Derwent London upgrades rental guidance after strong half-year

Derwent London reported a strong first-half rental income performance on Thursday, leading to an upgrade to its rental growth guidance.

The FTSE 250 commercial property investor and developer recorded a 1.5% increase in gross rental income, reaching £107.5m, while EPRA earnings per share rose 6.5% year-on-year to 52.7p.

It declared a 2% increase in its dividend to 25p per share.

Despite the positive indicators, Derwent London still posted a pre-tax loss of £27.2m, although that was a significant improvement from the £143.1m loss in the same period in 2023.

The company’s net asset value per share declined 2.7% to 3,044p, while its total return for the period was -1% - a marked improvement from the -11.7% recorded in the first half of 2023.

Key portfolio highlights included 2% growth in its estimated rental value, marking the strongest six-monthly performance since 2016.

Capital values decreased by 1.7%, but development values saw a 4.3% increase.

The firm also reported a reduced EPRA vacancy rate of 3.2%, down from 4.0% in December, with a tenant retention and re-letting rate of 86%.

Derwent said it made significant progress in its development projects in the half-year, notably receiving planning approval for the 50 Baker Street development and achieving 84% pre-letting at 25 Baker Street, at rates 14.6% above the appraisal ERV.

Looking ahead, Derwent London upgraded its ERV growth guidance for 2024 to a range of 3% to 6%, citing a stabilising UK economic and political environment.

The company said it anticipated attractive total returns in the coming years, with office yields becoming increasingly appealing to investors.

“The pace of rental growth accelerated in the first half for the best offices in the right locations whilst investment yields have recently stabilised, helping drive greater confidence across the sector,” said chief executive officer Paul Williams.

“We have delivered another strong leasing performance, agreeing £8.8m of new rent in the first half, with open-market lettings more than 10% above the December 2023 estimated rental value, including the third pre-let at 25 Baker Street W1.

“Year-to-date lettings total £10.8m, with a further £3.4m under offer.”

Williams said that more positive backdrop fed through into the strongest estimated rental value growth since 2016, giving the company confidence to upgrade its 2024 rental guidance to between 3% and 6%.

“London is a world-class city with broad appeal to both international and domestic businesses.

“Our design-led and amenity-rich best in class offices are in demand, supported by London's high quality transport network.

“Supply of space that meets occupier needs is relatively low; our predominantly West End portfolio is well-placed to benefit, in particular our on-site projects in Marylebone and Fitzrovia.”

Paul Williams noted that in February, Derwent said it was nearing the 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.”

At 0933 BST, shares in Derwent London were down 1.14% at 2,250p.

Reporting by Josh White for Sharecast.com.