Derwent upgrades rent growth guidance for London offices

DERWENT London expects rents to surge this year, as demand for the best new space outstrips supply.

The London office landlord expects its estimated rental values to grow as much as 5 per cent this year, up from the 2.1 per cent achieved in 2023.

London office demand has become concentrated on the small sliver of new, energy-efficient and amenity-rich buildings that can help companies reduce their carbon footprints and lure workers back to the office. That has put pressure on the value of older buildings, as developers weigh the hefty capital expenditure required to upgrade them in a bid to lure tenants.

“The continued bifurcation separating the best from the rest leaves developers such as Derwent in the enviable position of leasing much of their developments well in advance of completion,” Stifel analyst Denese Newton wrote in a note on Wednesday (Feb 28).

Tired and energy-inefficient properties have been hit harder by changes to working patterns that were accelerated by the pandemic. This was reflected in a 14.3 per cent drop in the value of Derwent’s older buildings that it is planning to modernise or redevelop.

That compares to an increase of 8.1 per cent in the value of its development projects, as tenants committed early to new leases at rents that were higher than expected.

In an interview on Wednesday, Derwent chief executive officer Paul Williams said: “We are seeing good demand for our product and while overall vacancy rates are elevated, our core areas in the West End have just 4.4 per cent vacancy. If you look at the vacant stock, about 70 per cent of it is second hand and new supply has been deferred and delayed.”

Still, rising rents were not enough to offset the impact of higher interest rates on the company’s portfolio valuation, which declined 10.6 per cent to £4.9 billion (S$8.3 billion) in the year to December.

UK property stocks have suffered a series of setbacks in recent years, as Brexit, the pandemic and rising interest rates have buffeted the sector and depressed share prices.

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Still, there are signs that markets over corrected anticipating deeper falls in valuation than have so far been reported, setting up the conditions for a bounce back. Segro, a developer of warehouses and logistics facilities, announced it had raised more than £900 million in an oversubscribed share issue on Wednesday.

Soaring rents have meant warehouses continue to be attractive to investors, despite the wider downturn in commercial real estate. Demand for data centres is also rising, while online retail has kept demand high for logistics facilities.

“We think the pressure on yields is easing,” Williams added. “The bottom is close.”