Income growth to boost Great Portland

Demand for West End space is linked to a great extent with the health of the London economy. At the moment, there are plenty of new jobs being created in London and that is underpinning the demand for more offices. That explains why the vacancy rate on Great Portland's portfolio fell from 3.7 per cent at the March year-end to a mere 2.5 per cent in June. And there's plenty of locked up value in the rental stream because the average rate or passing rent is well below the level that new lettings are attracting. This gap or so-called 'reversionary' rate is 19.4 per cent, which is the amount by which rental income would increase if all rents were brought up to current levels.

In fact, rental income is set to become the key driver for profits moving ahead. This is important for a number of reasons. Rental income from an established investment portfolio with quality tenants on long leases delivers a huge insurance policy against any downturn in the market. It provides a secure income, whereas big development projects are always at risk because it might be hard to find tenants if the market turns.

Rental growth in the three months to June was boosted by 22 new lettings, generating an annual rent of £6.1m, of which Great Portland's share is £4.5m. These were completed at a 1.4 per cent premium to March estimates. A further 10 rent reviews were carried out securing £3.9m of rent, up 30 per cent from the previous passing rent. Further 'reversionary' upside was crystalised with the letting of around 15,700 sq ft of space at £75 per sq ft, almost double the previous passing rent, while leasing activity at recently completed developments is also strong. In the first few weeks of the second quarter, a further £1m of rental income was secured on new lettings, with a further 16 under offer worth £2.7m. Significantly, the rent here is 6.1 per cent ahead of March's estimated rental value.

With no sign of any let-up in demand, the company has also committed to developing five schemes covering 724,500 sq ft, and these are expected to deliver a 20.7 per cent profit over the cost following completion in 2017. There are a further six uncommitted schemes that could start in the next 12 months, and a pipeline of a further 14 projects. All these add up to a total programme of 2.3m sq ft or around 54 per cent of the existing portfolio. Funding Great Portland's share of the committed schemes will cost £313m, rising to £416m including the six uncommitted schemes.

Valuation increases mean that gearing remains low. So while net debt in the three months to June rose from £586m to £602m, the loan-to-value rate fell from 25.7 per cent to 25.1 per cent. Revaluation surpluses have played a big part in boosting pre-tax profits, but these are set to slow in the coming years, which explains the decline in forecast pre-tax profits.