Derwent London upgrades rental guidance thanks to ‘world class’ London

An acceleration in rental growth and a more stable investment environment has helped office giant Derwent London upgrade its rental guidance off the back of “really active demand”, its boss said.

In its half-year results this morning, the FTSE 250 office specialist said its income grew but valuations continued their decline.

Derwent, which owns flagship spaces across London including the White Chapel Building and Shoreditch’s White Collar Factory, saw its year-on-year gross rental income rise 1.5 per cent across the six months to June 30, up from £105.9m to £107.5m.

“The lettings market for the right product for the right location is very good,” chief executive Paul Williams told City A.M. “We’ve booked nearly £11m year to date so far, about 10 per cent above ARV [after repair value – a term to prediction of how much a space will fetch after repairs and upgrades have been completed].”

The rising rent volumes helped earnings per share to rise 6.5 per cent to 52.7p, which was aided by the firm’s putting pen to paper on £8.8m of new rent.

This left its open-market lettings 10 per cent above December’s estimated recovery value (ERV); its strongest since 2016.

The healthy rental market led the office specialist, shares in which are down 22.64 per cent over five years after the double body blow of the pandemic followed by interest rate rises, to raise rental guidance to “three to six per cent”.

The guidance hike represents the second successive quarter where the company has raised its guidance.

But the overall value of Derwent’s portfolio continued to tumble. Having dropped over 10 per cent in its full year results, valuations fell by a further 1.7 per cent between January at June.

Derwent has, however, called the bottom of the falling valuation cycle, saying the “outlook as continued to improve”, with the prospect of further rate cuts meaning yields on London offices will become increasingly attractive.

London is ‘world class’ and the Elizabeth line is a ‘game changer’

Williams attributed much of the continued improvement in his firm’s fundamentals to the vibrancy of London, the location of almost all of the firm’s sites.

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“London is a world-class city with broad appeal to both international and domestic businesses,” he said. “It’s very much in demand. I think the Elizabeth Line has been a bit of a game changer for people getting into town.

“People are back in town… most people are in the office three or four days a week… and they enjoy the feel that London provides.

“And unlike other major cities, London benefits from such a diverse range of occupiers. We start talking to an occupier, we never know where they’re going to come from or what sort of business they are.”

Derwent London had planning permission on a new site in Baker Street granted earlier this week, and Williams also paved the way to future deals that would double down on its strategy of prioritising high-quality, well-located stock.

He said: “We have the ambition to buy. While we haven’t seen any real distressed, we are seeing some sensitively priced buildings. Hopefully we can look to add to the portfolio.”

Derwent London sold £900m of lower quality space three years ago.