)o Soho Place W1 and The Featherstone Building EC1 completed and became operational in mid-2022· Energy intensity increased to 149 kWh/sqm (+4.9%)· Embodied carbon intensity of both on-site developments are in-line with 2025 targets (≤600 kgCO2e/sqm) |
Our plans for an 18.4 MW solar park on our Scottish land, that we expect will generate in excess of 40% of the electricity needs of our London managed portfolio, came a step closer following receipt of planning consent in the year. Construction is scheduled to start through the second half of 2024, with generation of green electricity to commence through 2025. We also continue to explore other self-generation and carbon removal opportunities, including further tree planting.
In 2019, we published our original SBTi-verified targets which were aligned with a 2°C climate warming scenario. Following publication by SBTi of its 1.5°C-aligned pathway, we have rebased our near-term targets to align with this new methodology. We are committed to reducing our Scope 1 & 2 carbon footprint by 42% by 2030 from our 2022 baseline. We are finalising our long-term SBTi net zero carbon target, which will commit us to reducing our overall carbon footprint across all Scopes by 90% by 2040 against our 2022 baseline.
In 2023, 99% of energy used in the year was purchased on renewable tariffs backed by REGOs (electricity) or RGGOs (gas).
Whilst energy usage across the London managed portfolio increased 12.5% in 2023 to 56.7million kWh, this was principally due to Soho Place W1 and The Featherstone Building EC1 became operational in mid-2022. Consequently, energy intensity increased year on year to 149 kWh/sqm which is above the ‘target’ of 138 kWh/sqm. Although an increase, we remain on track to meet our longer-term target of 90 kWh/sqm in 2030, which equates to a 46% reduction compared to our 2019 baseline (166 kWh/sqm).
Our overall carbon footprint reduced in the year to 15,169 tCO2-e (2022: 44,183 tCO2e). There were no large completions in 2023, compared to two major project completions in the prior year. Consequently, our embodied carbon (Scope 3, Category 2) fell from 32,869 tCO2e in 2022 to 799 tCO2e in 2023, and has been offset. Our operational carbon footprint (Scopes 1, 2 & 3, excluding embodied carbon; location-based) increased 27% to 14,370 tCO2e.
At December 2023, 68% of our London commercial portfolio by ERV (including on-site projects) had an EPC rating of ‘A’ or ‘B’ and was compliant with proposed 2030 legislation. A further 19% was rated EPC ‘C’. The costs and likely timing of upgrading the remainder of the portfolio to ensure ongoing legislative compliance have been integrated into our asset management and financial planning.
INVESTMENT
| Developments· £169.3m of project expenditure· Two major projects on site – 25 Baker Street W1 (298,000 sq ft) and Network W1 (139,000 sq ft)o Combined 5.8% yield on cost and 13% development profito 25 Baker Street offices 75% pre-let (13.4% above December 2022 ERV)· Medium and longer-term pipeline totals over 1.3m sq ft Disposals· Total disposals £66m; major sales were 19 Charterhouse Street EC1 (Q1: £53.6m; 4.6% yield) and 12-16 Fitzroy Street W1 (Q2: £6.7m; 6.9% yield) |
Over the last five years, we have sold £894.0m of property, primarily focused on smaller non-core buildings where there was limited capacity for extra floor area and amenity. Disposal proceeds have largely been recycled into our development pipeline, with £855.4m of capital expenditure and acquisitions of £468.6m. This has helped us maintain a strong balance sheet with conservative levels of gearing, despite the valuation declines seen, and provides firepower for future acquisition opportunities that we expect to arise over the coming 12-24 months.
The Group’s capital allocation decisions in 2023 were focused on its exciting development and refurbishment pipeline. We incurred total project expenditure (including our share of the 50 Baker Street W1 JV) of £162.8m, plus £6.5m of capitalised interest. Of this, £117.4m was at our two on-site major projects.
We remain committed to owning a portfolio balanced between core income properties and those that offer future regeneration potential. At 31 December 2023, the portfolio was split 56% ‘core income’ and 44% ‘future opportunity’. This excludes Old Street Quarter EC1, with an existing floor area of c.400,000 sq ft, where our conditional acquisition is expected to complete from 2027 and offers significant potential to create a mixed-use campus.
Developments and refurbishments
Major on-site projects – 437,000 sq ft
Significant progress was made through 2023 at our two on-site projects, 25 Baker Street W1 and Network W1, which together total 437,000 sq ft and are both in the West End. The construction costs are now fixed and we have substantially de-risked delivery at 25 Baker Street. With limited competing supply in either the Marylebone or Fitzrovia sub-markets, we are confident in the leasing prospects for the remainder of the available space. We currently expect them to deliver a combined 5.8% yield on cost and 13% development profit.
· 25 Baker Street W1 (298,000 sq ft) – an office-led scheme in Marylebone, which is expected to complete in H1 2025, comprising 218,000 sq ft of best-in-class offices, 28,000 sq ft of new destination retail around a central landscaped courtyard (which is being delivered for the freeholder, The Portman Estate) and 52,000 sq ft of residential, of which 45,000 sq ft is private. Occupier demand for the office space is high, with 155,500 sq ft pre-let through 2023 at an average headline rent of £103 psf, 13.4% ahead of December 2022 ERV. In addition, seven of the 41 private residential units have exchanged for £38.9m, reflecting an average capital value of £3,560 psf, and a further three are under offer. The office and residential structures have now completed and the façade installation is making good progress. The mid-Stage 5 embodied carbon estimate is c.600 kgCO2e/sqm.
· Network W1 (139,000 sq ft) – an office-led scheme in Fitzrovia, targeted for completion in H2 2025, comprising 134,000 sq ft of adaptable offices and 5,000 sq ft of retail. The project is being delivered on a speculative basis. Ground and basement works have completed and construction of the core and upper slabs has reached level six. The Stage 4 design embodied carbon estimate is c.530 kgCO2e/sqm.
Major on-site development pipeline
| Project | Total | 25 Baker Street W1 | Network W1 |
| Completion | H1 2025 | H2 2025 | |
| Office (sq ft) | 352,000 | 218,000 | 134,000 |
| Residential (sq ft) | 52,000 | 52,000 | – |
| Retail (sq ft) | 33,000 | 28,000 | 5,000 |
| Total area (sq ft) | 437,000 | 298,000 | 139,000 |
| Est. future capex1 (£m) | 223 | 139 | 84 |
| Total cost2 (£m) | 734 | 486 | 248 |
| ERV (c.£ psf) | – | 95 | 90 |
| ERV (£m pa) | 33.0 | 20.43 | 12.6 |
| Pre-let/sold area (sq ft) | 201,300 | 201,3004 | – |
| Pre-let income (£m pa, net) | 15.6 | 15.6 | – |
| Embodied carbon intensity (kgCO2e/sqm)5 | c.600 | c.530 | |
| Target BREEAM rating | Outstanding6 | Outstanding | |
| Target NABERS rating | 4 Star or above6 | 4 Star or above | |
| Green Finance | Elected | Elected |
1 As at 31 December 2023. 2 Comprising book value at commencement, capex, fees and notional interest on land, voids and other costs. 25 Baker Street W1 includes a profit share to freeholder, The Portman Estate. 3 Long leasehold, net of 2.5% ground rent. 4 Includes PIMCO and Moelis pre-lets, five private residential units at year end, the pre-sold affordable housing plus the courtyard retail and Gloucester Place offices pre-sold to The Portman Estate. 5 Embodied carbon intensity estimate as at stage 4 or mid-stage 5. 6 Excludes offices at 30 Gloucester Place.
Future development projects – Four schemes totalling c.1.3m sq ft
Our medium-term pipeline comprises c.390,000 sq ft (at 100%) of high quality office-led space.
· Holden House W1 (c.150,000 sq ft) – from mid-2025: we are updating our plans which will have a higher office weighting and better sustainability credentials than the existing planning consent.
· 50 Baker Street W1 (c.240,000 sq ft at 100%) – from early 2026: held in a 50:50 joint venture with Lazari Investments, we have submitted a planning application, the outcome of which is expected in H1 2024. This leasehold property is on The Portman Estate and includes another building in their ownership.
Our longer-term pipeline could deliver 950,000+ sq ft of mixed-use, office-led space.
· Old Street Quarter EC1 (750,000+ sq ft) – from 2027/28: we continue to progress plans for this 2.5-acre island site which our studies suggest has potential for a significant mixed-use campus development, potentially incorporating both office and ‘living’ components. We have had constructive engagement with the London Borough of Islington. Our acquisition of the site is expected to complete from 2027, conditional on delivery of the new eye hospital at St Pancras and subsequent vacant possession of the existing site.
· 230 Blackfriars Road SE1 (200,000+ sq ft) – from 2030: our early appraisals show capacity for a large office-led development for this 1960s building, more than three times the existing floor area.
Refurbishments
Refurbishment projects will comprise an increasing proportion of capital expenditure over the coming years as we continue to upgrade the portfolio to meet the evolving requirements of an increasingly selective occupier base. Through improving the amenity offer and overall quality, as well as upgrading EPCs, we expect these projects to deliver an attractive rental uplift. Smaller units, typically <10,000 sq ft, will be appraised for our ‘Furnished + Flexible’ product where occupiers are willing to pay a premium rent for flexible, high quality space.
Acquisitions and disposals
There was limited investment activity in 2023. Disposals totalled £65.6m at a blended capital value of £845 psf and yield of 4.4% (excluding the forward sale of residential units at 25 Baker Street W1), compared to acquisitions of £3.8m.
Principal disposals in 2023
| Property | Date | Area sq ft | Total after costs £m | Net yield % | Net rental income £m pa |
| 19 Charterhouse Street EC1 | Q1 | 63,200 | 53.6 | 4.6 | 2.6 |
| 12-16 Fitzroy Street W1 | Q2 | 8,600 | 6.7 | 6.9 | 0.5 |
| Other | 2,200 | 5.3 | – | – | |
| Total | 74,000 | 65.6 | 4.4 | 3.1 |
