REG - Derwent London PLC - RESULTS FOR THE YEAR ENDED 31 DECEMBER 2023
28/02/2024 07:00
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RNS Number : 6953E Derwent London PLC 28 February 2024
28 February 2024
Derwent London plc ("Derwent London" / "the Group")
RESULTS FOR THE YEAR ENDED 31 DECEMBER 2023
STRONG LETTING PERFORMANCE
Paul Williams, Chief Executive of Derwent London, said:
"We had a strong year for leasing in 2023, achieving over £28m of new rent,
on average 8% ahead of ERV. Today we are upgrading our rental growth guidance
for 2024. Despite macro uncertainty, businesses are prioritising quality,
amenity and sustainability, supporting good demand for the right product in
the right location. This plays well to our strengths and reflects London's
diverse and robust occupational market, particularly in the West End. After a
year of substantial outward yield movement, investment opportunities are
starting to emerge and our balance sheet positions us well."
Letting activity
· Lettings in 2023 of £28.4m compared to £9.8m in 2022
o 8.0% above December 2022 ERV
o Activity spread across our villages
o Includes £16.0m of pre-lets at 25 Baker Street W1, 13.4% above ERV;
office element now 75% pre-let
· 2024 lettings to date of £1.8m, with a further £2.7m under
offer
Financial highlights
· EPRA net tangible assets(1) (NTA) 3,129p per share, down 13.8%
from 3,632p at 31 December 2022
· Gross rental income of £212.8m, up 2.8% from £207.0m in 2022;
+1.7% like-for-like
· EPRA earnings(1) £114.5m or 102.0p per share, down 4.6p from
106.6p in 2022, H2 6% higher than H1
· IFRS loss before tax £475.9m (2022: £279.5m loss)
· Total return -11.7% from -6.3% in 2022
· Full year dividend of 79.5p, up 1.3% from 78.5p
· Interest cover of 4.1 times and EPRA loan-to-value ratio of 27.9%
· Net debt increased to £1,356.8m (December 2022: £1,257.2m);
undrawn facilities and cash(2) of £480m
Portfolio highlights
· EPRA vacancy reduced to 4.0% (December 2022: 6.4%)
· £41.5m of asset management transactions, 1.7% above December
2022 ERV
· Portfolio valued at £4.9bn, an underlying decline of 10.6%
(2022: -6.8%)
o Development valuations up 8.1% principally due to pre-letting activity at
25 Baker Street W1
o West End properties outperformed, with values down 8.6%
· Portfolio valuation ERV growth of 2.1%, towards the top end of
guidance
· True equivalent yield of 5.55% compared to 4.88% at December 2022
· Total property return -7.3% outperforming our industry
benchmark(3) at -7.9%
· Two on-site major developments totalling 437,000 sq ft on
programme for completion in 2025
o 25 Baker Street W1 (298,000 sq ft) and Network W1 (139,000 sq ft)
Outlook
· Our upgraded 2024 guidance is for average ERVs across our
portfolio to increase by 2% to 5%
· High quality space to remain in demand, with better buildings to
outperform
· Inflation significantly reduced and expected to fall further;
yields to respond
(1) Explanations of how EPRA figures are derived from IFRS are shown in note
25
(2) Excludes restricted cash
(3) MSCI Central London Offices Quarterly Index
Webcast and conference call
There will be a live webcast together with a conference call for investors and
analysts at 09:00 GMT today.
To participate in the call or to access the webcast, please register at
www.derwentlondon.com (http://www.derwentlondon.com)
A recording of the webcast will also be made available following the event on
www.derwentlondon.com (http://www.derwentlondon.com)
For further information, please contact:
Derwent London Paul Williams, Chief Executive
Tel: +44 (0)20 3478 4217 Damian Wisniewski, Chief Financial Officer
Robert Duncan, Head of Investor Relations
Brunswick Group Nina Coad
Tel: +44 (0)20 7404 5959 Peter Hesse
CHAIRMAN'S STATEMENT
· A year of operational progress against a challenging market
backdrop
· Strong balance sheet and long-term strategy means we are well
positioned as opportunities emerge
· Annual dividend 79.5p, up 1.3%; uninterrupted annual growth since
2007
Our long-term strategic approach has ensured that the Group remains
well-positioned against an uncertain and challenging backdrop. While our total
property return was negative in 2023, we outperformed the MSCI IPD Central
London Office benchmark. Our total return was -11.7%, taking the NTA to
3,129p. The Group's balance sheet remains robust with EPRA LTV of 27.9% and
interest cover of 4.1 times, giving us capacity to continue investing in our
pipeline.
The occupational market continues to polarise with good rental growth
prospects for high quality, sustainable buildings where there is deep demand
and constrained supply, particularly in the West End where 72% of our
portfolio is located. In 2023, we agreed £28.4m of new leases, on average 8%
ahead of December 2022 ERV, which includes pre-letting 75% of the offices at
25 Baker Street W1 ahead of completion in H1 2025. This gives us confidence in
the letting prospects for our Network W1 project as well as the next phase of
our development pipeline.
The London office investment market has been adversely impacted by higher
inflation and the subsequent upward movement in interest rates. We expect to
see a rise in the number of motivated sellers, and we have the balance sheet
capacity to explore these opportunities as they emerge.
Our experienced management team has a strong track record of value creation
across the economic cycle. We recognise the importance of investing in our
people and planning ahead. Over the last three years, there have been eight
promotions to the Executive Committee with representation from across the
business. This diversity of skills and expertise helps position us well as the
macroeconomic environment starts to recover.
The Group has been impacted by global inflationary pressures and we have also
invested more in the amenity we offer our occupiers. As a result, EPRA EPS is
down slightly year-on-year to 102.0p. However, we have substantial
reversionary potential from a combination of on-site projects (requiring
£223m of capex to complete), underlying rental uplifts and vacant space. In
addition, we expect only a modest impact on our cost of debt from near-term
refinancing.
I am therefore pleased to confirm a 1.3% increase in the full year dividend to
79.5p in line with our progressive and well covered dividend policy, with the
final dividend raised by 0.5p to 55.0p. It will be paid on 31 May 2024 to
shareholders on the register of members at 26 April 2024. EPRA earnings
covered the 2023 interim and final dividends 1.28 times.
We greatly value and nurture relationships with stakeholders, including the
local communities in which we operate. Working alongside external consultants,
we have strengthened our commitment to social value, our primary goals and how
they will be measured and achieved. At the end of 2023, we published our new
Social Value Strategic Framework.
After nine years on the Board, Claudia Arney will step down at the 2024 AGM
from her position as a Non-Executive Director of the Company and Chair of the
Remuneration Committee. The Board thanks Claudia for her significant
contribution to the business and wishes her every success in the future.
Sanjeev Sharma, currently a Non-Executive Director and member of the
Remuneration Committee, will become Remuneration Committee Chair.
PwC was appointed as the Group's external auditor in 2014 and, in accordance
with the Competition and Markets Authority's (CMA) requirements, we conducted
a competitive tender in 2023. Following a comprehensive process, the Board has
approved PwC's ongoing appointment, subject to annual shareholder approval.
Despite the challenging global environment over the last few years, the Group
is well positioned with an outstanding central London portfolio and a strong
team.
CEO STATEMENT
· Strong leasing activity of £28.4m, on average 8% above December
2022 ERV
· LTV remains amongst lowest in UK REIT sector, despite 10.6%
decline in capital values in 2023
· 2023 ERV growth of 2.1%, towards top end of guidance range
· 2024 guidance:
o ERVs to increase 2% to 5%
o Inflation significantly reduced and expected to fall further; yields to
respond
Overview
London is maintaining its long-term reputation as a world-leading city with
broad appeal to a diverse range of businesses and investors despite the
ongoing macroeconomic challenges. Following its peak at 11.1% in October 2022,
CPI inflation declined significantly through the course of 2023, ending the
year at 4.0%. The hike in UK interest rates appears to have concluded, with
base rate on hold at 5.25% since August. On the assumption that inflation
slows further towards the 2% target, the consensus expectation is for a series
of base rate cuts in 2024 and beyond.
Market interest rates have responded positively to slowing inflation but
remain volatile. The yield on the 10-year UK gilt, which started 2023 at 3.7%,
ended the year at 3.6%, having peaked at 4.7% in August. However, since the
start of 2024, it has increased again to 4.1%. This reflects both a small rise
in inflation in December and more cautious 'higher for longer' commentary from
central banks.
Combined with the higher cost and restricted availability of debt, sentiment
in the investment market was subdued in 2023. Meanwhile, the occupational
market has remained strong for the right product in the right location.
Businesses are focused on their longer-term real estate strategies and the
flight to quality is continuing. With constrained availability and a thin
forward development pipeline, rents for the best space are rising.
Strong operational performance
We enjoyed an excellent year for leasing in 2023 with £28.4m of new rent
agreed, on average 8.0% above December 2022 ERV. This included 155,500 sq ft
of pre-lets at 25 Baker Street W1, 13.4% ahead of ERV as well as 19 'Furnished
+ Flexible' units leased at an average 9.2% premium to the adjusted ERV.
Key transactions in the year include:
· 25 Baker Street W1: Two pre-lets - to PIMCO and Moelis - at our
on-site major development which completes in H1 2025, with total rent of
£16.0m; the offices are now 75% pre-let; and
· The Featherstone Building EC1: Four further lettings with combined
rent of £4.3m in line with ERV; the building is now 80% leased, with further
occupier interest.
Since the start of 2024, new leases totalling £1.8m have been signed, 5.6%
ahead of December 2023 ERV, with a further £2.7m of space under offer.
Lease length is an important indicator for the Group. At year end, our
'topped-up' WAULT (to break) was 7.4 years (2022: 7.2 years). Overall, our
EPRA vacancy rate reduced 2.4% to 4.0% as we leased space across the portfolio
in both the West End and the City Borders.
Property valuations
Underlying capital values reduced by a further 10.6% in 2023 and we believe
valuations are now approaching this cycle's lows. The decline in capital
values has been predominantly yield driven with our equivalent yield up 67bp
to 5.55% in the year. By comparison, our valuation ERV was up 2.1% in the
year, towards the top end of our guidance range for 2023 of 0% to +3%. Capital
values across the UK real estate sector have declined, with the MSCI Central
London Office index down 11.1% and the MSCI UK All Property index down 5.6% in
the year.
This headline movement masks a broad range of outcomes, with our higher
quality buildings and developments delivering a more resilient performance,
supporting the nuanced change we made to our strategy in 2021 to retain our
better buildings for longer. The value of our on-site developments increased
8.1% in 2023 and properties valued at ≥£1,500 psf, generally the higher
quality buildings, reduced by 7.1%, which is a 350bp outperformance of the
portfolio average. By comparison, buildings valued at <£1,000 psf (our
'raw material' for future regeneration) fell 14.3%. Impacted by these
valuation movements, EPRA NTA per share declined 13.8% to 3,129p.
Our portfolio delivered a total property return of -7.3% compared to the MSCI
Central London Office index of -7.9%.
Derwent's differentiators
At Derwent London, we have long recognised the importance of providing
best-in-class space to maximise the appeal of our buildings to occupiers.
Modern offices need to be high quality and well-designed to inspire
innovation, collaboration and collective productivity. Good design has always
been in our DNA, but in today's market this increasingly extends beyond the
individual building to our broader portfolio approach, which includes a
commitment to service and amenity as well as net zero carbon ambitions.
With over 50,000 people estimated to work in our buildings, we focus on the
end user. Each individual is able to benefit from the full DL/Member offering
which provides amenity and service to the whole London portfolio. This
includes access to our two strategically located Member Lounges in Fitzrovia
(DL/78) and Old Street (the recently opened DL/28), the App and the Experience
team.
Given every business has its own unique space requirements, we design our
buildings to be as adaptable as possible - 'long-life, low carbon,
intelligent' - which increases tenant demand while also reducing obsolescence.
Our buildings are designed to be desirable over the long-term. We offer a
range of leasing options, from large-scale HQ space on long leases to smaller
'Furnished + Flexible' units on shorter leases.
Taken together, and as the bifurcation between prime and secondary properties
continues to evolve, we expect this relationship-driven approach to result in
reduced vacancy, shorter void periods, increased occupier retention and strong
rental growth.
London office market
The vacancy rate across central London rose 1.7% in 2023 to 9.1%. However,
averages do not show the full picture. West End vacancy is 4.4%, compared to
the City at 11.9% and Docklands at 16.7%, while availability of new space rose
more slowly than secondary space. We believe that the supply of new buildings
has rarely been more constrained, particularly in the West End, which helps to
explain why rents here are rising.
According to CBRE, the amount of space currently under construction across
London is relatively low with 12.9m sq ft due to complete by 2027, of which
7.9m sq ft (62%) is currently available. Compared to long-term take-up, this
equates to eight months' supply (and 11 months' supply in the West End) of new
space being delivered over the coming four years.
London has broad appeal to a diverse range of businesses, both by sector and
by size. We are encouraged by the substantial 74% increase in overall active
demand to 9.9m sq ft at the end of 2023, which indicates a rapid rise in
interest from a range of sectors.
Take-up in the year was 16% lower when compared to the prior year at 10.5m sq
ft, with the West End down 27% at 3.6m sq ft. The City, however, benefitted
from a number of high profile pre-lets, including HSBC and Clifford Chance
returning from Docklands to more central locations, and year-on-year take-up
was in line at 5.3m sq ft. Activity in 2023 was dominated by the banking &
finance (31%) and business services (19%) sectors.
Economic prospects are an important demand driver for offices. Growth in jobs,
population and the economy, alongside inflation prospects all have an impact.
According to CBRE, following a boom in office job creation over the last three
years (+415k new jobs), a further c.165k (net) positions are expected to be
created over the next five years and there is a continuing increase in the
number of companies requiring staff to come back to the office. The demand
outlook for London offices remains positive. London real GDP growth of 1-2% pa
is forecast to continue outperforming the UK and there is an ongoing increase
in the population of c.0.9m to 10.6m by 2035.
Strong balance sheet and capital allocation
The Group aims, over the long-term, to operate with modest leverage and a
simple financial structure to ensure resilience through the economic cycle. We
believe that having a strong balance sheet has rarely been more important than
at present.
We are well positioned. Our EPRA LTV ratio is 27.9% (December 2022: 23.9%) and
interest cover is both strong and stable at 4.1 times (2022: 4.2 times). At
the end of 2023, 98% of our debt was either fixed or hedged, with an average
interest rate on a cash basis of 3.17%. In addition, we have limited
refinancing in 2024 and 2025, with an £83m 3.99% secured facility maturing in
October 2024 and a £175m 1.5% convertible bond maturing in June 2025.
Over the medium-term, we seek to balance disposals against capital expenditure
and acquisitions. This has helped to contain the increase in our net debt and
ensure we can continue to invest into our regeneration pipeline, which
includes the acquisition of the exciting Old Street Quarter EC1 project which
is likely to complete from 2027.
With the investment market slowdown seen in 2023, we completed a lower than
normal £66m of disposals. This compared to £173m of acquisitions and capital
expenditure on major projects, smaller refurbishments and our second Member
Lounge, DL/28.
Sustainability
Our plans for an 18.4 MW solar park in Scotland came a step closer with
planning consent now received. We expect green electricity generation to
commence on completion in 2025, providing c.40% of the electricity needs of
our London managed portfolio. We are also exploring other
sustainability-related opportunities across our Scottish portfolio.
In accordance with our stated ambition, we rebased our SBTi-verified targets
to align with a 1.5°C climate scenario. Our revised target commits us to a
42% reduction in Scope 1 & 2 carbon emissions by 2030 from our 2022
baseline. We are committed to managing our carbon footprint and building in
climate resilience while collaborating across the industry and with our supply
chain.
Our strong team
We were pleased to recognise the achievements of our employees, with 18
internal promotions in 2023 which included two promotions to the Executive
Committee: Richard Dean, Director of Investment, joined the Committee from 1
July 2023 and Matt Cook, Head of Digital Innovation & Technology, with
effect from 1 January 2024. We were also delighted to be recognised
externally, being included on The Sunday Times 'Best Places to Work 2023' list
where we scored highly in many categories against industry and global
comparisons, and also winning 'Employer of the Year' at both the Westminster
Business Council and EG (Estates Gazette) Awards.
Outlook and guidance
We have previously anticipated an acceleration in rental growth for the best
buildings. Occupier demand continues to focus on well-located space with
best-in-class amenity and service, while existing supply and the development
pipeline are restricted. We expect these conditions to become increasingly
favourable through 2024 and as such increase our portfolio rental guidance for
the year to a range of 2% to 5%, with our better buildings to outperform.
Over the last few years, we have reduced our exposure to buildings which can
no longer meet evolving occupier requirements and have invested significant
capital upgrading our remaining portfolio. With inflation continuing to reduce
and the cost and availability of finance improving, property yields are
expected to respond, following a period of substantial increases. We believe
we are now approaching the end of this yield cycle, with transaction volumes
expected to increase and for opportunities to emerge.
CENTRAL LONDON OFFICE MARKET
· Take-up 10.5m sq ft; acceleration in Q4 to 3.4m sq ft (Q1 to Q3
average: 2.4m sq ft)
· Space under offer up 19% to 3.0m sq ft; active demand up 74% to
9.9m sq ft
· Vacancy elevated at 9.1%: West End remains tight at 4.4%
· Development pipeline 38% pre-let; eight months' speculative
supply
· Prime yields in West End at 4.0% (up 25bp in 2023) compared to
the City at 5.75% (up 125bp)
· Investment transactions £5.2bn, 59% below 10-year average
Overview and macro backdrop
The global economy has experienced significant uncertainty and volatility
since 2020. The resulting supply chain disruption and global conflicts led to
a rise in inflation which started three years ago and peaked in late 2022. In
response, there has been a substantial increase in benchmark interest rates
around the world, leading to a significant hike in the cost of debt and
reduced availability. For the commercial property sector, this has resulted in
a material adjustment in property yields.
Softening inflation data through 2023, however, has raised market expectations
that the interest rate cycle has peaked, with cuts now forecast in 2024. This
is feeding through into lower market interest rates and narrower credit
spreads and there are signs of improving credit availability.
Whilst GDP growth in the UK has plateaued for the time being, London is
outperforming, with economic growth to 2028 forecast to average c.2% pa.
Combined with a positive outlook for both jobs (c.165k net new jobs to be
created by 2028 according to CBRE) and population growth (c.0.9m increase by
2035 to 10.6m according to Macrotrends), the macro demand drivers for London
offices are encouragingly robust.
In line with long-term trends, foreign direct investment (FDI) into London
remains higher than other core global cities including Paris, New York and
Hong Kong. Throughout 2023 there was an increase in the number of FDI projects
to 103 in London which compares to a reduction in other global cities.
In a continuation of the trend seen over the last few years, businesses are
becoming increasingly strategic around their real estate planning and more
selective in both the building and the landlord they choose. Against a
backdrop of restricted supply of high quality space, landlords that provide
great space in the right location, with best in class amenity and service are
seeing attractive rental growth as the flight to quality continues. According
to Knight Frank, the office now fulfils five key purposes in the post-Covid
era, underlining its importance: talent attraction and retention; increased
collaboration; cost management and mitigation; corporate brand and image; and
employee wellbeing.
London's broad appeal to a diverse range of businesses continues to serve it
well. It is not overly dependent on any one sector and the diversity of scale
and occupational requirements supports demand across a wide spectrum, from
large global HQs let on long leases to space for SMEs on more flexible terms.
In recent years, there has been a convergence in the space needs across
business sectors, as the importance of quality has risen and there is a more
unified approach to what an office needs to provide.
Location and connectivity have also been important factors in the market and
data from a number of agents shows a clear preference among occupiers for
centrally located offices. Over the last few years, a significant number of
businesses have returned to London's core markets. The trend is widely
expected to continue.
Over the course of 2023, there has been a shift in the number of companies
issuing clearer guidance to employees around working policies. A recent study
of 400 global companies by VTS found that over the last six months, 60% of
European respondents have either 'mandated' or 'encouraged' more time in the
office. Looking forward to 2024, a similar pattern is seen, with 52% planning
to further 'mandate' or 'encourage' more time in the office. On a global
basis, only 10% of respondents have adopted a remote-first approach and 1% of
companies have gone fully remote.
Occupational market
London is not a homogenous market. Rather, it comprises a series of
sub-markets, each with its own characteristics and nuances - it is a tale of
three cities. This is particularly apparent when looking at vacancy levels.
Overall, central London vacancy is elevated at 9.1% against the 10-year
average (10YA) of 5.2%. This compares to the West End at 4.4% (10YA: 3.4%),
City at 11.9% (10YA: 6.7%) and Docklands at 16.7% (10YA: 8.9%).
While market dynamics vary by location, there is also a difference in occupier
demand between prime and secondary space. As a result, the composition of
vacancy is more relevant than the headline. Across London, there is 26.1m sq
ft of available space, of which 18.1m sq ft (69%) is secondhand, 4.0m sq ft is
newly completed space and 4.0m sq ft is under construction. Applying this to
the market, 'competing supply' for our high quality portfolio is meaningfully
lower than the headlines suggest, supporting our positive outlook for rental
growth.
According to CBRE, the pull back by Big Tech impacted take-up in 2023, which
was down 16% relative to 2022 at 10.5m sq ft. West End take-up was down 27% to
3.6m sq ft, against a supply-constrained backdrop, but City take-up was up 1%
to 5.3m sq ft, buoyed by several large pre-lets, including HSBC and Clifford
Chance, both of whom will vacate their existing space in Canary Wharf.
However, active demand is high, rising from 5.7m sq ft at December 2022 to
9.9m sq ft at December 2023 suggesting substantial pent-up requirements.
Another important market indicator is the development pipeline, which remains
restricted as a result of increases in construction and finance costs, coupled
with a more difficult planning backdrop. Across central London, CBRE estimates
12.9m sq ft of space will complete between 2024 and 2027, 31% lower than the
total over the preceding four years. 5.0m sq ft (38%) is pre-let and 7.9m sq
ft is speculative. Relative to average take-up over the last 10 years (12.1m
sq ft), speculative completions equate to just eight months' supply.
Investment market
Investment activity was subdued in 2023 with investor sentiment impacted by
the limited availability and high cost of debt. Transactions in the year
totalled £5.2bn, which compares to the 10-year average of £12.7bn.
In the West End, smaller assets (typically sub-£100m) were the most liquid
and robust in terms of pricing, with purchasers less reliant on debt
financing. In the City, where the average lot size is larger and investors are
generally more leverage-dependent, pricing showed greater weakness, in
particular for buildings in more secondary locations.
Well-located, value-add assets have continued to find a market, albeit at
repriced levels. By contrast, demand for secondary assets and leaseholds
remains constrained.
With the pace of inflation continuing to slow in the UK and the hike in
interest rates appearing to have concluded, the cost of debt is starting to
moderate as lender risk appetite shows signs of recovery. Consequently, there
are early signals that investor sentiment is starting to turn a corner.
London, and in particular the West End, remains an attractive location for
domestic and international investors and is likely to benefit from any
positive shift in momentum.
The number of potential investors has started to increase, and we expect 2024
and 2025 will present interesting acquisition opportunities for
well-capitalised investors that can move quickly, for several reasons. The
number of refinancings is gathering pace, with many borrowers facing both
increased debt costs and an equity gap. At the same time, a number of funds
are having to deal with ongoing redemption requests which is leading to them
selling their more liquid assets.
VALUATION
· Portfolio underlying capital value movement -10.6%
o On-site developments +8.1%, principally due to pre-letting activity at 25
Baker Street W1
o Portfolio excluding developments -11.9%
o Buildings valued at ≥£1,500 psf outperformed with values -7.1%
· EPRA valuation ERV growth 2.1%
· True equivalent yield up 67bp to 5.55%
The UK economy remained sluggish in 2023, with elevated interest rates and
inflation impacting confidence. In the real estate sector, higher debt costs
and lower investor confidence fed through to a substantial slowdown in
investment turnover. In central London, the £5.2bn of transactions was 59%
below the 10-year average. Although the second half of the year saw inflation
decrease and interest rates stabilise, the outward movement in property
valuation yields, which began in H2 2022, continued throughout 2023.
Against this backdrop the Group's investment portfolio was valued at £4.9bn
as at 31 December 2023 compared to £5.4bn at the end of 2022. There was a
deficit for the year of £583.3m which, after accounting adjustments of
£11.7m, produced a decline of £595.0m, including our share of joint
ventures. The portfolio valuation, including developments, decreased 10.6%,
following a 6.8% decline in 2022. This takes the writedown since June 2022 to
17.8% and we believe valuations are now approaching this cycle's lows.
Our portfolio valuation movement outperformed the MSCI Central London Offices
Quarterly Index which was -11.1% (and -21.6% since June 2022). This
outperformance was driven by the quality of our portfolio, balanced between
core income properties and value add opportunities. The wider UK All Property
Index was down by 5.6%.
The EPRA initial yield is 4.3% (December 2022: 3.7%) which, after allowing for
the expiry of rent-free periods and contractual uplifts, rises to 5.2% on a
'topped-up' basis (December 2022: 4.6%).
The occupier market remained more resilient for better quality buildings. Our
EPRA valuation rental values were up 2.1%, an improvement on the 1.3% uplift
in 2022, and towards the top end of our guidance range for 2023 of 0% to +3%.
Leasing activity was particularly buoyant, with £28.4m of transactions during
the year.
Our central London properties, which represent 98% of the portfolio, declined
by 10.7%. West End values were down 8.6% outperforming the City Borders, where
values reduced 15.8%, with the latter seeing greater outward yield movement.
The balance of the portfolio, our Scottish holdings, was down 4.9%.
During the year, our two on-site developments were 25 Baker Street W1 and
Network W1. Both are in the West End where occupier demand is strongest. They
were valued at £394.6m, up 8.1% after adjusting for capex invested during the
year and represent 8% of the portfolio. This overall strong performance mainly
came from 25 Baker Street where there was significant pre-letting during the
year, despite an outward movement in valuation yields. In addition, the
valuers released some development surpluses following good progress on site.
Both developments are due for delivery in 2025 and require £223m of capex to
complete. Excluding these, the portfolio valuation decreased by 11.9% on an
underlying basis.
The core income element of our portfolio is largely buildings where
refurbishment or redevelopment has been undertaken, providing quality
well-designed office space to meet current occupier trends. These properties
generally have a higher capital value per square foot and, as illustrated
below, proved more resilient. Our lower value properties mostly provide future
repositioning opportunities where we can deliver the next generation of high
quality space.
Valuation movement by capital value banding
Capital value banding Weighting by value Capital value change
(£psf)
(%)
(%)
≥£1,500 22 -7.1
£1,000 - £1,499 23 -11.4
<£1,000 47 -14.3
Sub-total 92 -11.9
On-site developments 8 +8.1
Portfolio 100 -10.6
Derwent London's total property return for 2023 was -7.3%, which compares to
the MSCI Quarterly Index of -7.9% for Central London Offices and -1.0% for UK
All Property.
Further details on the progress of our projects are in the 'Developments and
refurbishments' section below and additional guidance on the investment market
is laid out in the 'Outlook and guidance' section above.
Portfolio reversion
Our contracted annualised cash rent as at 31 December 2023 was £206.5m, a
1.1% increase over the last twelve months. With a portfolio ERV of £309.6m
there is £103.1m of potential reversion. Within this, £44.6m is contracted
through a combination of rent-free expiries and fixed uplifts, all of which is
straight-lined in the income statement under IFRS accounting standards; our
IFRS accounting rent roll at 31 December 2023 was £211.0m.
On completion, our on-site developments could add £33.0m at the current ERV,
of which £15.6m or 47% of this is pre-let. There are then £7.5m of smaller
refurbishment projects. This is up from £2.7m a year ago, however, c.80% of
this came from expiries and breaks in the last four months of the year. These
units will be upgraded during 2024. The ERV of 'available to occupy' space is
£10.9m, the main elements of which are £4.1m at The White Chapel Building
E1, £1.8m at The Featherstone Building EC1 and £1.3m at 230 Blackfriars Road
SE1. Since year end, £3.3m of available space has been let or is under offer.
The balance of the potential reversion of £7.1m comes from future reviews and
expiries.
LEASING AND ASSET MANAGEMENT
Lettings
· £28.4m of new leases, on average 8.0% above December 2022 ERV
o Includes £16.0m of pre-lets at 25 Baker Street W1, 13.4% above ERV
· Strong demand across all villages, split 77% West End and 23%
City Borders
Asset management
· 81 asset management transactions with rent of £41.5m, 3.5% above
the previous income
· Average 1.7% above December ERV
EPRA vacancy rate
· Down 2.4% through 2023 to 4.0%
Lettings
We saw strong occupier demand across all our villages, with total letting
activity in 2023 of £28.4m across 50 transactions and covering 340,500 sq ft.
This is a significant increase compared to the £9.8m of lettings in the prior
year. On average, new leases (including pre-lets) were agreed 8.0% above
December 2022 ERV. Pre-lets at 25 Baker Street W1 to PIMCO and Moelis, which
together total £16.0m of headline rent, were signed 13.4% above ERV with the
remaining open market lettings 4.4% above ERV.
The average WAULT (to break) of new leases in 2023 was 9.9 years, rising to
10.8 years excluding the £3.6m (51,100 sq ft) of 'Furnished + Flexible'
lettings, and we currently operate 144,400 sq ft of these smaller units with a
further 21,500 sq ft on site or committed.
Since the start of 2024, £1.8m of new leases have been agreed on average 5.6%
above December 2023 ERV, and there is £2.7m under offer.
Leasing in 2023 and 2024 to date
Let Performance against
Dec-22 ERV (%)
Area Income WAULT(1) Open market Overall(2)
sq ft
£m pa
yrs
H1 2023 228,000 19.3 11.0 8.9 7.3
H2 2023 112,500 9.1 7.5 10.4 9.5
2023 340,500 28.4 9.9 9.4 8.0
2024 to date 32,000 1.8 8.8 7.4(3) 5.6(3)
(1) Weighted average unexpired lease term (to break)
(2) Includes short-term lettings at properties earmarked for redevelopment
(3) Performance against December 2023 ERV
Leasing by location in 2023
Location Pre-let income Non pre-let income Total income Total income
£m
£m
£m
%
West End 16.3 5.6 21.9 77
City Borders - 6.5 6.5 23
Total 16.3 12.1 28.4 100
Principal lettings in 2023
Property Tenant Area Rent Total annual rent Lease term Lease break Rent-free equivalent
sq ft £ psf £m Years Year Months
H1
25 Baker Street W1 PIMCO 106,100 103.40 11.0 15 - 37
The Featherstone Building EC1 Buro Happold 31,100 74.40 2.3 15 10(1) 24, plus 12 if no break
One Oxford Street W1 Uniqlo 22,200 Conf (2) Conf (2) 10 5 12
Tea Building E1 Jones Knowles Ritchie 8,100 60.00 0.5 10 5 12, plus 12 if no break
The White Chapel Building E1 Comic Relief 5,000 61.90(3) 0.3 5 3 6, plus 1 if no break
Middlesex House W1 Zhonging Holding Group 4,200 81.00(3) 0.3 3 1.5 -
H2
25 Baker Street W1 Moelis 49,400 101.25 5.0 15 10 24, plus 9 if no break
The Featherstone Building EC1 Tide 14,400 71.00 1.0 10 5 15, plus 11 if no break
The Featherstone Building EC1 Avalere Health 10,900 81.00(3) 0.9 10 5 5, plus 5 if no break
Tea Building E1 Gemba 7,100 63.80(3) 0.5 5 - 8
Tottenham Court Walk W1 Sostrene Greene 6,400 54.90 0.4 10 6 12
The White Chapel Building E1 Asthma & Lung UK 7,000 45.00 0.3 10 3 7, plus 8 if no break
(1) There is an additional break at year 5 on level eight subject to a
12-month rent penalty payable by the tenant
(2) Uniqlo will pay a base rent (subject to annual indexation) plus turnover
top-up
(3) 'Furnished + Flexible' (Cat A+) lettings
Asset management
As the shortage of quality supply across the London office market becomes
increasingly apparent, businesses are having to plan their occupational
requirements earlier. Consequently, we engaged with several occupiers who have
already begun planning for lease breaks/expiries in 2026/27. The opening of
our two Member Lounges - DL/78 in 2021 and DL/28 in 2023 - is having a
positive impact on these early conversations, with many occupiers valuing the
additional amenity and level of service they provide.
Overall, asset management activity in 2023, excluding two short-term
development-linked regears, totalled 670,000 sq ft, 30% higher than in 2022
(516,900 sq ft).
The key transactions were:
· Brunel Building W2: Paymentsense took an additional 49,600 sq ft on a
lease assignment from Splunk, increasing its occupancy by 150% to 82,600 sq
ft. Simultaneously the lease break on their existing space was removed and the
term across all five floors was extended to 2036, with a minimum rental uplift
at next review. The WAULT on these five floors increased to 12.7 years from
6.9 years.
· 1 Stephen Street W1: As part of a wider asset management transaction,
Fremantle agreed the removal of its lease break in September 2024 on levels 3
to 6 adding five years' term certain alongside a 7.2% uplift in rent in
September 2024, and the hand back of level 7. The space will be refurbished
this year unlocking a substantial rental uplift. Also within the building,
Freud Communications agreed the removal of its lease break in September 2024,
adding five years' term certain to the lease.
· White Collar Factory EC1: rent review on 28,400 sq ft to AKTII settled
15% ahead of the previous rent, and in line with December 2022 ERV.
· Tea Building E1: Monkey Kingdom renewed its lease on 7,500 sq ft at
£0.5m, a level 9.1% above the previous rent and 4.3% above December 2022 ERV.
Asset management in 2023
Number Area Previous rent New rent(2) Uplift New rent vs Dec-22 ERV
'000 sq ft
£m pa
£m pa
%
%
Rent reviews 28 381.0 22.1 23.4 5.8 2.4
Lease renewals 39 62.8 3.1 3.2 3.3 6.7
Lease regears(1) 14 226.2 14.9 14.9 0.1 -0.3
Total 81 670.0 40.1 41.5 3.5 1.7
( )(1) Excludes two development-linked regears. (2) Headline rent, shown
prior to lease incentives.
The WAULT (to break) across the portfolio was broadly stable at 6.5 years
(December 2022: 6.4 years) despite the passage of time, reflecting our leasing
and asset management activity. This is split 7.5 years in the West End and 4.6
years in the City Borders.
Our 'topped-up' WAULT (adjusted for pre-lets and rent-free periods) was also
stable at 7.4 years (December 2022: 7.2 years).
At the start of 2023, 10% of passing rent was subject to break or expiry in
the year. After adjusting for disposals and space taken back for larger
schemes, 65% of income exposed to breaks and expiries was retained or re-let
by year end. This is lower than the rate reported at H1 2023 because units
with a passing rent of £6.0m were vacated in the final four months of the
year and there was insufficient time to complete our asset improvement plans
prior to year end. 1-2 Stephen Street W1 (units previously let to BrandOpus
and G-Research on low rents of £43.75 psf and £50 psf respectively) and 20
Farringdon Road EC1 (unit previously let to Indeed at a rent of £57.50 psf)
comprised 67% of this and improvement works have already commenced at these
units ahead of re-letting.
Vacancy
The portfolio EPRA vacancy (which is space 'available to occupy') decreased by
2.4% through 2023 to 4.0% (December 2022: 6.4%) with an ERV of £10.9m. The
decrease primarily reflects leasing progress at The Featherstone Building EC1
(58,600 sq ft leased in 2023), The White Chapel Building E1 (15,200 sq ft
leased in 2023) and Soho Place W1 (23,100 sq ft of retail space leased in
2023).
Within our EPRA portfolio, there is project space with an ERV of £7.5m which
is excluded from the EPRA vacancy rate. This includes space vacated in the
last four months of the year where projects are at an early stage. Once
complete, EPRA vacancy would increase to 6.8%, a 0.3% reduction compared to
the comparable rate at December 2022 (7.1%).
Rent and service charge collection
Rent and service charge collection rates remain high at 98% for the December
2023 quarter.
SUSTAINABILITY
· Planning consent secured for 18.4 MW solar park on Scottish land
· Energy usage increased to 56.7million kWh (+12.5%)
o Soho Place W1 and The Featherstone Building EC1 completed and became
operational in mid-2022
· Energy intensity increased to 149 kWh/sqm (+4.9%)
· Embodied carbon intensity of both on-site developments are
in-line with 2025 targets (≤600 kgCO(2)e/sqm)
Our plans for an 18.4 MW solar park on our Scottish land, that we expect will
generate in excess of 40% of the electricity needs of our London managed
portfolio, came a step closer following receipt of planning consent in the
year. Construction is scheduled to start through the second half of 2024, with
generation of green electricity to commence through 2025. We also continue to
explore other self-generation and carbon removal opportunities, including
further tree planting.
In 2019, we published our original SBTi-verified targets which were aligned
with a 2°C climate warming scenario. Following publication by SBTi of its
1.5°C-aligned pathway, we have rebased our near-term targets to align with
this new methodology. We are committed to reducing our Scope 1 & 2 carbon
footprint by 42% by 2030 from our 2022 baseline. We are finalising our
long-term SBTi net zero carbon target, which will commit us to reducing our
overall carbon footprint across all Scopes by 90% by 2040 against our 2022
baseline.
In 2023, 99% of energy used in the year was purchased on renewable tariffs
backed by REGOs (electricity) or RGGOs (gas).
Whilst energy usage across the London managed portfolio increased 12.5% in
2023 to 56.7million kWh, this was principally due to Soho Place W1 and The
Featherstone Building EC1 became operational in mid-2022. Consequently, energy
intensity increased year on year to 149 kWh/sqm which is above the 'target' of
138 kWh/sqm. Although an increase, we remain on track to meet our longer-term
target of 90 kWh/sqm in 2030, which equates to a 46% reduction compared to our
2019 baseline (166 kWh/sqm).
Our overall carbon footprint reduced in the year to 15,169 tCO(2-)e (2022:
44,183 tCO(2)e). There were no large completions in 2023, compared to two
major project completions in the prior year. Consequently, our embodied carbon
(Scope 3, Category 2) fell from 32,869 tCO(2)e in 2022 to 799 tCO(2)e in 2023,
and has been offset. Our operational carbon footprint (Scopes 1, 2 & 3,
excluding embodied carbon; location-based) increased 27% to 14,370 tCO(2)e.
At December 2023, 68% of our London commercial portfolio by ERV (including
on-site projects) had an EPC rating of 'A' or 'B' and was compliant with
proposed 2030 legislation. A further 19% was rated EPC 'C'. The costs and
likely timing of upgrading the remainder of the portfolio to ensure ongoing
legislative compliance have been integrated into our asset management and
financial planning.
INVESTMENT
Developments
· £169.3m of project expenditure
· Two major projects on site - 25 Baker Street W1 (298,000 sq ft)
and Network W1 (139,000 sq ft)
o Combined 5.8% yield on cost and 13% development profit
o 25 Baker Street offices 75% pre-let (13.4% above December 2022 ERV)
· Medium and longer-term pipeline totals over 1.3m sq ft
Disposals
· Total disposals £66m; major sales were 19 Charterhouse Street
EC1 (Q1: £53.6m; 4.6% yield) and 12-16 Fitzroy Street W1 (Q2: £6.7m; 6.9%
yield)
Over the last five years, we have sold £894.0m of property, primarily focused
on smaller non-core buildings where there was limited capacity for extra floor
area and amenity. Disposal proceeds have largely been recycled into our
development pipeline, with £855.4m of capital expenditure and acquisitions of
£468.6m. This has helped us maintain a strong balance sheet with conservative
levels of gearing, despite the valuation declines seen, and provides firepower
for future acquisition opportunities that we expect to arise over the coming
12-24 months.
The Group's capital allocation decisions in 2023 were focused on its exciting
development and refurbishment pipeline. We incurred total project expenditure
(including our share of the 50 Baker Street W1 JV) of £162.8m, plus £6.5m of
capitalised interest. Of this, £117.4m was at our two on-site major projects.
We remain committed to owning a portfolio balanced between core income
properties and those that offer future regeneration potential. At 31 December
2023, the portfolio was split 56% 'core income' and 44% 'future opportunity'.
This excludes Old Street Quarter EC1, with an existing floor area of c.400,000
sq ft, where our conditional acquisition is expected to complete from 2027 and
offers significant potential to create a mixed-use campus.
Developments and refurbishments
Major on-site projects - 437,000 sq ft
Significant progress was made through 2023 at our two on-site projects, 25
Baker Street W1 and Network W1, which together total 437,000 sq ft and are
both in the West End. The construction costs are now fixed and we have
substantially de-risked delivery at 25 Baker Street. With limited competing
supply in either the Marylebone or Fitzrovia sub-markets, we are confident in
the leasing prospects for the remainder of the available space. We currently
expect them to deliver a combined 5.8% yield on cost and 13% development
profit.
· 25 Baker Street W1 (298,000 sq ft) - an office-led scheme in Marylebone,
which is expected to complete in H1 2025, comprising 218,000 sq ft of
best-in-class offices, 28,000 sq ft of new destination retail around a central
landscaped courtyard (which is being delivered for the freeholder, The Portman
Estate) and 52,000 sq ft of residential, of which 45,000 sq ft is private.
Occupier demand for the office space is high, with 155,500 sq ft pre-let
through 2023 at an average headline rent of £103 psf, 13.4% ahead of December
2022 ERV. In addition, seven of the 41 private residential units have
exchanged for £38.9m, reflecting an average capital value of £3,560 psf, and
a further three are under offer. The office and residential structures have
now completed and the façade installation is making good progress. The
mid-Stage 5 embodied carbon estimate is c.600 kgCO(2)e/sqm.
· Network W1 (139,000 sq ft) - an office-led scheme in Fitzrovia,
targeted for completion in H2 2025, comprising 134,000 sq ft of adaptable
offices and 5,000 sq ft of retail. The project is being delivered on a
speculative basis. Ground and basement works have completed and construction
of the core and upper slabs has reached level six. The Stage 4 design embodied
carbon estimate is c.530 kgCO(2)e/sqm.
Major on-site development pipeline
Project Total 25 Baker Street W1 Network W1
Completion H1 2025 H2 2025
Office (sq ft) 352,000 218,000 134,000
Residential (sq ft) 52,000 52,000 -
Retail (sq ft) 33,000 28,000 5,000
Total area (sq ft) 437,000 298,000 139,000
Est. future capex(1) (£m) 223 139 84
Total cost(2) (£m) 734 486 248
ERV (c.£ psf) - 95 90
ERV (£m pa) 33.0 20.4(3) 12.6
Pre-let/sold area (sq ft) 201,300 201,300(4) -
Pre-let income (£m pa, net) 15.6 15.6 -
Embodied carbon intensity (kgCO(2)e/sqm)(5) c.600 c.530
Target BREEAM rating Outstanding(6) Outstanding
Target NABERS rating 4 Star or above(6) 4 Star or above
Green Finance Elected Elected
( )(1) As at 31 December 2023. (2) Comprising book value at commencement,
capex, fees and notional interest on land, voids and other costs. 25 Baker
Street W1 includes a profit share to freeholder, The Portman Estate. (3)
Long leasehold, net of 2.5% ground rent. (4) Includes PIMCO and Moelis
pre-lets, five private residential units at year end, the pre-sold affordable
housing plus the courtyard retail and Gloucester Place offices pre-sold to The
Portman Estate. (5) Embodied carbon intensity estimate as at stage 4 or
mid-stage 5. (6) Excludes offices at 30 Gloucester Place.
Future development projects - Four schemes totalling c.1.3m sq ft
Our medium-term pipeline comprises c.390,000 sq ft (at 100%) of high quality
office-led space.
· Holden House W1 (c.150,000 sq ft) - from mid-2025: we are updating
our plans which will have a higher office weighting and better sustainability
credentials than the existing planning consent.
· 50 Baker Street W1 (c.240,000 sq ft at 100%) - from early 2026: held
in a 50:50 joint venture with Lazari Investments, we have submitted a planning
application, the outcome of which is expected in H1 2024. This leasehold
property is on The Portman Estate and includes another building in their
ownership.
Our longer-term pipeline could deliver 950,000+ sq ft of mixed-use, office-led
space.
· Old Street Quarter EC1 (750,000+ sq ft) - from 2027/28: we continue
to progress plans for this 2.5-acre island site which our studies suggest has
potential for a significant mixed-use campus development, potentially
incorporating both office and 'living' components. We have had constructive
engagement with the London Borough of Islington. Our acquisition of the site
is expected to complete from 2027, conditional on delivery of the new eye
hospital at St Pancras and subsequent vacant possession of the existing site.
· 230 Blackfriars Road SE1 (200,000+ sq ft) - from 2030: our early
appraisals show capacity for a large office-led development for this 1960s
building, more than three times the existing floor area.
Refurbishments
Refurbishment projects will comprise an increasing proportion of capital
expenditure over the coming years as we continue to upgrade the portfolio to
meet the evolving requirements of an increasingly selective occupier base.
Through improving the amenity offer and overall quality, as well as upgrading
EPCs, we expect these projects to deliver an attractive rental uplift. Smaller
units, typically <10,000 sq ft, will be appraised for our 'Furnished +
Flexible' product where occupiers are willing to pay a premium rent for
flexible, high quality space.
Acquisitions and disposals
There was limited investment activity in 2023. Disposals totalled £65.6m at a
blended capital value of £845 psf and yield of 4.4% (excluding the forward
sale of residential units at 25 Baker Street W1), compared to acquisitions of
£3.8m.
Principal disposals in 2023
Property Date Area Total after Net yield Net rental income
sq ft
costs
%
£m pa
£m
19 Charterhouse Street EC1 Q1 63,200 53.6 4.6 2.6
12-16 Fitzroy Street W1 Q2 8,600 6.7 6.9 0.5
Other 2,200 5.3 - -
Total 74,000 65.6 4.4 3.1
FINANCE REVIEW
Financial highlights
Dec 2023 Dec 2022
Total net assets £3,508.8m £4,075.5m
EPRA NTA per share 3,129p 3,632p
Property portfolio at fair value £4,844.7m £5,321.8m
Gross property and other income £265.9m £248.8m
Net rental income £186.2m £188.5m
IFRS loss before tax (£475.9m) (£279.5m)
EPRA earnings per share (EPS) 102.0p 106.6p
Total dividend per share 79.5p 78.5p
LTV ratio 27.9% 23.9%
NAV gearing 38.7% 30.8%
Net interest cover ratio 4.1x 4.2x
Net debt/EBITDA 8.8x 7.8x
Introduction
Macroeconomics had a major impact on UK real estate in 2023, driving up
property investment yields and the cost of new finance quite sharply. Most
of the yield shift came in the second half of the year and, though there was a
significant improvement in mood during December, volatility has carried
through into early 2024. Office investment volumes in 2023 were also
substantially lower than normal. General cost pressures continued to erode
business and household confidence through 2023 but inflation and wage growth
both moderated in the final quarter and the outlook is now for the UK base
interest rate to fall rather than to rise. The pace and extent of those rate
decreases will have a decisive impact upon our sector.
Derwent London has continued to operate its well-established business model
effectively through this period of volatility, with many of the trends seen in
2022 continuing in 2023. Average office rents in central London grew in the
year, better-quality buildings with modern amenities and stronger
environmental performance outperforming. Older stock was under pressure and
we also saw elevated energy costs carry into H1 2023. Together with higher
average vacancy rates, these factors led to increased irrecoverable property
costs which impacted our recurring earnings in 2023. In addition, rental
growth continued to lag general cost inflation, a pattern we have seen now for
several years.
Similarly, while development and refurbishment projects are both bringing
positive incremental returns, development profits have been impacted by upward
yield shift, higher construction costs/fees and elevated marginal interest
rates.
Against this challenging background, we have continued to balance value
creation with relatively resilient recurring earnings and dividend growth, our
high-quality product is in demand and the Derwent London balance sheet remains
among the strongest in the UK real estate sector.
With a shortage of top-quality stock, strong occupier demand and cost
increases moderating, conditions may be starting to emerge where rents for the
best office space can outpace the lower levels of general inflation.
Net asset values and total return for the year
Upward yield shift, particularly in the second half, saw our IFRS net asset
value fall by 13.9% from £4,076m to £3,509m over the year. EPRA net
tangible asset (NTA) value per share also declined 13.8% from 3,632p per share
to 3,129p at 31 December 2023, 37% of the movement coming in the first half
and 63% in the second.
2023 2022
p p
Opening EPRA NTA 3,632 3,959
Revaluation movement (516) (373)
Profit on disposals 1 23
EPRA earnings 102 107
Ordinary dividends paid (79) (78)
Interest rate swap termination income 2 -
Share of joint venture revaluation movement (8) (8)
Other (5) 2
Closing EPRA NTA 3,129 3,632
After adding back dividends and property income distributions paid in the
year, the Group's total return for the year was -11.7% compared to -6.3% in
2022.
EPRA Net Disposal Value (NDV), which takes account of the £138m positive fair
value impact of fixed rate debt and bonds over their book values, was 3,243p
per share against 3,768p per share as at 31 December 2022.
Property portfolio at fair value
Knight Frank and Savills provided external valuations of the Group's property
portfolio as at 31 December 2023, the total of £4.8bn wholly-owned properties
allocated across the balance sheet as follows:
Dec 2023 Dec 2022
£m £m
Investment property 4,551.4 5,002.0
Non-current assets held for sale - 54.2
Owner-occupied property 46.1 50.0
Trading property 60.0 39.4
Property carrying value 4,657.5 5,145.6
Accrued income (non-current) 173.9 165.2
Accrued income (current) 20.2 23.6
Unamortised direct letting costs (non-current) 14.5 13.8
Unamortised direct letting costs (current) 2.4 2.5
Grossing up of headlease liabilities (33.6) (34.2)
Revaluation of trading property 9.8 4.8
Other - 0.5
Fair value of property portfolio 4,844.7 5,321.8
Fair value of properties held in joint venture (50%) 33.8 42.4
Capital expenditure of £152.3m (2022: £114.8m) was invested across the
wholly-owned property portfolio in 2023 together with capitalised interest of
£6.3m (2022: £7.0m). Acquisitions of new property were only £3.8m
compared with £133.0m a year earlier and the carrying value of disposals was
also lower at £64.0m (2022: £182.1m), principally the sale of 19
Charterhouse Street EC1 in Q1 which had been classified as an 'asset held for
sale' at 31 December 2022. A slower investment market meant that our
recycling activity was below typical levels in 2023 and, as a result, we have
increased our planned disposals in 2024 and 2025.
Owner-occupied property comprises our head office at 25 Savile Row W1 and is
included within 'property, plant and equipment' at £46.1m (2022: £50.0m)
together with £3.8m (2022: £4.3m) of leasehold improvements, furniture,
equipment and artwork.
Trading property at the year-end increased to £60.0m (2022: £39.4m) as we
continue to build the residential units under construction at 25 Baker Street
W1. To date, we have exchanged contracts on seven of these units totalling
£39m with completion due in 2025. Sales prices achieved to date are in
excess of our book cost and the estimated fair values, which are not included
within the IFRS balance sheet, were £9.8m (2022: £4.8m) above cost at the
year-end. The remaining trading property was Welby House SW1, held at
£3.6m. It was originally acquired as a potential site for affordable
housing and was sold in early 2024.
The accrued income through incentive periods also increased marginally, the
non-current amount being £173.9m (2022: £165.2m) and the current portion
being £20.2m (2022: 23.6m).
The fair value of our 50 per cent holding at 50 Baker Street W1 was £33.8m
(2022: £42.4m) after a revaluation deficit of £9.2m (2022: £9.3m) in the
year, retained profits of £2.0m (2022: £2.0m) and capital expenditure of
£0.6m (2022: £1.6m). Together with our other small joint venture
interests, this is included within 'investments' of £35.8m (2022: £43.9m).
Other balance sheet items
Our agreements in relation to the 25 Baker Street development require us to
deliver certain retail elements upon completion to the freeholder, The Portman
Estate, at an agreed price. Further costs of £6.6m were incurred in 2023
and the £8.9m total is included within 'trading stock'. It cannot be
classified as 'trading property' as we hold no legal interest in the real
estate itself.
Trade and other receivables were £42.7m at 31 December 2023 (2022: £42.4m)
and include £20.2m (2022: £23.6m) of income accrued through incentive
periods under IFRS 16 and classified as a current asset. As noted above,
£173.9m (2022: £165.2m) of accrued rent was also classified as non-current
as the amounts reverse in more than one year from the balance sheet date.
The remaining accrued income shown as current related to £2.4m of initial
direct letting fees and £0.8m of rent and interest. The balance of other
non-current receivables was made up of £14.5m (2022: £13.8m) of initial
direct letting fees and £12.6m (2022: £9.1m) of design and planning
application costs relating to the Old Street Quarter EC1 scheme. Our
expectation is that we will acquire the site in 2027 or once the vendor
provides vacant possession, if later. When that occurs, these design and
planning costs will be allocated and included within investment property at
fair value.
Property and other income
The Group's gross property and other income increased to £265.9m in 2023 from
£248.8m in the year ended 31 December 2022. Gross rental income rose by
2.8% to £212.8m from £207.0m, a further £8.0m of rent coming from Soho
Place W1, The Featherstone Building EC1 and Francis House SW1. In each case,
these projects completed in 2022 but a full twelve months of income arose in
2023. £7.5m of additional rent came from the rest of the portfolio while
tenants vacating and space taken back for refurbishments reduced gross rents
by £5.7m compared to 2022. Net disposals also reduced rent by £4.0m compared
to the prior year.
Lease surrender and rights-of-light premiums were only £0.1m in total in 2023
compared with £1.4m in 2022. With no completed residential properties
available to be sold, trading property sale proceeds were £nil (2022: £1.6m)
though, as noted above, we have now exchanged contracts on £39m of new sales
at our 25 Baker Street W1 construction project. In accordance with our
accounting policy, these sales will be reflected in the income statement on
completion, expected to be in 2025.
As noted within last year's statement and our 2023 half year results, energy
costs increased through late 2022 to mid 2023. In addition, many of the
services provided via our service charges have also risen in price due to
general inflation and wage growth. Together with higher average vacancy
rates, irrecoverable service charge costs were therefore higher than usual in
H2 2022 and H1 2023. With energy costs falling in the second half,
irrecoverable service charge costs were substantially lower in the second half
of 2023, as set out below:
H1 2022 H2 2022 2022 H1 2023 H2 2023 2023
£m £m £m £m £m £m
Service charges
Voids 0.6 2.8 3.4 2.1 1.8 3.9
Inclusive leases 0.3 0.4 0.7 0.3 0.2 0.5
Caps 0.3 0.3 0.6 1.0 0.1 1.1
Balancing charges/other 0.3 0.1 0.4 1.1 0.0 1.1
1.5 3.6 5.1 4.5 2.1 6.6
Other irrecoverable property expenditure also increased. In 2023, it
totalled £17.4m, up from £14.4m in 2022, allocated across the following main
cost categories:
H1 2022 H2 2022 2022 H1 2023 H2 2023 2023
£m £m £m £m £m £m
Property costs
Legal and letting 1.8 2.0 3.8 2.2 2.4 4.6
Rates 1.1 1.0 2.1 1.1 1.7 2.8
Ground rent 0.5 1.2 1.7 1.2 1.1 2.3
Marketing 1.1 0.7 1.8 1.0 0.7 1.7
Lounges & customer service 0.2 0.3 0.5 0.3 1.1 1.4
Repairs 0.2 0.5 0.7 0.7 0.4 1.1
Other 2.0 1.8 3.8 2.1 1.4 3.5
6.9 7.5 14.4 8.6 8.8 17.4
Our usual impairment testing of receivable balances has again been carried out
on trade receivables and the accrued income balances created by the spreading
of lease incentives. Office rent collection across the portfolio has
remained high but there is still some weakness among the retail, gym and
hospitality sectors and we also saw a few of our smaller tenants fail in
2023. We have also considered the carrying value of prepaid costs at Old
Street Quarter in accordance with IAS 36. Together, this has taken the
overall impairment charge to £2.6m in 2023 against a credit in 2022 of
£1.0m.
After allowing for all of these costs, net rental income fell slightly to
£186.2m in 2023 from £188.5m in 2022. With surrender premiums,
dilapidation receipts, other property income and management fees included, net
property and other income also fell a little to £190.5m from £194.6m in the
prior year.
Administrative expenses and EPRA cost ratios
Salaries increased by an average of 6% in 2023 and headcount also increased by
15 in the year. In addition, there was a £1.2m underaccrual in 2022 for
bonus payments awarded in March 2023 to Directors and Executive Committee
members which has therefore fallen into 2023. As a result, administrative
expenses were £39.1m in 2023 against £36.4m in 2022. Adjusting for the
bonus underaccrual, the underlying increase year on year was 1.0%. In
accordance with our normal practice, we do not capitalise any of our
overheads.
The higher property and administrative expenses in 2023 have increased our
EPRA cost ratio, including direct vacancy costs, to 27.3% from 23.3% in
2022. Excluding direct vacancy costs, the EPRA cost ratio was 22.3% (2022:
19.5%).
Other income statement items
The deficit on the wholly owned investment portfolio's revaluation in 2023 was
£581.5m (2022: £422.1m) with a further £9.2m (2022: £9.3m) from our share
of the 50 Baker Street joint venture. Our head office at 25 Savile Row saw a
revaluation deficit of £3.9m (2022: surplus of £0.7m), included within the
Group Statement of Comprehensive Income.
As noted above, the profit on disposal of investment properties was lower than
usual in 2023 at £1.2m (2022: £25.6m), mainly from the sale of 19
Charterhouse Street EC1.
Net finance costs increased marginally to £39.5m from £39.4m in 2022 with
capitalised interest slightly lower than the prior year at £6.5m (2022:
£7.0m).
The Group's interest rate swaps saw a fair value loss on derivative financial
instruments of £2.1m in 2023, contrasting with the £5.8m gain in 2022 when
rates moved sharply upwards, but much of the 2023 movement was offset by a
£1.8m gain in deferring the start date of these swaps.
Our joint venture with Lazari Investments at 50 Baker Street W1 showed a loss
for the year of £7.2m (2022: £7.3m), mainly due to the £9.2m (2022: £9.3m)
revaluation deficit noted above.
IFRS loss before tax and EPRA earnings per share
The IFRS income statement, which includes the substantial fair value deficit
on the property portfolio and derivative financial instruments, showed a loss
before tax for the year of £475.9m (2022: loss of £279.5m). IFRS earnings
per share were -424.3p (2022: -249.8p).
EPRA earnings per share, which adjust for the fair value movements and certain
other items, was 102.0p per share (2022: 106.6p). As noted above, the main
reason was an increase in irrecoverable property costs and overheads. A
table showing a reconciliation of the IFRS results to EPRA earnings per share
is included in note 25 and is summarised below.
Like-for-like rental income
Like-for-like (LFL) gross rental income was up 1.7% over the year, reflecting
modest underlying rental growth. However, LFL net rental income was lower by
1.4% due to the higher irrecoverable property costs explained above and LFL
net property income, which takes account of dilapidations and other property
income, was down by 2.1%.
Internal controls, assurance and the regulatory environment
Internal controls remained a key focus area during the year, with good
progress made enhancing existing documentation and the evidencing of controls
in anticipation of changes to governance requirements and potential
regulation.
The Financial Reporting Council has recently issued the updated UK Corporate
Governance Code (the Code), following consultation during 2023. Changes to
the Code have been kept to a minimum, after the Government withdrew draft
secondary legislation in the autumn and recognising that effective governance
should be targeted and proportionate. The most significant change to the Code
will require Boards to include an annual declaration in the annual report
explaining how they have monitored and reviewed the effectiveness of the
internal control framework, and the Board's conclusion as to the effectiveness
of material controls.
In this context, we are continuing to document, review and, where necessary,
strengthen key processes and controls. This will further build our resilience
and enable the business to respond quickly to emerging risks, while combating
fraud and enhancing the quality of reporting.
We continue to be supported by independent assurance obtained from a range of
external providers. Consistent with last year, the principal sources include
the annual statutory audit, which was subject to a tender process in 2023.
After strong presentations from each of the shortlisted firms, the Board has
recommended that PwC remain as our auditor. Additional external assurance is
obtained on selected sustainability, health and safety and green finance
disclosures, service charge audits, a twice-yearly external valuation and
internal audits that cover a range of key business risk areas.
Work will continue throughout 2024 to further enhance the control environment,
defining key controls deemed material to the long-term sustainability of the
business and ensuring we have sufficient assurance in place over these to
inform the Board's declaration which will be required for our financial year
commencing on 1 January 2026.
Taxation
The corporation tax charge for the year ended 31 December 2023 was £nil.
The movement in deferred tax for the year was a credit of £0.5m, (2022:
charge of £0.9m) of which £0.5m was expensed through the income statement.
The amount credited through 'other comprehensive income' in relation to the
owner-occupied property at 25 Savile Row was £1.0m.
As well as other taxation paid during the year, in accordance with our status
as a REIT, £9.7m of tax was paid to HMRC relating to withholding tax on
property income distributions (PIDs).
Derwent London's principles of good governance extend to a responsible
approach to tax. Derwent London has a low tolerance of tax risk and
successfully retained its low risk status in every area of HMRC's Business
Risk Review (BRR+) in July 2023. Our statement of tax principles is available
on our website www.derwentlondon.com/investors/governance/tax-principles
(http://www.derwentlondon.com/investors/governance/tax-principles) and is
approved by the Board in line with the Group's long-term values, culture and
strategy.
Borrowings, net debt and cash flow
Group borrowings rose to £1.34bn at 31 December 2023 from £1.25bn a year
earlier, impacted by lower than usual property disposals in a hesitant
investment market. The increase in debt came from drawings under our
unsecured revolving credit facilities but available cash and undrawn
facilities remained very substantial, totalling £480m at the December 2023
year end (2022: £577m). During the year, the £83m secured loan also moved
into current liabilities as it is due for repayment or refinancing in October
2024.
Taking account of leasehold liabilities, which were almost unchanged over the
year, derivative financial instruments and unrestricted cash, net debt was
£1.36bn compared with £1.26bn in December 2022.
The increase in debt as well as lower property valuations meant that the
Group's EPRA loan-to-value ratio increased to 27.9% from 23.9% in December
2022. It continues to be one of the lowest in the sector. Interest cover
also remained strong at 4.1 times, only marginally below the 4.2 times in 2022
with our main debt covenant at 1.45 times. We have also disclosed Net debt
to EBITDA for the first time this year as it is increasingly being used by
some of our stakeholders. As at 31 December 2023, it was 8.8 times (31
December 2022: 7.8 times).
The other main change this year was the presentation of the Cash Flow
Statement, bringing us in line with a majority of our peers and simplifying
the presentation of what was becoming an increasingly long statement. While
the previous 'direct' method has some advantages, the 'indirect' method that
we now use indicates the main working capital movements and clearly sets out
the linkages between the profit/loss from operations and the cash flow from
operations.
Cash generated from operations in 2023 was £135.3m (2022: £148.7m), the 2023
figure including £24.7m of cash outflows (2022: £9.7m) incurred building up
trading stock and trading property balances at the 25 Baker Street
development. Though this is a project lasting several years, IAS 7 requires
these cashflows to be shown as a deduction against operating cash flow (rather
than in investing activities) as they relate to elements to be sold on
completion rather than to be held as investment properties. At the point
when they are disposed of, expected to be in 2025, there will be a substantial
cash inflow which will also pass through operating activities.
Though acquisitions were considerably lower than in 2022, cash generated from
property disposals was also much lower this year and, as a result, the net
cash used in investing activities was £98.0m (2022: £51.7m).
Debt and financing
In 2022 and 2023, the real estate debt environment suffered what are probably
its two most challenging years since the financial crisis in 2007/8. The
reasons this time are quite different and, importantly, banks and most other
lenders remain well capitalised. Borrowers also have generally manageable
levels of debt. However, after many years when UK interest rates were held
down by quantitative easing, the return of inflation and a number of other
global events have led to big increases in the rates set by many central
banks. After 14 rate rises from December 2021, the UK base rate reached
5.25% in August where it remains. Other features of the past year or so have
been volatility and uncertainty as the market tries to absorb rapidly changing
data and sentiment.
To illustrate this, the UK 5-year swap rate started 2023 at 4.0%, reached a
high of 5.3% in July, and ended the year close to its 12-month low of 3.3%.
Longer rates also moved significantly: the 10-year UK gilt was 3.7% at the
beginning of 2023, fell to 3.0% in early February, hit a high of 4.7% in
August before falling over 100bps to end the year at 3.6%.
Credit spreads have also fluctuated significantly. Against this background,
we chose not to refinance any of our debt in 2023 but continued to hold active
discussions with our relationship lenders and also engaged with new parties.
Conditions in early 2024 look more positive and we detect a little more
optimism among both lenders and borrowers. However, rates across the curve
have moved upwards since the beginning of 2024 and uncertainty remains
elevated.
As we have been drawing more of our revolving credit facilities in recent
months, we decided to split our 1.36% interest rate swap expiring in April
2025 into four parts. At the year end, a £20m swap was subject to a forward
start date and three swaps totalling £55m were active.
Our next refinancing is due in October 2024, an £83m secured loan with a
coupon of 3.99%. We are expecting to refinance this later in the year and
have had a number of encouraging discussions. Expectations are that the rate
will be a little higher than the current level.
At the year-end, 94% of our debt was at fixed rates, 4% was hedged by the
active swaps and the balance of 2% was at floating rate. With so much of the
debt at fixed rates, the Group's weighted average interest rate on a cash
basis only rose very slightly to 3.17% from 3.14% in December 2022 and to
3.29% from 3.26% on an IFRS basis which adjusts for the convertible and green
bonds. The weighted average maturity of our borrowings was 5.0 years at 31
December 2023 compared to 6.2 years at 31 December 2022.
Reporting under the Green Finance Framework
Derwent London's Green Finance Framework (the Framework) has been prepared in
line with the LMA Green Loan Principles and ICMA Green Bond Principles
guidance document, has been externally reviewed and a second party opinion has
been obtained. The latest Framework is available on our website at
www.derwentlondon.com (http://www.derwentlondon.com) .
Out of our total debt facilities of £1.8bn, £650m satisfy our definition of
Green Financing Transactions (GFTs). The GFTs comprise the £350m Green Bond
issuance in 2021 and a £300m 'green' tranche included within our main
corporate £450m revolving credit facility taken out in 2019. Together these
are used to fund qualifying green expenditure.
In accordance with the reporting requirements set out in the Framework, we are
disclosing the Eligible Green Projects (EGPs) that have benefitted from our
Green Financing Transactions, and the allocation of drawn funds to each
project.
The projects eligible for funds from the GFTs are as follows:
Green project 80 Charlotte Street W1 Soho Place W1 The Featherstone Building EC1 25 Baker Street W1 Network W1
Expected completion date Completed in 2020 Completed in 2022 Completed in 2022 2025 2025
Category for eligibility Green building, criterion 1 of section 3.1 of the Framework (excludes Asta Green building, criterion 1 of section 3.1 of the Framework (Site A) Green building, criterion 1 of section 3.1 of the Framework Green building, criterion 1 and 2 of section 3.1 of the Framework (excludes Green building, criterion 1 of section 3.1 of the Framework
House and Charlotte Apartments)
retail and refurbished residential)
Impact reporting indicator Building certification achieved (system & rating) Building certification achieved (system & rating) Building certification achieved (system & rating) Building certification achieved (system & rating) Building certification achieved (system & rating)
Green credentials(1) Achieved: 1 Soho Place (Site A) Achieved: 25 Baker Street offices(2) Achieved:
BREEAM - Excellent (post-construction) Achieved: BREEAM - Outstanding (post-construction) Achieved: BREEAM - Outstanding (design stage)
EPC - B BREEAM - Outstanding (post-construction) EPC - A BREEAM - Outstanding (design stage)
LEED - Gold EPC - B LEED - Platinum Expected:
LEED - Gold Expected: BREEAM - Outstanding (post construction), on target
BREEAM - Outstanding (post-construction), on target LEED - Gold, on target
LEED - Gold, on target EPC - A, on target
EPC - A, on target
30 Gloucester Place offices(2)
Achieved:
BREEAM - Excellent (design stage)
Expected:
BREEAM - Excellent (post construction), on target
EPC - B, on target
Private residential
Expected:
Home Quality Mark - 4 Stars, on target
( )(1) Green EGP credentials disclosed in accordance with the Framework and
the Green Finance Basis of Reporting, available on our website and within the
Responsibility Report.
(2) The development includes 206,000 sq ft of offices at 25 Baker Street and
12,000 sq ft of offices at 30 Gloucester Place.
Qualifying 'green' expenditure
The qualifying expenditure as at 31 December 2023 for each project is set out
in the table below. This includes an element of 'look back' capital
expenditure on projects in which expenditure had been incurred prior to
management's approval of the project as an EGP. This also includes capital
expenditure on projects which had already been incurred as at the original
refinancing date in October 2019.
Costs which form part of the initial project appraisal or which are associated
with delivering the project through to practical completion are included
within the eligible green expenditure of the project. Costs incurred
subsequently are generally excluded unless specifically elected as green
projects.
80 Charlotte Street, Soho Place, and The Featherstone Building are all
completed projects and are fully operational. The 25 Baker Street scheme,
which commenced on site in 2021, is due to reach practical completion in H1
2025 and the Network building, which commenced on site in 2022 and was elected
as an EGP in 2023, is due to reach practical completion in H2 2025.
Cumulative spend on each EGP as at the reporting date
Subsequent spend
Look back spend Q4 2019 - 2023 Spend Cumulative Spend
FY 2022
EGP £m £m £m £m
80 Charlotte Street W1 185.6 52.5 - 238.1
Soho Place W1(1) 57.5 166.8 (0.9)(2) 223.4
The Featherstone Building EC1 29.1 67.6 0.8 97.5
25 Baker Street W1 26.5 42.3 89.8 158.6
Network W1 23.8 - 12.7 36.5
322.5 329.2 102.4 754.1
(1) Soho Place Site B was disposed of in 2022. In accordance with section
3.3 of the Framework, the expenditure of £34.9m allocated to Site B has now
been removed.
(2) This relates mainly to capital contributions received post completion, for
costs incurred during the construction period.
The total qualifying expenditure incurred in 2023 was £102.4m and the
cumulative qualifying expenditure on the EGPs at 31 December 2023 was
£754.1m.
Drawn borrowings from GFTs as at 31 December 2023 were £416.5m, which
comprised of the £350m Green Bonds and £66.5m drawn under the green tranche
of the RCF. Therefore, there was £233.5m undrawn under the £300m green
tranche of the RCF, all of which is available to fund future cash flow
requirements of the Group.
A requirement under the Framework and the facility agreement is for there to
be an excess of qualifying spend on EGPs over the amount of drawn borrowings
from all GFTs which, as shown above, has been met.
Dividend
As in previous years, our dividend policy is to target progressive increases
but to maintain a payout well-covered by EPRA earnings. We also take our
obligations to other stakeholders into account and consider any other IFRS
realised gains and losses which do not form part of EPRA earnings. The Board
is recommending a 0.5p per share increase in the final dividend to 55.0p. It
will be paid in May 2024 with 39.0p as a PID and the balance of 16.0p as a
conventional dividend. The Company's ISIN reference is GB0002652740.
This will take the total dividend for the year to 79.5p, a 1.3% increase over
2022 with dividends paid and declared in relation to 2023 earnings 1.28 times
covered by EPRA earnings.
PRINCIPAL RISKS AND UNCERTAINTIES
RISK MANAGEMENT AND INTERNAL CONTROLS
We have identified certain principal risks and uncertainties that could
prevent the Group from achieving its strategic objectives and have assessed
how these risks could best be mitigated, where possible, through a combination
of internal controls, risk management and the purchase of insurance cover.
As a predominantly London-based Group, we are particularly sensitive to
factors which impact upon central London's growth and demand for office space.
Like many businesses, we have been impacted by ongoing macroeconomic
challenges and geopolitical instability.
The availability and cost of financing has changed significantly in the past
year and is a wider industry issue. Our next refinancing is in October 2024,
an £83m secured facility with a coupon of 3.99%. We are in early discussions
with the existing lender, and also speaking to a number of other potential
debt providers who have expressed interest in developing a lending
relationship with us. Despite our strong long-standing relationships with
lenders, there is inevitably a small risk that the Group will be unable to
raise finance in a cost-effective manner which optimises our capital
structure. The Board has therefore classified refinancing as a principal risk
for 2024.
Geopolitical instability has been identified as an emerging risk for the
Group, as continued geopolitical tensions could cause prolonged global supply
chain disruption and commodity price inflation.
The principal risks and uncertainties facing the Group in 2024 are set out on
the following pages with the potential impact and the mitigating actions and
controls in place. These risks are reviewed and updated on a regular basis and
were last formally assessed by the Board on 26 February 2024.
The Group's approach to the management and mitigation of these risks is
included in the 2023 Report Accounts. The Board has confirmed that its risk
appetite and key risk indicators remain appropriate.
Strategic risks
The Group's business model and/or strategy does not create the anticipated
shareholder value or fails to meet investors' and other stakeholders'
expectations.
Risk, effect and progression Controls and mitigation
1. Failure to implement the Group's strategy
The Group's success depends on implementing its strategy and responding · The Board maintains a formal schedule of matters which are
appropriately to internal and external factors including changing work reserved solely for its approval. These matters include decisions relating to
practices, occupational demand, economic and property cycles. The London the Group's strategy, capital structure, financing, any major property
office market has generally been cyclical in recent decades, with strong acquisition or disposal, the risk appetite of the Group and the authorisation
growth followed by economic downturns, precipitated by rising interest rates. of capital expenditure above the delegated authority limits.
The impact of these cycles is dependent on the quality and location of the
Group's portfolio. · Frequent strategic and financial reviews. An annual strategic
review and budget is prepared for Board approval alongside two-year rolling
forecasts which are prepared three times a year.
· Assess and monitor the financial strength of potential and
existing occupiers. The Group's diverse and high quality occupier base
provides resilience against occupier default.
· Maintain income from properties until development commences and
have an ongoing strategy to extend income through lease renewals and regears.
Developments are de-risked through pre-lets.
· Maintain sufficient headroom for all the key ratios and financial
covenants, with a particular focus on interest cover.
· Develop properties in central locations where there is good
potential for future demand, such as near the Elizabeth Line. We do not have
any properties in the City core or Docklands.
Financial risks
The main financial risk is that the Group becomes unable to meet its financial
obligations. The probability of this occurring is low due to our significant
covenant headroom. Financial risks can arise from movements in the financial
markets in which we operate and inefficient management of capital resources.
Risk, effect and progression Controls and mitigation
2. Refinancing risks (new)
· Preparation of five-year cash flow, annual budgets and three
Inability to raise finance in a cost-effective manner that optimises the rolling forecasts enable the Group to raise finance in advance of
capital structure of the Group. requirements.
· Excellent long-standing relationships with funders.
· Regular review of financial covenants to monitor the impact of
changes in valuation, interest rates and rental income.
· Going concern and viability reviews considered at least half
yearly.
· The Group's financial position is reviewed at each Executive
Committee and Board meeting with update on leverage metrics and capital
markets from the CFO.
· Annual review with credit rating agency and low leverage
tolerance.
3. Risk of occupiers defaulting or occupier failure
The majority of the Group's revenues comprise rent received from our occupiers · Assess and monitor the financial strength of potential and
and any deterioration in their businesses and/or profitability could in turn existing occupiers. The Group's diverse and high quality occupier base
adversely affect the Group's rental income or increase the Group's bad debts provides resilience against occupier default.
and/or number of lease terminations.
· Focus on letting our buildings to large and established
businesses where the risk of default is lower.
· Active in-house rent collection, with regular reports to the
Executive Directors on day 1, 7, 14 and 21 of each rent collection cycle.
· Ongoing dialogue is maintained with occupiers to understand their
concerns and requirements.
· Rent deposits are held where considered appropriate.
4. Income decline
Changes in macroeconomic factors may adversely affect London's overall office · The Credit Committee receives detailed reviews of all prospective
market. The Group is exposed to external factors which are outside the Group's occupiers. The focus is on large and established businesses where the risk of
control, such as future demand for office space, the 'grey' market in office default is lower, and they also ensure the Group has a diverse range of
space (i.e. occupier controlled vacant space), weaknesses in retail and occupiers.
hospitality businesses, increase in hybrid working, a recession, and
subsequent rise in unemployment and/or interest rates. · A 'tenants on watch' register is maintained and regularly
reviewed by the Executive Directors and the Board.
· Ongoing dialogue is maintained with occupiers to understand their
concerns, requirements and future plans.
· The Group's low loan-to-value ratio and high interest cover ratio
reduces the likelihood that falls in property values have a significant impact
on our business continuity.
· Regular review of the lease expiry profile.
· Regular forecasts provide visibility of potential significant
vacancies.
5. Fall in property values
The potential adverse impact of the economic and political environment on · The impact of yield changes is considered when potential projects
property yields has heightened the risk of a fall in property values. are appraised.
· The impact of yield changes on the Group's financial covenants
and performance is monitored regularly and subject to sensitivity analysis to
ensure that adequate headroom is preserved.
· The Group's mainly unsecured financing makes management of our
financial covenants more straightforward.
· The Group's low loan-to-value ratio reduces the likelihood that
falls in property values have a significant operational impact on our business
continuity.
Operational risks
The Group suffers either a financial loss or adverse consequences due to
processes being inadequate or not operating correctly, human factors or other
external events.
Risk Controls and mitigation
6A. Reduced development returns
Returns from the Group's developments may be adversely impacted due to: · Our procurement process includes the use of highly regarded firms
increased construction costs and interest rates; material and labour of quantity surveyors and is designed to minimise cost uncertainty.
shortages; movement in yields and adverse letting conditions.
· Development costs are benchmarked to ensure that the Group
obtains competitive pricing and, where appropriate, fixed price contracts are
negotiated.
· Post-completion reviews are carried out for all major
developments to ensure that improvements to the Group's procedures are
identified, implemented and lessons learned.
· Investment appraisals are prepared and sensitivity analysis is
undertaken to judge whether an adequate return is made in all likely
circumstances.
· The Group's pre-letting strategy reduces or removes the letting
risk of the development as soon as possible. The Group's pre-letting strategy
reduces or removes the letting risk of the development as soon as possible.
6B. 'On-site' risk
Risks that can materialise whilst on site, include: · Prior to construction beginning on site, we conduct thorough site
investigations and surveys to reduce the risk of unidentified issues,
• unexpected ground conditions; including investigating the building's history and adjacent buildings/sites.
• deleterious material (including asbestos); · Adequately appraise investments prior to starting work on site,
including through:
• activity in adjacent sites/buildings; and
(a) the benchmarking of development costs; and (b) following a procurement
• unidentified issues with the existing building. process that is properly designed (to minimise uncertainty around costs) and
that includes the use of highly regarded quantity surveyors.
· Regular monitoring of our contractors' cash flows.
'On-site' risks can cause development projects to be significantly delayed and
could lead to penalties and a deferral of rental income. 'On-site' risks · Frequent meetings with key contractors and subcontractors to
typically arise if inadequate site investigations have been conducted prior to review their work programme and maintain strong relationships.
starting work on site.
· Off-site inspection of key components to ensure they have been
completed to the requisite quality.
· Monthly reviews of supply chain issues for each of our major
projects, including in respect to potential labour shortages.
6C. Contractor/subcontractor default
There have been ongoing issues within the construction industry in respect of · We use known 'Tier 1' contractors with whom we have established
the level of risk and narrow profit margins being accepted by contractors. working relationships and regular work with tried and tested sub-contractors.
· Regular monitoring of our contractors, including their project
cash flows, is carried out.
· Key construction packages are acquired early in the project's
life to reduce the risks associated with later default.
· The financial standing of our main contractors is reviewed prior
to awarding the project contract.
· Our main contractors are responsible, and assume the immediate
risk, for subcontractor default.
· Payments to contractors are in place to incentivise the
achievement of project timescales, with damages agreed in the event of
delay/cost overruns.
· Regular on-site supervision by a dedicated Project Manager who
monitors contractor performance and identifies problems at an early stage,
thereby enabling remedial action to be taken.
· Contractors are paid promptly and are encouraged to pay
subcontractors promptly. In addition, we externally publish our payment terms.
7A. Cyber-attack on our IT systems
The Group may be subject to a cyber attack that results in it being unable to · The Group's Business Continuity Plan and cyber security incident
use its information systems and/or losing data. response procedures are regularly reviewed and tested.
· Independent internal and external penetration/vulnerability tests
are regularly conducted to assess the effectiveness of the Group's security.
· Multi-Factor Authentication is in place for access to our
systems.
· The Group's data is regularly backed up and replicated off-site.
· Our IT systems are protected by anti-virus software, 24/7/365
threat hunting, security incident detection and response, security anomaly
detection and firewalls that are frequently updated.
· Frequent staff awareness and training programmes.
· Security measures are regularly reviewed by the DIT team.
7B. Cyber-attack on our buildings
The Group is exposed to cyber attacks on its properties which may result in · The Group's Business Continuity Plan and cyber security incident
data breaches or significant disruption to IT-enabled occupier services. response procedures are regularly reviewed and tested.
· Physical segregation between the building's core IT
infrastructure and occupiers' corporate IT networks.
· Physical segregation of IT infrastructure between buildings
across the portfolio.
· Frequent staff awareness and training programmes. Building
Managers are included in any cyber security awareness training and phishing
simulations.
· Sophos Rapid Response team provides unlimited support to our
Cyber Incident Response Team in the event of a cyber attack.
7C. Significant business interruption
Major incidents may significantly interrupt the Group's business, its · Fire protection and access/security procedures are in place at
occupiers and/or supply chain. Such incidents could be caused by a wide range all of our managed properties. At least annually, a fire risk assessment and
of events such as fire, natural catastrophes, cyber events, terrorism, health and safety inspection are performed for each property in our managed
pandemic outbreak, material supply chain failures and geopolitical factors. portfolio.
· The Group has comprehensive business continuity and incident
management procedures both at Group level and for each of our managed
buildings which are regularly reviewed and tested.
· Continuous review of property health and safety statutory
compliance.
· Comprehensive property damage and business interruption insurance
which includes terrorism.
· Robust security at our buildings, including CCTV and access
controls.
· Most of our employees are capable of working remotely and have
the necessary IT resources.
8. Reputational damage
The Group's reputation could be damaged, for example, through unauthorised or · Social media channels are monitored, and the Group retains the
inaccurate media coverage, unethical practices or behaviours by the Group's services of an external PR agency to monitor external media sources.
executives, or failure to comply with relevant legislation.
· The Executive Directors and Board receive ad hoc social media
reports. Our social media strategy is approved by the Executive Directors.
· Close involvement of senior management in day-to-day operations
and established procedures for approving all external announcements.
· All new members of staff attend an induction programme and are
issued with our Group staff handbook.
· A Group whistleblowing system is in place for staff to report
wrongdoing anonymously.
· Ongoing engagement with local communities in areas where the
Group operates.
· Staff training and awareness programmes.
9. Our resilience to climate change
If the Group fails to respond appropriately, and sufficiently, to · The Board and Executive Directors receive regular updates and
climate-related risks or fails to benefit from the potential opportunities. presentations on environmental and sustainability performance and management
matters, as well as progress against our pathway to becoming net zero carbon
by 2030.
· The Sustainability Committee monitors our performance and
management controls.
· Strong team led by an experienced Head of Sustainability.
· Production of an annual Responsibility Report with key data and
performance points which are internally reviewed and externally assured.
· Undertake periodic multi-scenario climate risk assessments
(physical and transition risks).
10. Health and safety (H&S)
A major incident occurs at a managed property or development scheme which · Relevant and effective health, safety, and fire management
leads to significant injuries, harm, or fatal consequences. policies and procedures.
· The Group has a competent H&S team, whose performance is
monitored and reviewed by the H&S and Risk Committees.
· The H&S competence of our main contractors and service
partners is verified by the H&S team prior to their appointment.
· Our main contractors must submit suitable Construction Phase
Plans, Management and Logistics Plans, and Fire Management Plans, before works
commence.
· The H&S team, with the support of internal and external
stakeholders, support both our Development Project teams and
our Managed Portfolio teams to ensure statutory compliance, effective
reporting, and feedback.
· The H&S team, with the support of external appointments and
audits, ensure our Construction (Design and Management) (CDM) client duties
are executed and monitored on a monthly basis.
· The Board, Risk Committee and Executive Directors receive
frequent updates and presentations on key H&S matters, including
'Significant Incidents', legislation updates, and trends across the
development and managed portfolio.
11. Non-compliance with law and regulations
The Group breaches any of the legislation that forms the regulatory framework · The Board and Risk Committee receive regular reports prepared by
within which the Group operates. the Group's legal advisers identifying upcoming legislative/regulatory
changes. External advice is taken on any new legislation, if required.
· Managing our properties to ensure they are compliant with the
Minimum Energy Efficiency Standards (MEES) for Energy Performance Certificates
(EPCs).
· A Group whistleblowing system ('Speak- up') for staff is
maintained to report wrongdoing anonymously.
· Ongoing staff training and awareness programmes.
· Group policies and procedures dealing with all key legislation
are available on the Group's intranet.
· Quarterly review of our anti-bribery and corruption procedures by
the Risk Committee.
Financial instruments - risk management
The Group is exposed through its operations to the following financial risks:
• credit risk;
• market risk; and
• liquidity risk.
In common with all other businesses, the Group is exposed to risks that arise
from its use of financial instruments. The following describes the Group's
objectives, policies and processes for managing those risks and the methods
used to measure them. Further quantitative information in respect of these
risks is presented throughout these financial statements.
There have been no substantive changes in the Group's exposure to financial
instrument risks, its objectives, policies and processes for managing those
risks or the methods used to measure them from previous years. The Group's
EPRA loan-to-value ratio has increased to 27.9% as at 31 December 2023, but
remains low relative to the UK REIT sector.
Principal financial instruments
The principal financial instruments used by the Group, from which financial
instrument risk arises, are trade receivables, accrued income arising from the
spreading of lease incentives, cash at bank, trade and other payables,
floating rate bank loans, fixed rate loans and private placement notes,
secured and unsecured bonds and interest rate swaps.
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group's risk
management objectives and policies and, whilst retaining ultimate
responsibility for them, it has delegated the authority to executive
management for designing and operating processes that ensure the effective
implementation of the objectives and policies.
The overall objective of the Board is to set policies that seek to reduce risk
as far as possible without unduly affecting the Group's flexibility and its
ability to maximise returns. Further details regarding these policies are set
out below:
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations. The Group is mainly exposed to credit risk from lease contracts
in relation to its property portfolio. It is Group policy to assess the credit
risk of new tenants before entering into such contracts. The Board has a
Credit Committee which assesses each new tenant before a new lease is signed.
The review includes the latest sets of financial statements, external ratings
when available and, in some cases, forecast information and bank or trade
references. The covenant strength of each tenant is determined based on this
review and, if appropriate, a deposit or a guarantee is obtained. The
Committee also reviews existing tenant covenants from time to time.
Impairment calculations have been carried out on trade receivables and lease
incentive receivables, applying IFRS 9 and IAS 36, respectively. In addition,
the Credit Committee has reviewed its register of tenants at higher risk,
particularly in the retail or hospitality sectors, those in administration or
CVA and the top 50 tenants by size with the remaining occupiers considered on
a sector by sector basis.
As the Group operates predominantly in central London, it is subject to some
geographical risk. However, this is mitigated by the wide range of tenants
from a broad spectrum of business sectors.
Credit risk also arises from cash and cash equivalents and deposits with banks
and financial institutions. For banks and financial institutions, only
independently rated parties with a minimum rating of investment grade are
accepted. This risk is also reduced by the short periods that money is on
deposit at any one time.
The carrying amount of financial assets recorded in the financial statements
represents the Group's maximum exposure to credit risk without taking account
of the value of any collateral obtained.
Market risk
Market risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate due to changes in market prices. Market
risk arises for the Group from its use of variable interest bearing
instruments (interest rate risk).
The Group monitors its interest rate exposure on at least a quarterly basis.
Sensitivity analysis performed to ascertain the impact on profit or loss and
net assets of a 50 basis point shift in interest rates would result in an
increase of £0.1m (2022: £nil) or decrease of £0.1m (2022: £nil).
It is currently Group policy that generally between 60% and 85% of external
Group borrowings (excluding finance lease payables) are at fixed rates. Where
the Group wishes to vary the amount of external fixed rate debt it holds
(subject to it being generally between 60% and 85% of expected Group
borrowings, as noted above), the Group makes use of interest rate derivatives
to achieve the desired interest rate profile. Although the Board accepts that
this policy neither protects the Group entirely from the risk of paying rates
in excess of current market rates nor eliminates fully cash flow risk
associated with variability in interest payments, it considers that it
achieves an appropriate balance of exposure to these risks. At 31 December
2023, the proportion of fixed debt held by the Group was above this range at
98% (2022: 100%). During both 2023 and 2022, the Group's borrowings at
variable rate were denominated in sterling.
The Group manages its cash flow interest rate risk by using floating-to-fixed
interest rate swaps. When the Group raises long-term borrowings, it is
generally at fixed rates.
Liquidity risk
Liquidity risk arises from the Group's management of working capital and the
finance charges and principal repayments on its debt instruments. It is the
risk that the Group will encounter difficulty in meeting its financial
obligations as they fall due.
The Group's policy is to ensure that it will always have sufficient headroom
in its loan facilities to allow it to meet its liabilities when they become
due. To achieve this aim, it seeks to maintain committed facilities to meet
the expected requirements. The Group also seeks to reduce liquidity risk by
fixing interest rates (and hence cash flows) on a portion of its long-term
borrowings. This is further explained in the 'market risk' section above.
Executive management receives rolling three-year projections of cash flow and
loan balances on a regular basis as part of the Group's forecasting processes.
At the balance sheet date, these projections indicated that the Group expected
to have sufficient liquid resources to meet its obligations under all
reasonably expected circumstances.
The Group's loan facilities and other borrowings are spread across a range of
banks and financial institutions so as to minimise any potential concentration
of risk. The liquidity risk of the Group is managed centrally by the finance
department.
Capital disclosures
The Group's capital comprises all components of equity (share capital, share
premium, other reserves and retained earnings).
The Group's objectives when maintaining capital are:
· to safeguard the entity's ability to continue as a going concern so
that it can continue to provide above average long-term returns for
shareholders; and
· to provide an above average annualised total return to
shareholders.
The Group sets the amount of capital it requires in proportion to risk. The
Group manages its capital structure and makes adjustments to it in light of
changes in economic conditions and the risk characteristics of the underlying
assets. In order to maintain or adjust the capital structure, the Group may
vary the amount of dividends paid to shareholders subject to the rules imposed
by its REIT status. It may also seek to redeem bonds, return capital to
shareholders, issue new shares or sell assets to reduce debt. Consistent with
others in its industry, the Group monitors capital on the basis of NAV gearing
and loan-to-value ratio. During 2023, the Group's strategy, which was
unchanged from 2022, was to maintain the NAV gearing below 80% in normal
circumstances. These two gearing ratios, as well as the net interest cover
ratio, are defined in the list of definitions at the end of this announcement
and are derived in note 26.
The Group is also required to ensure that it has sufficient property assets
which are not subject to fixed or floating charges or other encumbrances. Most
of the Group's debt is unsecured and, accordingly, there was £4.2bn (2022:
£4.6bn) of uncharged property as at 31 December 2023.
Directors' responsibilities
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have prepared the Group and the
Company financial statements in accordance with UK-adopted international
accounting standards.
Under Company law, Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs
of the Group and Company and of the profit or loss of the Group for that
period. In preparing the financial statements, the Directors are required to:
· select suitable accounting policies and then apply them
consistently;
· state whether applicable UK-adopted international accounting
standards have been followed, subject to any material departures disclosed and
explained in the financial statements;
· make judgements and accounting estimates that are reasonable and
prudent; and
· prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and Company will continue
in business.
The Directors are responsible for safeguarding the assets of the Group and
Company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are also responsible for keeping adequate accounting records
that are sufficient to show and explain the Group's and Company's transactions
and disclose with reasonable accuracy at any time the financial position of
the Group and Company and enable them to ensure that the financial statements
and the Directors' remuneration report comply with the Companies Act 2006.
The Directors are responsible for the maintenance and integrity of the
Company's website. Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from legislation in other
jurisdictions.
On behalf of the Board
Paul M. Williams
Damian M.A. Wisniewski
Chief Executive
Chief Financial Officer
27 February 2024
GROUP INCOME STATEMENT
2023 2022
Note £m £m
Gross property and other income 5 265.9 248.8
Net property and other income 5 190.5 194.6
Administrative expenses (39.1) (36.4)
Revaluation deficit 11 (581.5) (422.1)
Profit on disposal 6 1.2 25.6
Loss from operations (428.9) (238.3)
Finance income 7 0.9 0.3
Finance costs 7 (40.4) (39.7)
Movement in fair value of derivative financial instruments (2.1) 5.8
Financial derivative termination income/(costs) 8 1.8 (0.3)
Share of results of joint ventures 9 (7.2) (7.3)
Loss before tax (475.9) (279.5)
Tax charge 10 (0.5) (1.0)
Loss for the year (476.4) (280.5)
Basic loss per share 25 (424.25p) (249.84p)
Diluted loss per share 25 (424.25p) (249.84p)
GROUP STATEMENT OF COMPREHENSIVE INCOME
2023 2022
Note £m £m
Loss for the year (476.4) (280.5)
Actuarial losses on defined benefit pension scheme (0.7) (2.0)
Revaluation (deficit)/surplus of owner-occupied property 11 (3.9) 0.7
Deferred tax credit/(charge) on revaluation 21 1.0 (0.2)
Other comprehensive expense that will not be reclassified to profit or loss (3.6) (1.5)
Total comprehensive expense relating to the year (480.0) (282.0)
GROUP BALANCE SHEET
2023 2022
Note £m £m
Non-current assets
Investment property 11 4,551.4 5,002.0
Property, plant and equipment 12 49.9 54.3
Investments 14 35.8 43.9
Derivative financial instruments 19 2.9 5.0
Pension scheme surplus 2.0 1.2
Other receivables 15 201.0 188.1
4,843.0 5,294.5
Current assets
Trading property 11 60.0 39.4
Trading stock 13 8.9 2.3
Trade and other receivables 16 42.7 42.4
Corporation tax asset 0.4 -
Cash and cash equivalents 23 73.0 76.6
185.0 160.7
Non-current assets held for sale 17 - 54.2
Total assets 5,028.0 5,509.4
Current liabilities
Borrowings 19 102.9 19.7
Leasehold liabilities 19 0.4 0.5
Trade and other payables 18 148.0 148.1
Corporation tax liability - 0.9
Provisions 0.1 -
251.4 169.2
Non-current liabilities
Borrowings 19 1,233.2 1,229.4
Leasehold liabilities 19 34.2 34.5
Provisions 0.3 0.2
Deferred tax 21 0.1 0.6
1,267.8 1,264.7
Total liabilities 1,519.2 1,433.9
Total net assets 3,508.8 4,075.5
Equity
Share capital 5.6 5.6
Share premium 196.6 196.6
Other reserves 939.3 941.9
Retained earnings 2,367.3 2,931.4
Total equity 3,508.8 4,075.5
GROUP STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
Share Share Other Retained Total
capital premium reserves earnings equity
£m £m £m £m £m
At 1 January 2023 5.6 196.6 941.9 2,931.4 4,075.5
Loss for the year - - - (476.4) (476.4)
Other comprehensive expense - - (2.9) (0.7) (3.6)
Share-based payments - - 0.3 1.7 2.0
Dividends paid - - - (88.7) (88.7)
At 31 December 2023 5.6 196.6 939.3 2,367.3 3,508.8
Attributable to equity shareholders
Share Share Other Retained Total
capital premium reserves earnings equity
£m £m £m £m £m
At 1 January 2022 5.6 195.4 941.1 3,299.7 4,441.8
Loss for the year - - - (280.5) (280.5)
Other comprehensive income/(expense) - - 0.5 (2.0) (1.5)
Share-based payments - 1.2 0.3 1.2 2.7
Dividends paid - - - (87.0) (87.0)
At 31 December 2022 5.6 196.6 941.9 2,931.4 4,075.5
GROUP CASH FLOW STATEMENT
2023 2022
Restated(1)
Note £m £m
Operating activities
Cash generated from operations 20 135.3 148.7
Interest received 0.8 0.3
Interest and other finance costs paid (38.1) (37.1)
Distributions from joint ventures 0.3 -
Tax paid in respect of operating activities (1.3) (0.5)
Net cash from operating activities 97.0 111.4
Investing activities
Acquisition of properties (3.8) (137.6)
Capital expenditure(2) (151.5) (120.7)
Disposal of investment properties 65.4 206.7
Investment in joint ventures - (0.3)
Repayment of joint venture loans 0.6 -
Purchase of property, plant and equipment (0.7) (2.0)
VAT movement (8.0) 2.2
Net cash used in investing activities (98.0) (51.7)
Financing activities
Net movement in revolving bank loans 84.0 (10.1)
Proceeds from other loan 0.3 7.4
Financial derivative termination income/(costs) 8 1.8 (0.3)
Net proceeds of share issues - 1.2
Dividends paid 22 (88.7) (86.8)
Net cash used in financing activities (2.6) (88.6)
Decrease in cash and cash equivalents in the year (3.6) (28.9)
Cash and cash equivalents at the beginning of the year 23 76.6 105.5
Cash and cash equivalents at the end of the year 23 73.0 76.6
(1) Prior year figures have been restated for changes in accounting policies.
See note 2 for additional information.
(2) Finance costs of £6.5m (2022: £7.0m) are included in capital expenditure
(see note 7).
NOTES TO THE FINANCIAL STATEMENTS
1. Basis of preparation
The financial statements have been prepared in accordance with UK-adopted
International Accounting Standards, (the "applicable framework"), and have
been prepared in accordance with the provisions of the Companies Act 2006 (the
"applicable legal requirements"). The financial statements have been
prepared under the historical cost convention as modified by the revaluation
of investment properties, the revaluation of property, plant and equipment,
assets held for sale, pension scheme, and financial assets and liabilities
held at fair value.
As with most other UK property companies and real estate investment trusts
('REITs'), the Group presents many of its financial measures in accordance
with the guidance criteria issued by the European Public Real Estate
Association ('EPRA'). These measures, which provide consistency across the
sector, are all derived from the IFRS figures in note 25.
Going concern
The Board continues to adopt the going concern basis in preparing these
consolidated financial statements. In considering this requirement, the
Directors have taken into account the following:
· The Group's latest rolling forecast for the next two years, in
particular the cash flows, borrowings and undrawn facilities, including the
severe but plausible downside case.
· The headroom under the Group's financial covenants.
· The risks included on the Group's risk register that could impact
on the Group's liquidity and solvency over the next 12 months.
· The risks on the Group's risk register that could be a threat to
the Group's business model and capital adequacy.
The Directors have considered the relatively long-term and predictable nature
of the income receivable under the tenant leases, the Group's year-end
loan-to-value ratio for 2023 of 27.9%, the interest cover ratio of 414%, the
£480m total of undrawn facilities and cash and the fact that the average
maturity of borrowings was 5.0 years at 31 December 2023. The impact of the
current economic situation, the increases to interest rates and cost inflation
on the business and its occupiers have been considered. Office occupation
rates are also gradually increasing. The likely impact of climate change has
been incorporated into the Group's forecasts which have also taken account of
a programme of EPC upgrades across the portfolio as space becomes available.
In total, at 31 December 2023 the estimated EPC upgrade costs is £95m. Based
on the Group's forecasts, rental income would need to decline by 65% and
property values would need to fall by 53% before breaching its financial
covenants.
The £83m fixed rate loan, which matures in October 2024, is now a current
liability and therefore the Group is in a net current liabilities position.
However, as noted above, the Group has access to £480m of available undrawn
facilities and cash to meet all current liabilities as they fall due.
The financial position of the Group, its cash flows, liquidity position and
borrowing facilities are described in the financial review. In addition, the
Group's risks and risk management processes can be found within the risk
management and internal controls.
Having due regard to these matters and after making appropriate enquiries, the
Directors have reasonable expectation that the Group has adequate resources to
continue in operational existence for a period of at least 12 months from the
date of signing of these consolidated financial statements and, therefore, the
Board continues to adopt the going concern basis in their preparation.
2. Changes in accounting policies
The accounting policies used by the Group in these condensed financial
statements are consistent with those applied in the Group's financial
statements for the year to 31 December 2022, as amended to reflect the
adoption of new standards, amendments and interpretations which became
effective in the year as shown below.
New standards adopted during the year
The following standards, amendments and interpretations were effective for the
first time for the Group's current accounting period and had no material
impact on the financial statements.
IAS 1 and IFRS Practice Statement 2 (amended) - Disclosure of Accounting
Policies;
IAS 8 (amended) - Definition of Accounting Estimate;
IAS 12 (amended) - Income Taxes: Deferred Tax Related to Assets and
Liabilities Arising from a Single Transaction;
IAS 12 (amended) - International Tax Reform - Pillar Two Model Rules;
IFRS 17 (amended) - Insurance Contracts;
IFRS 17 (amended) and IFRS 9 - Comparative Information.
Standards in issue but not yet effective
The following standards, amendments and interpretations were in issue at the
date of approval of these financial statements but were not yet effective for
the current accounting period and have not been adopted early. Based on the
Group's current circumstances, the Directors do not anticipate that their
adoption in future periods will have a material impact on the financial
statements of the Group.
IAS 1 (amended) - Classification of liabilities as current or non-current,
Non-current Liabilities with Covenants;
IFRS 10 and IAS 28 (amended) - Sale or Contribution of Assets between an
investor and its Associate or Joint Venture;
IFRS 16 (amended) - Lease Liability in a Sale and Leaseback;
IAS 7 and IFRS 7 (amended) - Supplier Finance Arrangements;
IAS 21 (amended) - Lack of Exchangeability.
Restatement - Presentation of the Statement of Cash Flows - Change from the
direct method to the indirect method
The Group has made a voluntary change to its accounting policy in relation to
the presentation of the cash flow statement and, as a result, the operating
cash flows will now be presented using the 'indirect' method as set out in IAS
7 Statement of Cash Flows. The alternative presentation allowed under IAS 7
known as the 'direct' method has been used previously.
The indirect method contains a number of adjustments including non-cash items
included within the income statement and also sets out the main working
capital movements. As a result, it provides a clearer understanding of the
linkages between the profit/loss from operations and the cash flow from
operations. It aligns more closely with practice within the real estate
industry and provides more relevant information to users of the accounts.
The cash flow statement for the year ended 31 December 2022 has been restated
as shown in the table below.
There is no impact upon the main categories of cash within the cash flow
statement as a result of this change in presentation.
2022
2022 Restated
£m £m
Direct method Indirect method
Operating activities Operating activities
Rents received 193.7 Cash generated from operations (note 20) 148.7
Surrender premiums and other property income 0.7 Interest received 0.3
Property expenses (22.5) Interest and other finance costs paid (37.1)
Costs recoverable from tenants (1.9) Tax paid in respect of operating activities (0.5)
Service charge balance inflows 64.5
Service charge balance outflows (61.5) Net cash from operating activities 111.4
Tenant deposit inflows 13.9
Tenant deposit outflows (4.2)
Cash paid to and on behalf of employees (25.1) Note 20. Cash generated from operations
Other administrative expenses (8.0) Loss from operations (238.3)
Interest received 0.3
Interest paid (33.7) Adjustment for non-cash items:
Other finance costs (3.4) Revaluation deficit 422.1
Other income 4.2 Depreciation 1.0
Disposal of trading properties 3.0 Lease incentive/cost spreading (21.7)
Expenditure on trading properties/stock (9.7) Share based payments 2.1
Tax paid in respect of operating activities (0.5) Ground rent adjustment (0.6)
VAT movement 1.6
Adjustment for other items:
Net cash from operating activities 111.4 Profit on disposal (25.6)
Changes in working capital:
Increase in receivables balance (0.5)
Increase in payables balance 19.3
Increase in trading property and trading stock (9.1)
Cash generated from operations 148.7
3. Significant judgments, key assumptions and estimates
The preparation of financial statements in accordance with the applicable
framework requires the use of certain significant accounting estimates and
judgements. It also requires management to exercise judgement in the process
of applying the Group's accounting policies. Not all of these accounting
policies require management to make difficult, subjective or complex
judgements or estimates. Estimates and judgements are continually evaluated
and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under the
circumstances. Although these estimates are based on management's best
knowledge of the amount, event or actions, actual results may differ from
those estimates. The following is intended to provide an understanding of
the policies that management consider critical because of the level of
complexity, judgement or estimation involved in their application and their
impact on these condensed financial statements.
Key sources of estimation uncertainty
Property portfolio valuation
The Group uses the valuation carried out by external valuers as the fair value
of its property portfolio. The valuation considers a range of assumptions
including future rental income, investment yields, anticipated outgoings and
maintenance costs, future development expenditure and appropriate discount
rates. The external valuers also make reference to market evidence of
transaction prices for similar properties and take into account the impact of
climate change and related Environmental, Social and Governance
considerations. Where reasonable and measurable, the effects and consequences
of climate change are reflected in these financial statements and valuations.
Knight Frank LLP were appointed to value the whole London-based portfolio as
at 31 December 2022. More information is provided in note 11.
Impairment testing of trade receivables and lease incentive receivables
Trade receivables and accrued rental income recognised in advance of receipt
are subject to impairment testing under IFRS 9 and IAS 36, respectively. This
accrued rental income arises due to the spreading of rent-free and reduced
rent periods, capital contributions and contracted rent uplifts in accordance
with IFRS 16 Leases. Impairment testing remains a key area of estimation for
the Group.
Impairment calculations have been carried out and the result is a £0.4m
reduction in the provision to £4.6m. Taking account of receivable balances
written off of £2.4m, the total charge to the income statement for 2023 was
£2.0m, compared to the £1.0m credit recognised in 2022. In arriving at these
estimates, the Group considered the tenants at higher risk, particularly in
the retail or hospitality sectors, those in administration or CVA, the top 50
tenants by size and also considered the remaining balances classified by
sector.
The impairment provisions are included within 'Other receivables
(non-current)' (see note 15) and 'Trade and other receivables' (see note 16)
as shown below:
Other Trade Total
receivables and other receivables
(non-current) (current)
£m £m £m
Lease incentive receivables before impairment 176.8 20.8 197.6
Impairment of lease incentive receivables (2.2) (0.5) (2.7)
Write-off (0.7) (0.1) (0.8)
Net lease incentive included within accrued income 173.9 20.2 194.1
Trade receivables before impairment - 13.9 13.9
Impairment of trade receivables - (1.0) (1.0)
Service charge provision - (0.9) (0.9)
Write-off - (1.6) (1.6)
Net trade receivables - 10.4 10.4
The assessment considered the risk of tenant failures or defaults using
information on tenants' payment history, deposits held, the latest known
financial position together with forecast information where available, ongoing
dialogue with tenants as well as other information such as the sector in which
they operate. Following this, tenants were classified as either low, medium or
high risk and the table below provides further information. The impairment
against lease incentive receivable balances was £2.7m and against trade
receivable balances was £1.9m.
Lease incentive Lease incentive Trade receivables
receivables receivables (current)
(non-current) (current)
£m £m £m
Balance before impairment
Low risk 168.7 17.8 8.8
Medium risk 2.8 1.9 1.8
High risk 4.6 1.0 1.7
176.1 20.7 12.3
Impairment
Low risk - - -
Medium risk (0.1) (0.1) (0.2)
High risk (2.1) (0.4) (1.7)
(2.2) (0.5) (1.9)
173.9 20.2 10.4
A 10% increase/decrease to the absolute probability rates of tenant default
used in the impairment calculations in the year would increase/decrease the
Group's loss for the year by £1.3m and £0.9m, respectively. This sensitivity
has been performed on tenants deemed to be medium and high risk.
Significant judgements
Compliance with the real estate investment trust (REIT) taxation regime
As a REIT, the Group benefits from tax advantages. Income and chargeable gains
on the qualifying property rental business are exempt from corporation tax.
Income that does not qualify as property income within the REIT rules is
subject to corporation tax in the normal way. There are a number of tests that
are applied annually, and in relation to forecasts, to ensure the Group
remains well within the limits allowed within those tests.
The Group met all the criteria in 2023 in each case, thereby ensuring its REIT
status is maintained. The Directors intend that the Group should continue as a
REIT for the foreseeable future.
In July 2023, it was confirmed that the Group has maintained its low risk
rating following a detailed review carried out by HMRC, continued regular
dialogue and a focus on transparency and full disclosure.
4. Segmental information
IFRS 8 Operating Segments requires operating segments to be identified on the
basis of internal financial reports about components of the Group that are
regularly reviewed by the chief operating decision makers (which in the
Group's case are the four executive Directors assisted by the other eleven
members of the Executive Committee) in order to allocate resources to the
segments and to assess their performance.
The internal financial reports received by the Group's Executive Committee
contain financial information at a Group level as a whole and there are no
reconciling items between the results contained in these reports and the
amounts reported in the financial statements. These internal financial reports
include IFRS figures but also report non-IFRS figures for the EPRA earnings
and net asset value. Reconciliations of each of these figures to their
statutory equivalents are detailed in note 25. Additionally, information is
provided to the Executive Committee showing gross property income and property
valuation by individual property. Therefore, for the purposes of IFRS 8,
each individual property is considered to be a separate operating segment in
that its performance is monitored individually.
The Group's property portfolio includes investment property, owner-occupied
property and trading property and comprised 96% office buildings(1) by value
at 31 December 2023 (2022: 97%). The Directors consider that these
individual properties have similar economic characteristics and therefore have
been aggregated into a single reportable segment. The remaining 4% (2022: 3%)
represented a mixture of retail, residential and light industrial properties,
as well as land, each of which is de minimis in its own right and below the
quantitative threshold in aggregate. Therefore, in the view of the
Directors, there is one reportable segment under the provisions of IFRS 8.
All of the Group's properties are based in the UK. No geographical grouping is
contained in any of the internal financial reports provided to the Group's
Executive Committee and, therefore, no geographical segmental analysis is
required by IFRS 8. However, geographical analysis is included in the tables
below to provide users with additional information regarding the areas
contained in the strategic report. The majority of the Group's properties
are located in London (West End central, West End borders/other and City
borders), with the remainder in Scotland (Provincial).
(1) Some office buildings have an ancillary element such as retail or
residential.
Gross property income
2023 2022
Office Office
buildings Other Total buildings Other Total
£m £m £m £m £m £m
West End central 123.7 1.7 125.4 118.3 1.5 119.8
West End borders/other 17.3 - 17.3 16.3 - 16.3
City borders 65.2 0.5 65.7 67.2 0.5 67.7
Provincial - 4.5 4.5 - 4.6 4.6
Gross property income
(excl. joint venture) 206.2 6.7 212.9 201.8 6.6 208.4
Share of joint venture gross
property income 2.2 - 2.2 2.1 - 2.1
208.4 6.7 215.1 203.9 6.6 210.5
A reconciliation of gross property income to gross property and other income
is given in note 5.
Property portfolio
2023 2022
Office Office
buildings Other Total buildings Other Total
£m £m £m £m £m £m
Carrying value
West End central 2,945.4 99.2 3,044.6 3,123.9 81.2 3,205.1
West End borders/other 302.3 - 302.3 356.9 - 356.9
City borders 1,228.8 6.7 1,235.5 1,494.5 10.4 1,504.9
Provincial - 75.1 75.1 - 78.7 78.7
Group (excl. joint venture) 4,476.5 181.0 4,657.5 4,975.3 170.3 5,145.6
Share of joint venture 34.0 - 34.0 42.6 - 42.6
4,510.5 181.0 4,691.5 5,017.9 170.3 5,188.2
Fair value
West End central 3,068.1 109.5 3,177.6 3,234.9 86.3 3,321.2
West End borders/other 318.4 - 318.4 376.6 - 376.6
City borders 1,266.3 6.7 1,273.0 1,534.2 10.4 1,544.6
Provincial - 75.7 75.7 - 79.4 79.4
Group (excl. joint venture) 4,652.8 191.9 4,844.7 5,145.7 176.1 5,321.8
Share of joint venture 33.8 - 33.8 42.4 - 42.4
4,686.6 191.9 4,878.5 5,188.1 176.1 5,364.2
A reconciliation between the fair value and carrying value of the portfolio is
set out in note 11.
5. Property and other income
2023 2022
£m £m
Gross rental income 212.8 207.0
Surrender premiums received 0.1 1.1
Other property income - 0.3
Gross property income 212.9 208.4
Trading property sales proceeds(1) - 1.6
Service charge income(1) 48.5 34.6
Other income(1) 4.5 4.2
Gross property and other income 265.9 248.8
Gross rental income 212.8 207.0
Movement in impairment of receivables (2.0) 1.0
Movement in impairment of prepayments (0.6) -
Service charge income(1) 48.5 34.6
Service charge expenses (55.1) (39.7)
(6.6) (5.1)
Property costs (17.4) (14.4)
Net rental income 186.2 188.5
Trading property sales proceeds(1) - 1.6
Trading property cost of sales - (1.4)
Profit on trading property disposals - 0.2
Other property income - 0.3
Other income(1) 4.5 4.2
Surrender premiums received 0.1 1.1
Dilapidation receipts 0.1 0.5
Write-down of trading property (0.4) (0.2)
Net property and other income 190.5 194.6
(1) In line with IFRS 15 Revenue from Contracts with Customers, the Group
recognised £53.0m (2022: £40.4m) of other income, trading property sales
proceeds and service charge income within gross property and other income.
Gross rental income includes £5.9m (2022: £20.3m) relating to rents
recognised in advance of cash receipts.
Other income relates to fees and commissions earned from tenants in relation
to the management of the Group's properties and was recognised in the Group
income statement in accordance with the delivery of services.
6. Profit on disposal
2023 2022
£m £m
Investment property
Gross disposal proceeds 66.3 209.6
Costs of disposal (0.7) (3.2)
Net disposal proceeds 65.6 206.4
Carrying value (64.0) (180.8)
Adjustment for lease costs and rents recognised in advance (0.4) -
Profit on disposal 1.2 25.6
Included within gross disposal proceeds for 2023 is £54.0m relating to the
disposal of the Group's freehold interest in 19 Charterhouse Street EC1 in
January 2023, £6.8m relating to the disposal of the Group's freehold interest
in 12-16 Fitzroy Street W1 in April 2023, and £2.8m relating to the disposal
of the Group's leasehold interest in 216-218 Blackfriars Road SE1 in May 2023.
7. Finance income and finance costs
2023 2022
£m £m
Finance income
Net interest received on defined benefit pension scheme asset (0.1) -
Bank interest receivable (0.8) (0.2)
Other - (0.1)
Finance income (0.9) (0.3)
Finance costs
Bank loans 1.1 1.1
Non-utilisation fees 2.2 2.1
Unsecured convertible bonds 3.9 3.9
Unsecured green bonds 6.7 6.7
Secured bonds 11.4 11.4
Unsecured private placement notes 15.6 15.6
Secured loan 3.3 3.3
Amortisation of issue and arrangement costs 2.6 2.6
Amortisation of the fair value of the secured bonds (1.5) (1.4)
Obligations under headleases 1.3 1.1
Other 0.3 0.3
Gross finance costs 46.9 46.7
Less: interest capitalised (6.5) (7.0)
Finance costs 40.4 39.7
Finance costs of £6.5m (2022: £7.0m) have been capitalised on development
projects, in accordance with IAS 23 Borrowing Costs, using the Group's average
cost of borrowings during each quarter. Total finance costs paid to 31
December 2023 were £44.6m (2022: £44.1m) of which £6.5m (2022: £7.0m) out
of a total of £151.5m (2022: £120.7m) was included in capital expenditure on
the property portfolio in the Group cash flow statement under investing
activities.
8. Financial derivative termination income/(costs)
The Group benefitted from net receipts of £1.8m in the year to 31 December
2023 (2022: incurred costs of £0.3m) deferring or terminating interest rate
swaps. Included in this is £1.8m (2022: £0.3m) of receipts and £nil (2022:
£0.6m) of costs.
9. Share of results of joint ventures
2023 2022
£m £m
Net property income 2.2 2.1
Administrative expenses (0.2) (0.1)
Revaluation deficit (9.2) (9.3)
(7.2) (7.3)
The share of results of joint ventures for the year ended 31 December 2023
includes the Group's 50% share in the Derwent Lazari Baker Street Limited
Partnership. See note 14 for further details of the Group's joint ventures.
10. Tax charge
2023 2022
£m £m
Corporation tax
UK corporation tax and income tax in respect of results for the year - 0.5
Other adjustments in respect of prior years' tax - 0.4
Corporation tax charge - 0.9
Deferred tax
Origination and reversal of temporary differences 0.5 0.1
Deferred tax charge 0.5 0.1
Tax charge 0.5 1.0
In addition to the tax charge of £0.5m (2022: charge of £1.0m) that passed
through the Group income statement, a deferred tax credit of £1.0m (2022:
charge of £0.2m) relating to the revaluation of the owner-occupied property
at 25 Savile Row W1 was recognised in the Group statement of comprehensive
income.
The effective rate of tax for 2023 is lower (2022: lower) than the standard
rate of corporation tax in the UK. The differences are explained below:
2023 2022
£m £m
Loss before tax (475.9) (279.5)
Expected tax credit based on the standard rate of
corporation tax in the UK of 23.50% (2022: 19.00%)(1) (111.8) (53.1)
Difference between tax and accounting profit on disposals 6.1 (3.1)
REIT exempt income (20.8) (16.0)
Revaluation deficit attributable to REIT properties 131.7 78.6
Expenses and fair value adjustments not allowable for tax purposes 2.1 0.4
Capital allowances (7.6) (6.5)
Other differences 0.8 0.3
Tax charge in respect of loss before tax 0.5 0.6
Adjustments in respect of prior years' tax - 0.4
Tax charge 0.5 1.0
(1) Changes to the UK corporation tax rates were substantively enacted as part
of the Finance Bill 2021 (on 24 May 2021) and include increasing the main rate
to 25% effective on or after 1 April 2023. Deferred taxes at the balance sheet
date have been measured using the enacted tax rate and this is reflected in
these financial statements.
11. Property portfolio
Total Owner- Assets Total
investment occupied held for Trading property
Freehold Leasehold property property sale property portfolio
£m £m £m £m £m £m £m
Carrying value
At 1 January 2023 3,700.5 1,301.5 5,002.0 50.0 54.2 39.4 5,145.6
Acquisitions 3.8 - 3.8 - - - 3.8
Capital expenditure 59.8 72.5 132.3 - - 20.0 152.3
Interest capitalisation 1.1 4.2 5.3 - - 1.0 6.3
Additions 64.7 76.7 141.4 - - 21.0 162.4
Disposals (7.3) (2.5) (9.8) - (54.2) - (64.0)
Revaluation (477.4) (104.1) (581.5) (3.9) - - (585.4)
Write-down of trading property - - - - - (0.4) (0.4)
Movement in grossing up of
headlease liabilities - (0.7) (0.7) - - - (0.7)
At 31 December 2023 3,280.5 1,270.9 4,551.4 46.1 - 60.0 4,657.5
At 1 January 2022 4,140.4 1,220.8 5,361.2 49.3 102.8 32.2 5,545.5
Acquisitions 0.1 132.9 133.0 - - - 133.0
Capital expenditure 47.7 58.8 106.5 - - 8.3 114.8
Interest capitalisation 1.3 3.9 5.2 - 1.4 0.4 7.0
Additions 49.1 195.6 244.7 - 1.4 8.7 254.8
Disposals (46.6) (30.0) (76.6) - (104.2) (1.3) (182.1)
Transfers (54.2) - (54.2) - 54.2 - -
Revaluation (388.2) (33.9) (422.1) 0.7 - - (421.4)
Write-down of trading property - - - - - (0.2) (0.2)
Movement in grossing up of
headlease liabilities - (51.0) (51.0) - - - (51.0)
At 31 December 2022 3,700.5 1,301.5 5,002.0 50.0 54.2 39.4 5,145.6
Total Owner- Assets Total
investment occupied held for Trading property
Freehold Leasehold property property sale property portfolio
£m £m £m £m £m £m £m
Adjustments from fair value to carrying value
At 31 December 2023
Fair value 3,450.0 1,278.8 4,728.8 46.1 - 69.8 4,844.7
Revaluation of trading property - - - - - (9.8) (9.8)
Lease incentives and costs
included in receivables (169.5) (41.5) (211.0) - - - (211.0)
Grossing up of headlease liabilities - 33.6 33.6 - - - 33.6
Carrying value 3,280.5 1,270.9 4,551.4 46.1 - 60.0 4,657.5
At 31 December 2022
Fair value 3,865.8 1,307.1 5,172.9 50.0 54.7 44.2 5,321.8
Selling costs relating to assets
held for sale - - - - (0.5) - (0.5)
Revaluation of trading property - - - - - (4.8) (4.8)
Lease incentives and costs
included in receivables (165.3) (39.8) (205.1) - - - (205.1)
Grossing up of headlease liabilities - 34.2 34.2 - - - 34.2
Carrying value 3,700.5 1,301.5 5,002.0 50.0 54.2 39.4 5,145.6
Reconciliation of fair value
2023 2022
£m £m
Portfolio including the Group's share of joint ventures 4,878.5 5,364.2
Less: joint ventures (33.8) (42.4)
IFRS property portfolio 4,844.7 5,321.8
The property portfolio is subject to semi-annual external valuations and was
revalued at 31 December 2023 by external valuers on the basis of fair value in
accordance with The RICS Valuation - Professional Standards, which takes
account of the properties' highest and best use. When considering the highest
and best use of a property, the external valuers will consider its existing
and potential uses which are physically, legally and financially viable.
Where the highest and best use differs from the existing use, the external
valuers will consider the costs and the likelihood of achieving and
implementing this change in arriving at the property valuation. There were no
such instances in the year.
The valuation reports produced by the external valuers are based on
information provided by the Group such as current rents, terms and conditions
of lease agreements, service charges and capital expenditure. This information
is derived from the Group's financial and property management systems and is
subject to the Group's overall control environment. In addition, the valuation
reports are based on assumptions and valuation models used by the external
valuers. The assumptions are typically market related, such as yields and
discount rates, and are based on their professional judgement and market
observation and take into account the impact of climate change and related
Environmental, Social and Governance considerations. Each property is
considered a separate asset class based on the unique nature, characteristics
and risks of the property.
The external valuations for the London-based portfolio at December 2023 were
carried out by Knight Frank LLP.
Knight Frank valued properties at £4,807.9m (2022: £5,285.6m) and other
valuers at £36.8m (2022: £36.2m), giving a combined value of £4,844.7m
(2022: £5,321.8m). Of the properties revalued, £46.1m (2022: £50.0m)
relating to owner-occupied property was included within property, plant and
equipment and £69.8m (2022: £44.2m) was in relation to trading property.
The total fees, including the fee for this assignment, earned by Knight Frank
(or other companies forming part of the same group of companies within the UK)
from the Group is less than 5.0% of their total UK revenues.
Net zero carbon and EPC compliance
The Group published its pathway to net zero carbon in July 2020 and has set
2030 as its target date to achieve this. £102.4m (year to 31 December 2022:
£99.9m) of eligible 'green' capital expenditure, in accordance with the
Group's Green Finance Framework, was incurred in the year to 31 December 2023
on the major developments at 80 Charlotte Street W1, Soho Place W1, The
Featherstone Building EC1, 25 Baker Street W1 and Network W1. In addition, the
Group continues to hold carbon credits to support certain externally validated
green projects to offset embodied carbon.
To quantify the impact of climate change on the valuation, an independent
third-party assessment was carried out in 2021. Following a review of the
latest scope changes in building regulation, subsequent inflation, disposals,
and work carried out to date, the estimated amount was £95m at the end of
2023. Of this amount, a specific deduction of £48m was included in the 31
December 2023 external valuation. In addition, further amounts have been
allowed for in the expected costs of future refurbishment projects.
Reconciliation of revaluation deficit
2023 2022
£m £m
Total revaluation deficit (583.3) (401.8)
Less:
Share of joint ventures 9.3 9.2
Lease incentives and costs (5.8) (23.2)
Assets held for sale selling costs - (2.5)
Trading property revaluation adjustment (5.2) (3.3)
Other (0.8) -
IFRS revaluation deficit (585.8) (421.6)
Reported in the:
Revaluation deficit (581.5) (422.1)
Write-down of trading property (0.4) (0.2)
Group income statement (581.9) (422.3)
Group statement of comprehensive income (3.9) 0.7
(585.8) (421.6)
Historical cost
2023 2022
£m £m
Investment property 3,602.6 3,469.0
Owner-occupied property 19.6 19.6
Assets held for sale - 42.5
Trading property 81.8 60.8
Total property portfolio 3,704.0 3,591.9
Historical cost for 2022 has been re-presented to reclassify £9.0m from
assets held for sale to trading property. In addition, £9.3m has been
reclassified from investment property to trading property. This
re-presentation has no impact on the total 2022 historical cost amount
previously disclosed.
Sensitivity of measurement to variations in the significant unobservable
inputs
The significant unobservable inputs used in the fair value measurement
categorised within Level 3 of the fair value hierarchy of the Group's property
portfolio, together with the impact of significant movements in these inputs
on the fair value measurement, are shown below:
Impact on fair value measurement Impact on fair value measurement
Unobservable input of significant increase in input of significant decrease in input
Gross ERV Increase Decrease
Net initial yield Decrease Increase
Reversionary yield Decrease Increase
True equivalent yield Decrease Increase
There are inter-relationships between these inputs as they are partially
determined by market conditions. An increase in the reversionary yield may
accompany an increase in gross ERV and would mitigate its impact on the fair
value measurement.
A sensitivity analysis has been performed to ascertain the impact of a 25
basis point shift in true equivalent yield and a £2.50 per sq ft shift in ERV
on the property valuations. The Group believes this captures the range of
variations in these key valuation assumptions. The results are shown in the
tables below:
West End West End City Provincial
At 31 December 2023 central(1) borders/other borders commercial Total
True equivalent yield
+25bp (4.7%) (3.7%) (3.9%) (2.3%) (4.3%)
-25bp 5.2% 4.0% 4.3% 2.4% 4.7%
ERV
+£2.50 psf 3.8% 4.8% 4.6% 18.8% 4.3%
-£2.50 psf (3.8%) (4.8%) (4.6%) (18.8%) (4.3%)
At 31 December 2022
True equivalent yield
+25bp (5.2%) (4.4%) (4.7%) (2.6%) (4.9%)
-25bp 5.7% 4.9% 5.2% 2.8% 5.4%
ERV
+£2.50 psf 3.9% 4.8% 4.7% 19.3% 4.4%
-£2.50 psf (3.9%) (4.8%) (4.7%) (19.3%) (4.4%)
(1) Includes the Group's share of joint ventures.
12. Property, plant and equipment
Owner-
occupied
property Artwork Other Total
£m £m £m £m
At 1 January 2023 50.0 0.8 3.5 54.3
Additions - - 0.6 0.6
Depreciation - - (1.1) (1.1)
Revaluation (3.9) - - (3.9)
At 31 December 2023 46.1 0.8 3.0 49.9
At 1 January 2022 49.3 0.8 3.9 54.0
Additions - - 0.6 0.6
Depreciation - - (1.0) (1.0)
Revaluation 0.7 - - 0.7
At 31 December 2022 50.0 0.8 3.5 54.3
Net book value
Cost or valuation 46.1 0.8 8.4 55.3
Accumulated depreciation - - (5.4) (5.4)
At 31 December 2023 46.1 0.8 3.0 49.9
Net book value
Cost or valuation 50.0 0.8 7.8 58.6
Accumulated depreciation - - (4.3) (4.3)
At 31 December 2022 50.0 0.8 3.5 54.3
The artwork is periodically valued by Bonhams on the basis of fair value using
their extensive market knowledge. The latest valuation was carried out in
December 2021. In accordance with IFRS 13 Fair Value Measurement, the artwork
is deemed to be classified as Level 3.
The historical cost of the artwork in the Group at 31 December 2023 was £0.9m
(2022: £0.9m). See note 11 for the historical cost of owner-occupied
property.
13. Trading stock
2023 2022
£m £m
Trading stock 8.9 2.3
Trading stock relates to capitalised development expenditure incurred which is
due to be transferred under development agreements to a third party upon
completion. This has been included in trading stock as the Group does not have
an ownership interest in the property.
14. Investments
The Group has a 50% interest in four joint venture vehicles, Derwent Lazari
Baker Street Limited Partnership, Dorrington Derwent Holdings Limited,
Primister Limited and Prescot Street Limited Partnership.
2023 2022
£m £m
At 1 January 43.9 51.1
Additions - 0.1
Revaluation deficit (see note 9) (9.2) (9.3)
Other profit from operations (see note 9) 2.0 2.0
Repayment of joint venture loans (0.6) -
Distributions received (0.3) -
At 31 December 35.8 43.9
The Group's share of its investments in joint ventures is represented by the
following amounts in the underlying joint venture entities.
2023 2022
Joint ventures Group share Joint ventures Group share
£m £m £m £m
At 1 January 85.0 42.5 100.4 50.2
Additions 1.3 0.6 3.2 1.6
Revaluation (18.4) (9.2) (18.6) (9.3)
Non-current assets(1) 67.9 33.9 85.0 42.5
Current assets 7.2 3.6 5.0 2.5
Current liabilities (2.8) (1.4) (2.7) (1.4)
Non-current liabilities (121.0) (60.5) (121.0) (60.5)
Net liabilities (48.7) (24.4) (33.7) (16.9)
Loans provided to joint ventures 60.2 60.8
Total investment in joint ventures 35.8 43.9
(1) Non-current assets for the year ended 31 December 2022 has been
re-presented to provide more detail and has no impact on the total amount
disclosed.
15. Other receivables (non-current)
2023 2022
£m £m
Prepayments and accrued income
Rents recognised in advance 173.9 165.2
Initial direct letting costs 14.5 13.8
Prepayments 12.6 9.1
201.0 188.1
Prepayments and accrued income include £173.9m (2022: £165.2m) after
impairments relating to rents recognised in advance as a result of spreading
tenant lease incentives over the expected terms of their respective leases.
This includes rent free and reduced rent periods, capital contributions in
lieu of rent free periods and contracted rent uplifts. In addition, £14.5m
(2022: £13.8m) relates to the spreading effect of the initial direct costs of
letting over the same term. Together with £22.6m (2022: £26.1m), which was
included as accrued income within trade and other receivables (see note 16),
these amounts totalled £211.0m at 31 December 2023 (2022: £205.1m).
Prepayments represent £12.6m (2022: £9.1m) of costs incurred in relation to
Old Street Quarter EC1. This was after a £0.6m (2022: £nil) impairment in
accordance with IAS 36 Impairment of Assets. In May 2022, the Group entered
into a conditional contract to acquire the freehold of Old Street Quarter
island site. The site is being sold by Moorfields Eye Hospital NHS Foundation
Trust and UCL, together the Oriel joint initiative ("Oriel"). Completion is
subject to Oriel's receipt of final Treasury approval (received in February
2023), delivery by Oriel of a new hospital at St Pancras and subsequent vacant
possession of the site, which is anticipated in 2027.
The total movement in tenant lease incentives is shown below:
2023 2022
£m £m
At 1 January 188.8 167.0
Amounts taken to income statement 5.9 20.4
Capital incentives granted - 0.6
Lease incentive reversal 0.5 1.0
Disposal of investment properties (0.3) -
Write off to bad debt (0.8) (0.2)
194.1 188.8
Amounts included in trade and other receivables (see note 16) (20.2) (23.6)
At 31 December 173.9 165.2
16. Trade and other receivables
2023 2022
£m £m
Trade receivables 10.4 4.9
Other receivables 2.0 5.8
Prepayments 6.9 3.8
Accrued income(1)
Rents recognised in advance 20.2 23.6
Initial direct letting costs 2.4 2.5
Other 0.8 1.8
42.7 42.4
Trade receivables are split as follows:
2023 2022
£m £m
less than three months due 10.3 4.9
between three and six months due 0.1 -
10.4 4.9
(1) Accrued income for the year ended 31 December 2022 has been re-presented
to provide more detail and has no impact on the total amount disclosed.
Trade receivables are stated net of impairment.
In response to the Group's climate change agenda, costs of £1.1m (2022:
£0.7m) were incurred in relation to a c.100 acre, 18.4MW solar park on its
Scottish land and have been included within prepayments. Resolution to grant
planning consent for this project was received in 2022.
The Group has £4.6m of provision for bad debts as shown below. £1.9m is
included in trade receivables, £0.5m in accrued income and £2.2m in
prepayments and accrued income within other receivables (non-current) (note
15).
Provision for bad debts
2023 2022
£m £m
At 1 January 5.0 8.3
Trade receivables provision 0.5 (0.8)
Lease incentive provision - (0.2)
Service charge provision 0.7 (0.2)
Released (1.6) (2.1)
At 31 December 4.6 5.0
The provision for bad debts are split as follows:
2023 2022
£m £m
less than three months due 0.7 2.2
between three and six months due 0.3 0.1
between six and twelve months due 0.8 0.3
over twelve months due 2.8 2.4
4.6 5.0
17. Non-current assets held for sale
2023 2022
£m £m
Transferred from investment properties (see note 11) - 54.2
- 54.2
18. Trade and other payables
2023 2022
£m £m
Trade payables 0.7 0.4
Other payables(1) 3.6 2.2
Other taxes 3.3 11.8
Accruals 30.5 35.8
Deferred income 50.8 48.2
Tenant rent deposits 27.0 27.3
Service charge balances(1) 32.1 22.4
148.0 148.1
(1) Other payables for the year ended 31 December 2022 has been re-presented
to disaggregate service charge balances and has no impact on the total amount
disclosed.
Deferred income primarily relates to rents received in advance.
19. Net debt and derivative financial instruments
2023 2022
Book Fair Book Fair
value value value value
£m £m £m £m
Current liabilities
Other loans 20.0 20.0 19.7 19.7
3.99% secured loan 2024 82.9 81.8 - -
102.9 101.8 19.7 19.7
Non-current liabilities
1.5% unsecured convertible bonds 2025 172.1 164.7 170.1 157.2
6.5% secured bonds 2026 179.6 178.1 181.0 179.7
1.875% unsecured green bonds 2031 346.8 279.0 346.4 247.3
Unsecured private placement notes 2026 - 2034 453.5 399.0 453.3 410.4
3.99% secured loan 2024 - - 82.7 80.6
Unsecured bank loans 81.2 84.0 (4.1) -
Borrowings 1,336.1 1,206.6 1,249.1 1,094.9
Derivative financial instruments expiring in
greater than one year (2.9) (2.9) (5.0) (5.0)
Total borrowings and derivative financial instruments 1,333.2 1,203.7 1,244.1 1,089.9
Reconciliation to net debt:
Borrowings and derivative financial instruments 1,333.2 1,244.1
Adjustments for:
Leasehold liabilities 34.6 35.0
Derivative financial instruments 2.9 5.0
Cash at bank excluding restricted cash (see note 23) (13.9) (26.9)
Net debt 1,356.8 1,257.2
The fair values of the Group's bonds have been estimated on the basis of
quoted market prices, representing Level 1 fair value measurement as defined
by IFRS 13 Fair Value Measurement.
The fair values of the 3.99% secured loan and the unsecured private placement
notes were determined by discounting the contractual cash flows by the
replacement rate. The replacement rate is the sum of the current underlying
Gilt rate plus the market implied margin. These represent Level 2 fair value
measurement.
The fair values of the Group's outstanding interest rate swaps have been
estimated by using the mid-point of the yield curves prevailing on the
reporting date and represent the net present value of the differences between
the contracted rate and the valuation rate when applied to the projected
balances for the period from the reporting date to the contracted expiry
dates. These represent Level 2 fair value measurement.
The fair value of the Group's bank loans is approximately the same as their
carrying amount, after adjusting for the unamortised arrangement fees, and
also represent Level 2 fair value measurement.
The fair value of the following financial assets and liabilities are the same
as their carrying amounts:
· Cash and cash equivalents.
· Trade receivables, other receivables and accrued income included
within trade and other receivables.
· Trade payables, other payables and accruals included within trade
and other payables.
· Leasehold liabilities.
There have been no transfers between Level 1 and Level 2 or Level 2 and Level
3 in either 2023 or 2022.
Unsecured bank borrowings are accounted for at amortised cost. At 31 December
2023, there was £84.0m (2022: £nil) drawn on the RCFs and the unamortised
arrangement fees were £2.8m (2022: £4.1m), resulting in the carrying value
being a £81.2m credit balance (2022: debit balance of £4.1m).
Other loans consist of a £20.0m (2022: £19.7m) interest-free loan with no
fixed repayment date from a third-party providing development consultancy
services on the residential element of the 25 Baker Street W1 development. The
loan will be repaid from the sale proceeds of these residential apartments
after completion of the scheme. The agreement provides for a profit share on
completion of the sales which, under IFRS 9 Financial Instruments, has been
deemed to have a carrying value of £nil at 31 December 2023 (2022: £nil).
The carrying value of the loan at 31 December 2023 was £20.0m (2022:
£19.7m).
The 3.99% secured loan 2024 was secured by a fixed charge over £246.6m (31
December 2022: £272.8m) of the Group's properties. In addition, the secured
bonds 2026 were secured by a floating charge over a number of the Group's
subsidiary companies which contained £395.9m (31 December 2022: £448.8m) of
the Group's properties.
20. Cash generated from operations
The cash flow statement has been restated, with operating cash flows now being
presented using the 'indirect' method as set out in IAS 7 Statement of Cash
Flows. See note 2 Changes in accounting policies for more information.
2022
2023 Restated(1)
£m £m
Loss from operations (428.9) (238.3)
Adjustment for non-cash items:
Revaluation deficit 581.5 422.1
Depreciation 1.1 1.0
Lease incentive/cost spreading (6.6) (21.7)
Share based payments 2.5 2.1
Ground rent adjustment 0.3 (0.6)
Adjustment for other items:
Profit on disposal (1.2) (25.6)
Changes in working capital:
Increase in receivables balance (3.7) (0.5)
Increase in payables balance 17.5 19.3
Increase in trading property and trading stock (27.2) (9.1)
Cash generated from operations 135.3 148.7
(1) Prior year figures have been restated for changes in accounting
policies. See note 2 for additional information.
Net cash from operations includes £nil (2022: £3.0m) inflow from disposal of
trading properties and £24.7m (2022: £9.7m) outflow in relation to
expenditure on trading properties and stock.
21. Deferred tax
Revaluation Other Total
£m £m £m
At 1 January 2023 3.7 (3.1) 0.6
Charged to the income statement 0.1 0.4 0.5
Credited to other comprehensive income (1.0) - (1.0)
At 31 December 2023 2.8 (2.7) 0.1
At 1 January 2022 3.3 (3.6) (0.3)
Charged/(credited) to the income statement 0.2 (0.1) 0.1
Charged to other comprehensive income 0.2 - 0.2
Charged to equity - 0.6 0.6
At 31 December 2022 3.7 (3.1) 0.6
Deferred tax on the balance sheet revaluation deficit/surplus is calculated on
the basis of the chargeable gains that would crystallise on the sale of the
property portfolio at each balance sheet date. The calculation takes account
of any available indexation on the historical cost of the properties. Due to
the Group's REIT status, deferred tax is only provided at each balance sheet
date on properties outside the REIT ring-fence.
22. Dividend
Dividend per share
Payment PID Non-PID Total 2023 2022
date p p p £m £m
Current year
2023 final dividend(1) 31 May 2024 39.00 16.00 55.00 - -
2023 interim dividend 13 October 2023 24.50 - 24.50 27.5 -
63.50 16.00 79.50
Prior year
2022 final dividend 2 June 2023 38.50 16.00 54.50 61.2 -
2022 interim dividend 14 October 2022 24.00 - 24.00 - 26.9
62.50 16.00 78.50
2021 final dividend 1 June 2022 35.50 18.00 53.50 - 60.1
Dividends as reported in the
Group statement of changes in equity 88.7 87.0
2023 interim dividend withholding tax 12 January 2024 (3.7) -
2022 interim dividend withholding tax 13 January 2023 3.7 (3.7)
2021 interim dividend withholding tax 14 January 2022 - 3.5
Dividends paid as reported in the
Group cash flow statement 88.7 86.8
(1) Subject to shareholder approval at the AGM on 10 May 2024.
23. Cash and cash equivalents
2023 2022
£m £m
Cash at bank 13.9 26.9
Cash held in restricted accounts
Tenant rent deposits 27.0 27.3
Service charge balances 32.1 22.4
73.0 76.6
24. Related parties
There have been no related party transactions for the year ended 31 December
2023 that have materially affected the financial position or performance of
the Group. All related party transactions are materially consistent with those
disclosed by the Group in its financial statements.
25. EPRA performance measures
Unaudited unless stated otherwise.
Number of shares
Earnings per share Net asset value per share
Weighted average At 31 December
2023 2022 2023 2022
Audited Audited Audited Audited
'000 '000 '000 '000
For use in basic measures 112,291 112,270 112,291 112,291
Dilutive effect of share-based payments 243 142 257 138
For use in diluted measures 112,534 112,412 112,548 112,429
The £175m unsecured convertible bonds 2025 ('2025 bonds') have an initial
conversion price set at £44.96.
The Group recognises the effect of conversion of the bonds if they are both
dilutive and, based on the share price, likely to convert. For the year ended
31 December 2022 and 2023, the Group did not recognise the dilutive impact of
the conversion of the 2025 bonds on its earnings per share (EPS) or net asset
value (NAV) per share metrics as, based on the share price at the end of each
year, the bonds were not expected to convert.
The following tables set out reconciliations between the IFRS and EPRA
earnings for the year and earnings per share. The adjustments made between
the figures are as follows:
A - Disposal of investment and trading property (including the Group's share
in joint ventures), and associated tax.
B - Revaluation movement on investment property, in joint ventures and other
interests, write-down of trading property and associated deferred tax.
C - Fair value movement and termination costs relating to derivative
financial instruments.
Earnings and earnings per share
Adjustments EPRA
IFRS A B C basis
£m £m £m £m £m
Year ended 31 December 2023 (audited)
Net property and other income 190.5 - 1.0 - 191.5
Total administrative expenses (39.1) - - - (39.1)
Revaluation deficit (581.5) - 581.5 - -
Profit on disposal of investments 1.2 (1.2) - - -
Net finance costs (39.5) - - - (39.5)
Movement in fair value of derivative financial instruments (2.1) - - 2.1 -
Financial derivative termination income 1.8 - - (1.8) -
Share of results of joint ventures (7.2) - 9.2 - 2.0
Loss before tax (475.9) (1.2) 591.7 0.3 114.9
Tax charge (0.5) - 0.1 - (0.4)
(Loss)/earnings attributable to equity shareholders (476.4) (1.2) 591.8 0.3 114.5
(Loss)/earnings per share (424.25p) 101.97p
Diluted (loss)/earnings per share (424.25p) 101.75p
The diluted loss per share for the period to 31 December 2023 was restricted
to a loss of 424.25p per share, as the loss per share cannot be reduced by
dilution in accordance with IAS 33 Earnings Per Share.
Adjustments EPRA
IFRS A B C basis
£m £m £m £m £m
Year ended 31 December 2022 (audited)
Net property and other income 194.6 (0.2) 0.2 - 194.6
Total administrative expenses (36.4) - - - (36.4)
Revaluation deficit (422.1) - 422.1 - -
Profit on disposal of investments 25.6 (25.6) - - -
Net finance costs (39.4) - - - (39.4)
Movement in fair value of derivative financial instruments 5.8 - - (5.8) -
Financial derivative termination costs (0.3) - - (0.1) (0.4)
Share of results of joint ventures (7.3) - 9.3 - 2.0
Loss before tax (279.5) (25.8) 431.6 (5.9) 120.4
Tax charge (1.0) - 0.3 - (0.7)
(Loss)/earnings attributable to equity shareholders (280.5) (25.8) 431.9 (5.9) 119.7
(Loss)/earnings per share (249.84p) 106.62p
Diluted (loss)/earnings per share (249.84p) 106.48p
The diluted loss per share for the year to 31 December 2022 was restricted to
a loss of 249.84p per share, as the loss per share cannot be reduced by
dilution in accordance with IAS 33 Earnings per Share.
EPRA Net Asset Value metrics
2023 2022
Audited Audited
£m £m
Net assets attributable to equity shareholders 3,508.8 4,075.5
Adjustment for:
Revaluation of trading properties 9.8 4.8
Deferred tax on revaluation surplus(1) 1.4 1.9
Fair value of derivative financial instruments (2.9) (5.0)
Fair value adjustment to secured bonds 5.0 6.5
EPRA Net Tangible Assets 3,522.1 4,083.7
Per share measure - diluted 3,129p 3,632p
Net assets attributable to equity shareholders 3,508.8 4,075.5
Adjustment for:
Revaluation of trading properties 9.8 4.8
Fair value adjustment to secured bonds 5.0 6.5
Mark-to-market of fixed rate debt 133.4 159.5
Unamortised issue and arrangement costs (7.4) (10.1)
EPRA Net Disposal Value 3,649.6 4,236.2
Per share measure - diluted 3,243p 3,768p
Net assets attributable to equity shareholders 3,508.8 4,075.5
Adjustment for:
Revaluation of trading properties 9.8 4.8
Deferred tax on revaluation surplus 2.8 3.7
Fair value of derivative financial instruments (2.9) (5.0)
Fair value adjustment to secured bonds 5.0 6.5
Purchasers' costs(2) 329.4 361.9
EPRA Net Reinstatement Value 3,852.9 4,447.4
Per share measure - diluted 3,423p 3,956p
( )
(1) Only 50% of the deferred tax on the revaluation surplus is excluded.
(2) Includes Stamp Duty Land Tax. Total costs assumed to be 6.8% of the
portfolio's fair value.
Cost ratios (unaudited)
2023 2022
£m £m
Administrative expenses 39.1 36.4
Write-off/impairment of receivables 2.0 (1.0)
Other property costs 15.2 12.7
Dilapidation receipts (0.1) (0.5)
Net service charge costs 6.6 5.1
Service charge costs recovered through rents but not separately invoiced (0.9) (0.7)
Management fees received less estimated profit element (4.5) (4.2)
Share of joint ventures' expenses 0.4 0.5
EPRA costs (including direct vacancy costs) (A) 57.8 48.3
Direct vacancy costs (10.4) (7.9)
EPRA costs (excluding direct vacancy costs) (B) 47.4 40.4
Gross rental income 212.8 207.0
Ground rent (2.2) (1.7)
Service charge components of rental income (0.9) (0.7)
Share of joint ventures' rental income less ground rent 2.4 2.5
Adjusted gross rental income (C) 212.1 207.1
EPRA cost ratio (including direct vacancy costs) (A/C) 27.3% 23.3%
EPRA cost ratio (excluding direct vacancy costs) (B/C) 22.3% 19.5%
In addition to the two EPRA cost ratios, the Group has calculated an
additional cost ratio based on its property portfolio fair value to recognise
the 'total return' nature of the Group's activities.
Property portfolio at fair value (D) 4,844.7 5,321.8
Portfolio cost ratio (A/D) 1.2% 0.9%
The Group has not capitalised any overheads in either 2023 or 2022.
Property-related capital expenditure (unaudited)
2023 2022
Group Joint Group Joint
(excl. Joint ventures Total (excl. Joint ventures Total
ventures) (50% share) Group ventures) (50% share) Group
£m £m £m £m £m £m
Acquisitions 3.8 - 3.8 133.0 - 133.0
Development 127.3 0.6 127.9 94.7 1.6 96.3
Incremental lettable space - - - 0.9 - 0.9
No incremental lettable space 25.0 - 25.0 18.5 - 18.5
Tenant incentives - - - 0.8 - 0.8
Capitalised interest 6.3 - 6.3 6.9 - 6.9
Total capital expenditure 162.4 0.6 163.0 254.8 1.6 256.4
Conversion from accrual to
cash basis 12.1 0.1 12.2 11.1 0.1 11.2
Total capital expenditure
on a cash basis 174.5 0.7 175.2 265.9 1.7 267.6
26. Gearing and interest cover
NAV gearing
2023 2022
£m £m
Net debt 1,356.8 1,257.2
Net assets 3,508.8 4,075.5
NAV gearing 38.7% 30.8%
Loan-to-value ratio
2023 2022
£m £m
Group loan-to-value ratio
Net debt 1,356.8 1,257.2
Fair value adjustment of secured bonds (5.0) (6.5)
Unamortised discount on unsecured green bonds 1.5 1.7
Unamortised issue and arrangement costs 7.4 10.1
Leasehold liabilities (34.6) (35.0)
Drawn debt net of cash (A) 1,326.1 1,227.5
Fair value of property portfolio (B) 4,844.7 5,321.8
Group loan-to-value ratio (A/B) 27.4% 23.1%
Proportionally consolidated loan-to-value ratio
Drawn debt net of cash (A) 1,326.1 1,227.5
Share of cash and cash equivalents joint ventures (2.2) (1.6)
Drawn debt net of cash including Group's share of joint ventures (C) 1,323.9 1,225.9
Fair value of property portfolio (B) 4,844.7 5,321.8
Share of fair value of property portfolio of joint ventures 33.8 42.4
Fair value of property portfolio including Group's share of joint ventures (D) 4,878.5 5,364.2
Proportionally consolidated loan-to-value ratio (C/D) 27.1% 22.9%
EPRA loan-to-value ratio
Drawn debt net of cash including Group's share of joint ventures (C) 1,323.9 1,225.9
Debt with equity characteristics (20.0) (19.7)
Adjustment for hybrid debt instruments 2.0 3.3
Net payable adjustment 57.2 74.1
Adjusted debt (E) 1,363.1 1,283.6
Fair value of property portfolio including Group's share of joint ventures (D) 4,878.5 5,364.2
EPRA loan-to-value ratio (E/D) 27.9% 23.9%
Net interest cover ratio
2023 2022
£m £m
Group net interest cover ratio
Net property and other income 190.5 194.6
Adjustments for:
Other income (4.5) (4.2)
Other property income - (0.3)
Surrender premiums received (0.1) (1.1)
Write-down of trading property 0.4 0.2
Profit on disposal of trading properties - (0.2)
Adjusted net property income 186.3 189.0
Finance income (0.9) (0.3)
Finance costs 40.4 39.7
Adjustments for:
Finance income 0.9 0.3
Other finance costs (0.3) (0.3)
Amortisation of fair value adjustment to secured bonds 1.5 1.4
Amortisation of issue and arrangement costs (2.6) (2.6)
Finance costs capitalised 6.5 7.0
Net interest payable 45.5 45.2
Group net interest cover ratio 409% 418%
Proportionally consolidated net interest cover ratio
Adjusted net property income 186.3 189.0
Share of joint ventures' net property income 2.2 2.1
Adjusted net property income including share of joint ventures 188.5 191.1
Net interest payable 45.5 45.2
Proportionally consolidated net interest cover ratio 414% 423%
Net debt to EBITDA
2023 2022
£m £m
Net debt to EBITDA
Net debt 1,356.8 1,257.2
Loss for the year (476.4) (280.5)
Add back: tax charge 0.5 1.0
Loss before tax (475.9) (279.5)
Add back: net finance charges 39.5 39.4
Add back: movement in fair value of derivative financial instruments 2.1 (5.8)
Add back: financial derivative termination (income)/costs (1.8) 0.3
(436.1) (245.6)
Add back: profit on disposal of investment property (1.2) (25.6)
Add back: revaluation deficit 581.5 422.1
Add back: share of joint venture revaluation deficit (note 9) 9.2 9.3
Add back: depreciation 1.1 1.0
EBITDA (B) 154.5 161.2
Net debt to EBITDA (A/B) 8.8 7.8
27. Total return (unaudited)
2023 2022
p p
EPRA Net Tangible Assets on a diluted basis
At end of year 3,129 3,632
At start of year (3,632) (3,959)
Decrease (503) (327)
Dividend per share 79 78
Decrease including dividend (424) (249)
Total return (11.7%) (6.3%)
28. List of definitions
Building Research Establishment Environmental Assessment Method (BREEAM)
An environmental impact assessment method for non-domestic buildings.
Performance is measured across a series of ratings; Good, Very Good, Excellent
and Outstanding.
Capital return
The annual valuation movement arising on the Group's portfolio expressed as a
percentage return on the valuation at the beginning of the year adjusted for
acquisitions and capital expenditure.
Company Voluntary Arrangement (CVA)
An insolvency procedure allowing a company with debt problems or that is
insolvent to reach a voluntary agreement with its creditors to repay its debt
over a fixed period.
Diluted figures
Reported results adjusted to include the effects of potential dilutive shares
issuable under the Group's share option schemes and the convertible bonds.
Earnings/earnings per share (EPS)
Earnings represent the profit or loss for the year attributable to equity
shareholders and are divided by the weighted average number of ordinary shares
in issue during the financial year to arrive at earnings per share.
EBITDA
Earnings before interest, tax, depreciation and amortisation.
Energy Performance Certificate (EPC)
An EPC is an asset rating detailing how energy efficient a building is, rated
by carbon dioxide emission on a scale of A-G, where an A rating is the most
energy efficient. They are legally required for any building that is to be put
on the market for sale or rent.
Estimated rental value (ERV)
This is the external valuers' opinion as to the open market rent which, on the
date of valuation, could reasonably be expected to be obtained on a new
letting or rent review of a property.
European Public Real Estate Association (EPRA)
A not-for-profit association with a membership of Europe's leading property
companies, investors and consultants which strives to establish best practices
in accounting, reporting and corporate governance and to provide high-quality
information to investors. EPRA's Best Practices Recommendations includes
guidelines for the calculation of the following performance measures which the
Group has adopted.
- EPRA Earnings Per Share
Earnings from operational activities.
- EPRA Loan-to-value (LTV)
Debt divided by the property value. Debt is equal to drawn facilities less
cash, adjusted with equity characteristics, adding back the equity portion of
hybrid debt instruments and including net payables if applicable. Property
value is equal to the fair value of the property portfolio including net
receivables if applicable.
- EPRA Net Reinstatement Value (NRV) per share
NAV adjusted to reflect the value required to rebuild the entity and assuming
that entities never sell assets. Assets and liabilities, such as fair value
movements on financial derivatives are not expected to crystallise in normal
circumstances and deferred taxes on property valuation surpluses are excluded.
- EPRA Net Tangible Assets (NTA) per share
Assumes that entities buy and sell assets, thereby crystallising certain
levels of unavoidable deferred tax.
- EPRA Net Disposal Value (NDV) per share
Represent the shareholders' value under a disposal scenario, where deferred
tax, financial instruments and certain other adjustments are calculated to the
full extent of their liability, net of any resulting tax.
- EPRA capital expenditure
The total expenditure incurred on the acquisition, enhancement, and
development of investment properties. This can include amounts spent on any
investment properties under construction or related development projects, as
well as the amounts spent on the completed (operational) investment property
portfolio. Capitalised finance costs included in the financial statements are
also presented within this total. The costs are presented on both an accrual
and a cash basis, for both the Group and the proportionate share of joint
ventures.
- EPRA Cost Ratio (including direct vacancy costs)
EPRA costs as a percentage of gross rental income less ground rent (including
share of joint venture gross rental income less ground rent). EPRA costs
include administrative expenses, other property costs, net service charge
costs and the share of joint ventures' overheads and operating expenses (net
of any service charge costs), adjusted for service charge costs recovered
through rents and management fees.
- EPRA Cost Ratio (excluding direct vacancy costs)
Calculated as above, but with an adjustment to exclude direct vacancy costs.
- EPRA Net Initial Yield (NIY)
Annualised rental income based on the cash rents passing at the balance sheet
date, less non-recoverable property operating expenses, divided by the market
value of the EPRA property portfolio, increased by estimated purchasers'
costs.
- EPRA 'topped-up' Net Initial Yield
This measure incorporates an adjustment to the EPRA NIY in respect of the
expiration of rent free periods (or other unexpired lease incentives such as
discounted rent periods and stepped rents).
- EPRA Vacancy Rate
Estimated rental value (ERV) of immediately available space divided by the ERV
of the EPRA portfolio.
In addition, the Group has adopted the following recommendation for investment
property reporting.
- EPRA like-for-like rental income growth
The growth in rental income on properties owned throughout the current and
previous year under review. This growth rate includes revenue recognition and
lease accounting adjustments but excludes properties held for development in
either year and properties acquired or disposed of in either year.
Fair value adjustment
An accounting adjustment to change the book value of an asset or liability to
its market value.
Ground rent
The rent payable by the Group for its leasehold properties. Under IFRS, a
liability is recognised using the discounted payments due. Fixed lease
payments made are allocated between the interest payable and the reduction in
the outstanding liability. Any variable payments are recognised in the income
statement in the period to which it relates.
Headroom
This is the amount left to draw under the Group's loan facilities (i.e. the
total loan facilities less amounts already drawn).
Interest rate swap
A financial instrument where two parties agree to exchange an interest rate
obligation for a predetermined amount of time. These are generally used by the
Group to convert floating rate debt to fixed rates.
Key Performance Indicators (KPIs)
Activities and behaviours, aligned to both business objectives and individual
goals, against which the performance of the Group is annually assessed.
Lease incentives
Any incentive offered to occupiers to enter into a lease. Typically the
incentive will be an initial rent free or half rent period, stepped rents, or
a cash contribution to fit-out or similar costs.
Loan-to-value ratio (LTV)
Drawn debt net of cash divided by the fair value of the property portfolio.
Drawn debt is equal to drawn facilities less unrestricted cash and the
unamortised equity element of the convertible bonds.
Mark-to-market
The difference between the book value of an asset or liability and its market
value.
MSCI Inc. (MSCI IPD)
MSCI Inc. is a company that produces independent benchmarks of property
returns. The Group measures its performance against both the Central London
Offices Index and the UK All Property Index.
National Australian Built Environment Rating System (NABERS)
This is a building performance rating system which provides an energy
performance benchmark using a simple star rating system on a 1-6 scale. This
helps property owners understand and communicate a building's performance
versus other similar buildings to occupiers. Ratings are validated on an
annual basis.
NAV gearing
Net debt divided by net assets.
Net assets per share or net asset value (NAV)
Equity shareholders' funds divided by the number of ordinary shares in issue
at the balance sheet date.
Net debt
Borrowings plus bank overdraft less unrestricted cash and cash equivalents.
Net debt to EBITDA
Net Debt to EBITDA is the ratio of gross debt less unrestricted cash to
earnings before interest, tax, depreciation and amortisation (EBITDA).
Net interest cover ratio
Net property income, excluding all non-core items divided by interest payable
on borrowings and non-utilisation fees.
Property income distribution (PID)
Dividends from profits of the Group's tax-exempt property rental business
under the REIT regulations.
Non-PID
Dividends from profits of the Group's taxable residual business.
Real Estate Investment Trust (REIT)
The UK Real Estate Investment Trust ("REIT") regime was launched on 1 January
2007. On 1 July 2007, Derwent London plc elected to convert to REIT status.
The REIT legislation was introduced to provide a structure which closely
mirrors the tax outcomes of direct ownership in property and removes tax
inequalities between different real estate investors. It provides a liquid and
publicly available vehicle which opens the property market to a wide range of
investors.
A REIT is exempt from corporation tax on qualifying income and gains of its
property rental business providing various conditions are met. It remains
subject to corporation tax on non-exempt income and gains e.g. interest
income, trading activity and development fees.
REITs must distribute at least 90% of the Group's income profits from its tax
exempt property rental business, by way of dividend, known as a property
income distribution (PID). These distributions can be subject to withholding
tax at 20%.
If the Group distributes profits from the non-tax exempt business, the
distribution will be taxed as an ordinary dividend in the hands of the
investors (non-PID).
Rent reviews
Rent reviews take place at intervals agreed in the lease (typically every five
years) and their purpose is usually to adjust the rent to the current market
level at the review date. For upwards only rent reviews, the rent will either
remain at the same level or increase (if market rents are higher) at the
review date.
Reversion
The reversion is the amount by which ERV is higher than the rent roll of a
property or portfolio. The reversion is derived from contractual rental
increases, rent reviews, lease renewals and the letting of space that is
vacant and available to occupy or under development or refurbishment.
Scrip dividend
Derwent London plc sometimes offers its shareholders the opportunity to
receive dividends in the form of shares instead of cash. This is known as a
scrip dividend.
Task Force on Climate-related Financial Disclosures (TCFD)
Set up by the Financial Stability Board (FSB) in response to the G20 Finance
Ministers and Central Bank Governors request for greater levels of
decision-useful, climate-related information; the TCFD was asked to develop
climate-related disclosures that could promote more informed investment,
credit (or lending), and insurance underwriting decisions. In turn, this would
enable stakeholders to understand better the concentrations of carbon-related
assets in the financial sector and the financial system's exposures to
climate-related risks.
'Topped-up' rent
Annualised rents generated by the portfolio plus rent contracted from expiry
of rent free periods and uplifts agreed at the balance sheet date.
Total property return (TPR)
Total property return is a performance measure calculated by the MSCI IPD and
defined in the MSCI Global Methodology Standards for Real Estate Investment as
'the percentage value change plus net income accrual, relative to the capital
employed'.
Total return
The movement in EPRA Net Tangible Assets per share on a diluted basis between
the beginning and the end of each financial year plus the dividend per share
paid during the year expressed as a percentage of the EPRA Net Tangible Assets
per share on a diluted basis at the beginning of the year.
Total shareholder return (TSR)
The growth in the ordinary share price as quoted on the London Stock Exchange
plus dividends per share received for the year, expressed as a percentage of
the share price at the beginning of the year.
Transmission and distribution (T&D)
The emissions associated with the transmission and distribution losses in the
grid from the transportation of electricity from its generation source.
Underlying portfolio
Properties that have been held for the whole of the year (i.e. excluding any
acquisitions or disposals made during the year).
Underlying valuation increase
The valuation increase on the underlying portfolio.
Well to tank (WTT)
The emissions associated with extracting, refining and transporting raw fuel
to the vehicle, asset or process under scrutiny.
Yields
- Net initial yield
Annualised rental income based on cash rents passing at the balance sheet
date, less non-recoverable property operating expenses, divided by the market
value of the property, increased by estimated purchasers' costs.
- Reversionary yield
The anticipated yield to which the net initial yield will rise once the rent
reaches the estimated rental values.
- True equivalent yield
The constant capitalisation rate which, if applied to all cash flows from the
portfolio, including current rent, reversions to valuers' estimated rental
value and such items as voids and expenditures, equates to the valuation
having taken into account notional purchasers' costs. Rent is assumed to be
received quarterly in advance.
- Yield shift
A movement in the yield of a property asset, or like-for-like portfolio, over
a given period. Yield compression is a commonly-used term for a reduction in
yields.
29. Copies of this announcement will be available on the Company's website,
www.derwentlondon.com, from the date of this statement. Copies will also be
available from the Company Secretary, Derwent London plc, 25 Savile Row,
London, W1S 2ER.
Notes to editors
Derwent London plc
Derwent London plc owns 66 buildings in a commercial real estate portfolio
predominantly in central London valued at £4.9 billion as at 31 December
2023, making it the largest London office-focused real estate investment trust
(REIT).
Our experienced team has a long track record of creating value throughout the
property cycle by regenerating our buildings via development or refurbishment,
effective asset management and capital recycling.
We typically acquire central London properties off-market with low capital
values and modest rents in improving locations, most of which are either in
the West End or the Tech Belt. We capitalise on the unique qualities of each
of our properties - taking a fresh approach to the regeneration of every
building with a focus on anticipating tenant requirements and an emphasis on
design.
Reflecting and supporting our long-term success, the business has a strong
balance sheet with modest leverage, a robust income stream and flexible
financing.
As part of our commitment to lead the industry in mitigating climate change,
Derwent London has committed to becoming a net zero carbon business by 2030,
publishing its pathway to achieving this goal in July 2020. In 2019 the Group
became the first UK REIT to sign a Revolving Credit Facility with a 'green'
tranche. At the same time, we also launched our Green Finance Framework and
signed the Better Buildings Partnership's climate change commitment. The Group
is a member of the 'RE100' which recognises Derwent London as an influential
company, committed to 100% renewable power by purchasing renewable energy, a
key step in becoming a net zero carbon business. Derwent London is one of the
property companies worldwide to have science-based carbon targets validated by
the Science Based Targets initiative (SBTi).
Landmark buildings in our 5.4 million sq ft portfolio include 1 Soho Place W1,
80 Charlotte Street W1, Brunel Building W2, White Collar Factory EC1, Angel
Building EC1, 1-2 Stephen Street W1, Horseferry House SW1 and Tea Building E1.
In January 2022 we were proud to announce that we had achieved the National
Equality Standard - the UK's highest benchmark for equality, diversity and
inclusion. In May 2023 we were recognised on the Sunday Times Best Places to
Work List 2023 within the medium-sized organisation category and in the
following month we won two OAS awards - West End New Build for Soho Place W1
and Developer of the Year whilst we were also highly commended for The
Featherstone Building in the City New Build category. In October 2023, White
Collar Factory EC1 won the BCO's Test of Time 2023 award, Soho Place W1 won
the British Construction Industry Awards' Best Commercial Property Project of
the Year and Derwent London was awarded the EG Employer Award. In March 2023
we placed in the top three of the Property Sector in Management Today's
Britain's Most Admired Companies awards 2022. In October 2022, 80 Charlotte
Street won the BCO's Best National Commercial Workplace award 2022. In 2013
the Company launched a voluntary Community Fund which has to date supported
over 160 community projects in the West End and the Tech Belt. The Company is
a public limited company, which is listed on the London Stock Exchange and
incorporated and domiciled in the UK. The address of its registered office is
25 Savile Row, London, W1S 2ER.
For further information see www.derwentlondon.com
(http://www.derwentlondon.com) or follow us on X (Twitter) at @derwentlondon
Forward-looking statements
This document contains certain forward-looking statements about the future
outlook of Derwent London. By their nature, any statements about future
outlook involve risk and uncertainty because they relate to events and depend
on circumstances that may or may not occur in the future. Actual results,
performance or outcomes may differ materially from any results, performance or
outcomes expressed or implied by such forward-looking statements.
No representation or warranty is given in relation to any forward-looking
statements made by Derwent London, including as to their completeness or
accuracy. Derwent London does not undertake to update any forward-looking
statements whether as a result of new information, future events or otherwise.
Nothing in this announcement should be construed as a profit forecast.
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