Is the UK property sector about to hit the Brexit wall? A good question – it has both its bears and bulls. There is the increase in office space vacancy rates in London from 4.6% to 4.3% during the first half of this year. According to CBRE, new construction projects are bringing another 13.5 million square feet into the London property market, but only 49% are pre-let.
Derwent London interim results
Interim results from the Derwent London REIT, issued today, show that the bulk of its lease expiries will fall in the second half of this year, at a time when Brexit, economic and interest rate uncertainties will persist. Its NAV per share was pretty much flat, coming in at £37.13 per share at the end of June, compared to £37.16 in December, after payment of the interim dividend.
But hey, Derwent London saw its NAV grow 4% year-on-year. New unlet property under construction work represents an increase in capacity in London offices of barely 3% and of West End space of barely 2%. Supply and demand in London office property remain tightly in balance, especially as Asian buyers returned in force to the London market in the first half of this year, potentially attracted by further falls in the pound.
Derwent London’s first half total property return was positive, at 3.3%, as rent reviews, rent renewals and lease regears all increased rental income. On-site projects in the post code areas W1 and W2 are already 73% and 40% pre-let, while development work on projects in Soho, W1 and EC1 is underway, with consent received for two more mixed-use schemes in W1, including one on Baker Street.
“The company is also looking forward to the new Elizabeth line on the London Underground starting operations, not least because 74% of its assets are located close to the station,” says Russ Mould, investment director at AJ Bell. “This promising pipeline, added to strong demand for London property and a low loan-to-value ratio of just 15% persuaded management to increase the interim dividend by 10% to 19.1p.”
This represents the third straight double digit percentage increase in the interim dividend and means Derwent London is on course to add its phenomenal record of increasing its annual distribution to shareholders every year for at least the last two decades, with special dividends added to the mix in 2016 and 2017 for good measure.
At £31.16, Derwent London shares are being forecast by analysts to offer a yield of some 2%. They come at a discount to historic net asset value of some 13%.
Mould says that neither figure really stands out in the REITs sector, “which may well be a tribute to the attractiveness of its London assets, low debts and careful expansion plans.”
Investor interest in Derwent London?
Investors see Derwent London as a relatively safe stock in what is clearly perceived to be a risk sector at the moment, given its poor performance since June 2016. But Derwent London’s long run record of organic portfolio development, with the 2006 all-share acquisition of London Merchant its last major piece of merger and acquisition activity, suggests that patient investors who do not fear Brexit might start to take another look at the company, especially as the Elizabeth Line looks like it will shortly be ready.