Derwent London (LON:DLN) said its first-half operating performance exceeded expectations, prompting the London office landlord to upgrade its 2026 earnings outlook as leasing demand and rental growth remained strong across its portfolio.
The company reported more than £30 million of leasing and asset-management transactions since the start of the year, including £22 million of new income. New leases were signed at 5.1% above estimated rental values, while its EPRA vacancy rate stood at 4.4%, or 3.5% excluding 88 to 94 Tottenham Court Road, which is under offer for sale.
Rental Growth and AI Demand Support Outlook
Underlying estimated rental value growth was 2.6% in the first half, the company’s highest first-half increase in a decade, according to Chief Financial Officer Damian Wisniewski. West End properties outperformed those in East London.
Derwent reiterated its forecast for estimated rental value growth of 4% to 7% for 2026. Prideaux said demand was broad-based across professional services, financial companies, technology and artificial intelligence businesses.
AI-related office take-up reached 700,000 square feet in the first half, nearly double the full-year 2025 total, Prideaux said. A further 600,000 square feet of active demand from the sector remained unsatisfied. She said London had attracted AI companies seeking a European location, citing its talent base, venture capital market and innovation ecosystem.
Despite the rental backdrop, tenant incentives have remained “fairly stubborn” at around 24 months on a 10-year lease, Prideaux said in response to an analyst question. She attributed this in part to construction-cost inflation affecting occupiers as well as landlords.
Earnings Guidance Raised as Buyback Advances
First-half EPRA earnings totaled £54.6 million, or 48.7 pence per share. Gross rental income declined slightly from the same period last year as development activity and vacancies offset contributions from completed and newly leased assets. On a like-for-like basis, gross rent increased 1% and net rent rose 2.7%.
Wisniewski said Derwent now expects 2026 EPRA earnings per share to range from flat to 3% below 2025 levels, representing a 2% to 3% improvement from guidance issued at the start of the year. He said the improvement reflected organic portfolio growth and cost reductions, while changes in interest-rate expectations had partly offset the benefit.
The company also maintained its longer-term expectation for 25% to 30% growth in EPRA earnings by 2030, although Wisniewski said its internal model had strengthened since February.
Derwent increased its interim dividend, continuing a pattern of annual increases since its 2007 merger, according to the company. The dividend remained covered by EPRA earnings.
The company had spent about £34 million of its £50 million share repurchase program by the time of the presentation. The program, launched in May, was expected to be completed within weeks. Management said further buybacks would be considered only if disposals generated surplus capital and after comparison with development and acquisition opportunities.
Valuation Declines Include Old Street Provision
EPRA net tangible assets fell 2.1% to £31.57 per share at June 30. Wisniewski said the decline reflected a £0.18-per-share revaluation deficit after accounting adjustments and a £0.41-per-share provision related to Old Street Quarter.
The portfolio experienced a six-basis-point outward movement in yields during the half, following the conflict in the Middle East. The balance of the portfolio declined 1.3% on average, with older assets approaching refurbishment, vacant properties and assets earmarked for sale seeing larger falls as leases shortened.
Derwent booked a £45.8 million provision for Old Street Quarter, which it expects to acquire in the fourth quarter of 2027 for £239 million under terms agreed in May 2022. The provision followed updated assumptions on costs, benefits and delivery options for the scheme. The company said it would reassess the provision every six months until acquisition.
Management said it had received approaches concerning the site but was focused on securing planning permission. It described self-delivery of the large central London project as “extremely unlikely” and said it would consider ways to reduce risk, including potential third-party involvement.
Development Pipeline and Balance Sheet
Network W1 reached practical completion in May, with its offices fully pre-let. The project delivered an ungeared internal rate of return of about 11%, with achieved rent 5% above its December estimated rental value. Other projects under construction increased in value by just over 5% during the half.
Derwent has four major West End projects on site totaling roughly 500,000 square feet: 50 Baker Street, Holden House, Greencoat and Gordon, and Middlesex House. The company forecasts a combined 12% internal rate of return, 18% profit on cost and development yield of about 7% across the projects.
Management expects 50 Baker Street to generate an ungeared internal rate of return above 12%. Prideaux said fixed-price construction contracts and anticipated rental growth supported the returns expected from the current development program.
The company completed or contracted £280 million of disposals during the year, at an average 3% discount to book value, and said a further approximately £100 million could be completed in 2026. Its target is £400 million of disposals this year and £1 billion over three years.
Derwent repaid £230 million of maturing fixed-rate debt in the first half and refinanced £175 million of 6.5% secured bonds with lower-cost floating-rate bank debt. Its weighted average interest rate was 3.9% in the first half, and it expects 3.8% in the second half, assuming one further base-rate increase. Pro forma cash and undrawn facilities totaled £581 million following a new £100 million revolving credit facility and an extension of its main £450 million facility to July 2030.
The company also announced that its chief executive, who said he was retiring after nearly 40 years at Derwent, would be succeeded by Jonathan Murphy on Sept. 1.
About Derwent London (LON:DLN)
Derwent London plc owns 66 buildings in a commercial real estate portfolio predominantly in central London valued at £4.9 billion as at 31 December 2023, making it the largest London office-focused real estate investment trust (REIT). Our experienced team has a long track record of creating value throughout the property cycle by regenerating our buildings via development or refurbishment, effective asset management and capital recycling. We typically acquire central London properties off-market with low capital values and modest rents in improving locations, most of which are either in the West End or the Tech Belt.
