Derwent's valuation sinks further

The last six months have been hard for Derwent London (DLN). While its real estate investment trust (Reit) peer Tritax Big Box (BBOX) has called the bottom of the warehouse market, the London office landlord’s assets continue to haemorrhage value. Industry numbers bear this out. Warehouses are in value recovery mode; office values are still dropping.

The upshot is that Derwent swung to a pre-tax loss. Its net tangible asset (NTA) value dropped 9.8 per cent from 30 June last year to the end of last year due to the ructions caused by the disastrous ‘mini-Budget’ and fell a further 5.1 per cent over the first half of 2023 as bearishness around offices in the post-Covid world continued. All told, over the 12 months to 30 June this year, its NTA value per share has shrunk from 4,525.5p to 3,874.5p.

Office values are sinking because of a weaker occupier market – even for the top-of-the-range offices Derwent owns. True, it did manage to reduce the amount of unlet space in its portfolio by 1.9 percentage points to a respectable 4.5 per cent, at a time when a peer such as CLS Holdings (CLI) which focuses on offices outside the capital, has a vacancy rate of 9.2 per cent, and it did so while increasing its gross rental income.

However, it has spent more money on services to get these tenants into its buildings, resulting in a 3.3 per cent drop in net rental income. 

Derwent’s relatively low gearing is a plus in the high interest rate environment. So too is its discount to net asset value, but its continued weak performance and valuation slump keeps its rating down. Hold.

Last IC view: Hold, 2,592p, 28 Feb 2023