Derwent London confident in ‘flight to quality’

Derwent London has lifted profits for the first half of the year by 13% to £137m. In its preliminary results published today the central London office specialist reported total returns of 3%, up from 2.7% in H1 2021. IFRS profit from operations rose to £152.6m, against £134.1m for the half year to June 2021. The main reason for this was an increase in the overall revaluation surplus for our investment properties. EPRA earnings, which exclude fair value movements, fell by 1.7% to 53.13p per share. Chief executive Paul Williams said: “We are seeing good demand for our distinctive brand of high quality offices, with short supply of prime space in our core locations. Despite the uncertain macro environment, the continuing flight to quality combined with our strong financial position gives us confidence that we are well placed with a pipeline of value-adding opportunities.” Net rental income rose 4.2% – with collection broadly back in line with pre-pandemic levels – to £93.9m. Like-for-like the value rose 1.7%, while developments added 8.5% to take the total to £5.9bn. Over the period Derwent London continued to be net investors into the portfolio, increasing borrowings from £1.25bn in December to £1.37bn. However, its LTV remains stable at 23.7%, with undrawn facilities and cash falling from £608m in December to £452m. Derwent added that the DL/78 hybrid working space at its 80 Charlotte Street campus “was proving popular with both existing and new customers. Based on its success, we are exploring the potential to open an equivalent amenity in The Featherstone Building EC1.” The Featherstone Building, which was completed this quarter, is now 22% let. Derwent said that it had now concerns that space would not be taken up. “Despite some of the large Tech companies pulling back on their space expansion plans, there remains a broad range of businesses with active requirements. A variety of international companies continue to choose London for their UK or European HQ.” The REIT said it was on-site with 435,000 of development, at 25 Baker Street and Network W1. It also has a further pipeline of 1.9m sq ft, which would add a third to its current portfolio. But this excludes its 750,000 sq ft-plus plans for Old Street Quarter, EC1. While Derwent has exchanged a conditional contract to acquire the 2.5 acre Moorfields Eye Hospital site, the £239m acquisition is not expected to complete until 2027, when the site payment will be made. Analysts at RBC were less convinced by Derwent London’s results. Labeling the stock as “underperform” and stating the sentiment was “negative”, analyst Julian Livingston-Booth said: “We forecast negative trends for the historically economically cyclical London office markets on the back of a negative GDP growth scenario. We expect Derwent London to benefit from its focus on the best-quality buildings. However, the returns from developing such buildings appear unattractive vs. history, when Derwent benefited from above-average rent growth as the tech belt developed as an office location. Structural changes in working patterns add to the uncertainty over long-term London office market demand.”