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Derwent London (LSE:DLN) has adjusted its rental guidance upwards due to an acceleration in rental growth and a more stable investment environment. The FTSE 250 office specialist reported a 1.5% increase in gross rental income for the first half of the year, rising from £105.9 million to £107.5 million by June 30. This boost in rental income is attributed to heightened demand for high-quality, well-located office spaces. As a result, Derwent London has revised its rental growth forecast to a range of 3% to 6%, marking the second consecutive quarter in which the company has upgraded its guidance.
Earnings Per Share and New Lease Agreements
The growth in rental income contributed to a 6.5% increase in earnings per share, reaching 52.7p. This improvement was also supported by the completion of £8.8 million in new lease agreements. The company’s open-market lettings are currently 10% above December’s estimated recovery value (ERV), representing its strongest performance in this metric since 2016.
Ongoing Decline in Portfolio Valuations
Despite the positive performance in rental income and earnings, the overall value of Derwent London's property portfolio continued to decline. Valuations fell by an additional 1.7% between January and June, following a more than 10% drop reported in the previous year. This ongoing decrease reflects the impact of challenges faced by the office sector, including the dual effects of the pandemic and subsequent interest rate increases.
Outlook and Market Conditions
Derwent London has indicated that it may have reached the lowest point in the valuation cycle. The company notes that the outlook is improving, with expectations of further interest rate cuts potentially making yields on London office properties more attractive. The recent stabilization of investment yields has contributed to a greater sense of confidence in the sector.
CEO’s Perspective on Market Dynamics
Paul Williams, Chief Executive of Derwent London, highlighted the acceleration in rental growth for premium office spaces in desirable locations. He noted that investment yields have recently stabilized, which has bolstered sector confidence. Williams emphasized London’s status as a premier business hub with broad appeal to both international and domestic companies. He also pointed to the limited supply of office space that meets current occupier needs, particularly in the West End. The company’s on-site projects in Marylebone and Fitzrovia are well-positioned to benefit from these market dynamics.
