Derwent London, the listed UK office specialist, reported that net asset value (NAV) fell 1.3% in the second half of 2016 compared to the first six months as capital values declined by 1.7%.
Values fell despite a record period of letting activity for the company which added a total of £31.4 mln (€36.8 mln) to the rent roll. Lettings were signed at an average premium of 6.3% versus the estimated rental value (ERV) in December 2016.
Commenting on the results, Derwent's CEO John Burns said they 'highlight how the company's business model of creating well-designed and innovative office space in improving locations can make meaningful progress even in less buoyant market conditions. Whilst we believe it is right to remain cautious, we are in a strong financial position with a well balanced portfolio rich with opportunities which gives us considerable scope to create further growth in our business'.
The second-quarter declines were largely yield driven by investors pricing in the additional risk and uncertainty associated with the UK property market post-Brexit. The London-based REIT reported an increase of 25 basis points in its portfolio equivalent yield following the shock June referendum.
Given the growing turbulence of the UK negotiations with Brussels on its exit from the 28-member EU bloc, yields are likely to rise further in exposed markets, like London offices, the company said.
Despite the uncertainty sparked by the Brexit vote in June, Derwent booked a record year in terms of its lettings activity and the occupier market remained robust for London offices as portfolio ERV increased by 5.1% over the full year.
The strong lettings trend has continued into the first months of this year, with an additional £11.5 mln added to the portfolio rent roll. This includes pre-lettings of current developments, one of which (80 Charlotte Street - pictured) is not expected to complete until 2019.
In light of the new uncertain landscape, acquisitions were kept to a minimum at only £18 mln in 2016 and de-risking of developments and disposals were the main focus.
Derwent London has a 98% focus on London, predominantly offices. The company conceded that it will face inevitable pressures on capital values as the UK heads towards the EU exit. 'However, the de-risking of its near-term development pipeline, with 44% now pre-let, along with the expectation of lowering debt levels in 2017 through additional disposals, provides some comfort,' the company said.
