There remains a big gap between what investors fear might happen in the London office market and what is actually happening. Taking a cautious stance as Brexit drags on seems sensible, but it also means that some valuations are discounting a lot of bad news that may not happen.
This explains why shares in London office landlord Derwent London (DLN) are trading at a discount to net asset value (NAV). And while there was a fall in headline profits because of a lower valuation uplift and no repeat of the disposal profits logged a year earlier, net property income in the six months to June rose by nearly 10 per cent on a like-for-like basis. Some of this came from new lettings, but it’s telling that those new lettings are being secured at an 8.2 per cent premium to December 2017 estimated rental value. And while a development arm carries risk, the 623,000 sq ft of on-site developments are now 60 per cent pre-let, up from 45 per cent at the end of 2017.
As a measure of the group’s confidence, further capital expenditure of £206m is expected to deliver £70.5m of additional rent, while at Soho Place and the Featherstone building additional expenditure of £369m could add £28.5m to annual estimated rental valuations.
Analysts at Numis are forecasting adjusted NAV per share at the December 2018 year-end of 3,827p (up from 3,716p in 2017).
DERWENT LONDON (DLN) | ||||
ORD PRICE: | 3,123p | MARKET VALUE: | £3.48bn | |
TOUCH: | 3,120-3,123p | 12-MONTH HIGH: | 3,163p | LOW: 2,545p |
DIVIDEND YIELD: | 2.0% | TRADING PROP: | £28.5m | |
DISCOUNT TO NAV: | 16% | |||
INVESTMENT PROP: | £4.86bn | NET DEBT: | 20% |
Half-year to 30 Jun | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
2017 | 3,568 | 146 | 131 | 17.3 |
2018 | 3,706 | 134 | 120 | 19.1 |
% change | +4 | -8 | -9 | +10 |
Ex-div: | 13 Sep | |||
Payment: | 19 Oct |