Derwent leaders on NAV discounts, Brexit and the future

Having taken Derwent London from “the beginning [in 1984], when the company was only capitalised at £1.5m, to the current level of £3.3bn”, John Burns has decided to step down as chief executive. [caption id="attachment_866853" align="alignright" width="200"] John Burns[/caption] He is to hand over the reins to the company’s property director, Paul Williams, in May, when he begins a two-year stint as non-executive chairman. Burns leaves the real estate investment trust in good shape, with a portfolio of 87 commercial buildings valued at £5bn, net rental income for the first six months of 2018 hitting £80.6m and net asset value standing at £4.2bn at the end of June. However, Burns concedes that the business, like several other property REITs, has been trading at around a 13% discount to NAV, according to stockbroker AJ Bell. “There are companies at substantial discounts that are an awful lot wider than us,” Burns says. “I think it is a moment in time. Nobody likes to see their shares standing at a discount, but I think after a period of time that certainly will change.” Building on success [caption id="attachment_955624" align="alignright" width="200"] Paul Williams[/caption] His successor, Williams, is confident about taking the helm, having worked at the firm for around 30 years. “We’ve got a great brand and reputation, and I think [the future] will be about building on the success that’s been generated and making sure we’re creating space for the tenants of the future,” he says. “We’ve got some good properties going forward, whether it’s Soho Place or Featherstone.” Soho Place is the 285,000 sq ft mixed-use development that Derwent is set to create on the corner of Oxford Street and Charing Cross Road. Featherstone, an office scheme totalling 69,000 sq ft, will be located opposite its award-winning White Collar Factory site in Shoreditch, EC1. Furthermore, the company secured planning approval last year for a 150,000 sq ft scheme at Holden House on Oxford Street, W1, and for a 293,000 sq ft redevelopment at 19-35 Baker Street, W1, and assessments are being undertaken on Premier House and Francis House, according to Derwent’s website. Both office buildings are around 60,000 sq ft and located in Victoria, SW1. “We’re lucky that we have a portfolio of opportunities for the next 8-10 years,” Williams adds. “I’d like to buy some more if we could, but, obviously, there’s lots of money coming in [from other investors into the London market competing for properties]. Part of that has been the weakness of the pound, but also people are only looking to sell if they can replace their income. “I’m a big fan of Whitechapel, so I’d like to buy some more there. If we could find properties to acquire then we would do so. We’re also always looking for those new areas where tenants will go if you build the right product.” Game-changing acquisition Derwent’s current pipeline was predominantly put together during the 1990s and 2000s under Burns’s stewardship, boosted by the takeover of London Merchant Securities in 2007. Derwent outbid rival Great Portland Estates to secure the deal. It is a particular highlight for Burns as it “virtually doubled the size of our portfolio, and in areas in the majority that we had holdings ourselves, which was fantastic”. Williams agrees, pointing out that the merger gave Derwent “some real core properties to use our skills on”, such as 80 Charlotte Street in Fitzrovia, which is currently under construction. The deal also led to the conversion of the business into a REIT that summer. The industry, however, has changed over the past three decades, and it is arguably far more difficult today to create the type of property empire that Burns has built with Derwent. “There’s far more demand for investment, especially from overseas. The market is not domestic any more, it’s very wide,” Burns muses. “I’ve also seen a lot of people come in such as private equity – people looking to leverage to the highest possible degree. Companies, very successful ones like Blackstone, have come in, so the field has become far wider.” Williams adds: “What we’ve also done is create a different space for tenants that no other landlords were previously doing, and the nature of the landlord and tenant relationship has changed quite dramatically in comparison with the 1980s and 1990s. “We’re much more customer focused than ever before, whereas previously it was more of a vanilla relationship. London is also more fluid than it was before. We’re much less location specific, so you have to build the right building in the right location. It is more product led.” Capital performance For Burns, London is still one of the most important global cities, despite Brexit persuading some banks to relocate. “I know that a number of banks have taken space abroad, but [many] want to stay here as well. However, big City banks are not our core market.” He considers current levels of foreign money pouring into the capital as evidence of the buoyancy of the city’s office market. “London is going to have to fight to remain the top city, but I think it will make it. “Since the referendum vote two years ago, we have let more space than we have let before and brought in occupiers such as Boston Consulting, Arup, Sony and the Premier League. They are all international businesses which know London is a place they want to be.” After buying the company around a decade after the UK first joined the European Economic Community, Burns now leaves Williams with a clear leadership role to guide the business through a period of unprecedented political turmoil. KEY DATES 1984 – John Burns and Simon Silver acquire the holding company that had operated the Derwent Valley Light Railway in Yorkshire but had a full listing as a property company on the London Stock Exchange, capitalised at around £1.5m. 1987 – Derwent Valley acquires Elliot House in Victoria and a building in Alfred Place, near Tottenham Court Road, and attempts to acquire a small portfolio of properties in Fitzrovia for £26m just before the stock market crash heralded by “Black Monday” as part of its building-up process. 1988 – Derwent buys its largest project to date in the form of Berkshire House in High Holborn, where the firm adds an 11th floor and carries out a refurbishment. 1993 – Derwent Valley buys a portfolio of mainly government-tenanted offices in the regions and acquires an interest in 1-5 Grosvenor Place at Hyde Park Corner for just under £10m. In the mid-1990s, Derwent also acquires portfolios from MEPC in three deals ranging from £32m to £100m and a 15-property portfolio from the Co-operative Insurance Society. 1999 – Moorfield Capital Partners sells its portfolio of nine central London properties to Derwent for around £70m. 2003 – Leo Noe’s offshore bid vehicle Winten launches a takeover bid for Derwent Valley. The takeover is rejected by Derwent’s board and Noe withdraws his offer. 2006 – Derwent outbids rival Great Portland Estates to agree a merger with London Merchant Securities. 2007 – In February, the merger with London Merchant Securities completes, and in July the merged business converts to a REIT. 2009 – Derwent London reports in August that £258.9m has been wiped off the value of its portfolio, reducing it to £1.86bn, due to the portfolio’s underlying estimated rental value falling by 11% over the first half of the year, compared with a 4.6% decrease in the second half of 2008. In a September trading statement, the REIT signals that it is working up plans for the next property cycle and a disposal programme that sees it sell 16 properties in Q3. 2011 – Planning approval is secured for the award-winning White Collar Factory, designed by AHMM, and 80 Charlotte Street. 2013 – Derwent sells its stake in 1-5 Grosvenor Place, SW1, to Hongkong and Shanghai Hotels for £132.5m. 2014 – Construction starts on the White Collar Factory. 2017 – White Collar Factory completes. 2018 – Site for Soho Place handed back to Derwent by TfL, and Derwent confirms plans to start the redevelopment of Monmouth House, EC1, in 2019. CURRENT PIPELINE 80 Charlotte Street Located in Fitzrovia, the under-construction scheme is due to complete in H1 2020. Designed by Make, the development will provide 321,000 sq ft of office, 5,000 sq ft of residential and 14,000 sq ft of retail space, along with a new public realm park. Engineer Arup has taken a prelet of 133,600 sq ft of the office space at £9.7m pa, and has an option to take a further 19,800 sq ft at £1.5m pa, while the Boston Consulting Group has agreed to take a minimum of 123,500 sq ft at £10.6m pa, with options to increase this by 33,100 sq ft. Elliott Wood has taken a prelet of 11,000 sq ft of offices at Asta House, which is part of the project, while BCG has the right to occupy the remaining 10% of office space at the scheme. Brunel Building Adjacent to Paddington Station, the 243,000 sq ft office scheme is due to complete in the first half of next year. Designed by Fletcher Priest, it is already 68% prelet to tenants including Sony Pictures, which has taken 77,200 sq ft, and the FA Premier League, which has taken 20,500 sq ft, as well as Coach and Alpha FX. Soho Place Enabling works are under way on the development located on the corner of Oxford Street and Charing Cross Road, directly above Tottenham Court Road station, after the site was handed back to Derwent in January. A 285,000 sq ft mixed-use scheme designed by AHMM comprising 209,000 sq ft of office space, 36,000 sq ft of retail space, a 40,000 sq ft theatre and new public realm is to be delivered in early 2022. Featherstone Building Located opposite Derwent’s White Collar Factory scheme in the City Fringe, Derwent plans to start the redevelopment of the two existing buildings, totalling 69,000 sq ft, early next year to create its Morris & Company-designed 125,000 sq ft office scheme. It is scheduled to complete in 2022. Holden House Planning consent was received from Westminster Council in 2017 for a 150,000 sq ft mixed-use scheme on Oxford Street. 19-35 Baker Street Planning consent has been secured for a 293,000 sq ft mixed-use scheme designed by Hopkins. The Portman Estate has a 45% interest in the property. To send feedback, e-mail louise.dransfield@egi.co.uk or tweet @DransfieldL or @estatesgazette