Derwent upgrades guidance as market strengthens

Derwent London chief executive Paul Williams is toasting more than just the business’s 40th anniversary as the firm sees its strongest rental growth since 2016. Reporting on the first six months of trading, Williams said the pace of rental growth of the best office assets in the right locations had accelerated in H1. “We have delivered another strong leasing performance, agreeing £8.8m of new rent in H1 with open-market lettings more than 10% above the December 2023 ERV,” said Williams. “This more positive backdrop fed through into the strongest ERV growth since 2016, giving us confidence to upgrade our 2024 rental guidance to 3% to 6%.” Underlying ERV growth across Derwent’s portfolio was 2%. The group said it had a further £4.5m of space under offer. Confidence to update its guidance also came from the stabilisation of yields. It recorded equivalent yields of 5.73% at the end of H1, moving in by 18 basis points. Derwent’s net debt was broadly flat in H1 at just less than £1.4bn, as disposal proceeds, mainly from the sale of Turnmill, EC1, and retained earnings offset capital expenditure and payment of the 2023 final dividend. EPRA earnings rose by 6.5% to £59.2m, with gross rental income up by 1.5% to £107.5m. The value of Derwent’s investment portfolio dipped by 1.7% to £4.8bn during the period, which compares favourably to a decline of 7.2% in H2 2023. By location, its central London properties, which represent 98% of the portfolio, were down by 1.8%, with the West End down by 1.5% and the City borders down by 2.7%. The value of its Scottish holdings rose by 3.6%. Looking ahead, Williams said: “In February 2024, we said we were nearing this cycle’s valuation low point. The outlook has continued to improve, supported by a strengthening of the UK economic environment and an initial interest rate cut, with yields on London offices looking increasingly attractive to a range of investors. “With our strong balance sheet and 40-year track record, we have the capacity and ambition to accelerate our growth plans and are exploring a number of opportunities while also continuing to build out our substantial pipeline. Combined with rising rents, we expect to deliver increasingly attractive total returns over the coming years.”