Derwent shakes off slump fears as NAV, rents rally

LONDON (Reuters) - Office landlord Derwent London (DLN.L) reported sustained growth in the value of its portfolio to 2.2 billion pounds on Wednesday, easing fears of a new real estate slump as Britain's economic prospects wilt.

Chief Executive John Burns told Reuters Derwent's signature strategy of providing affordable offices in the capital's nascent business hubs would hold up as firms budgeted for slower expansion and higher rates of inflation.

"We have a sort of formulaic business model, operating off the middle market for rents between 30-50 pounds a square foot and I'm just very positive that the momentum has continued. Even over this summer period, we were making lettings," Burns said.

"We're in a good position. We have been able to deal with all the crises without having a rights issue and we've still bought, we've got a lot of uncharged property that's not mortgaged and a lot of unused (credit) facilities," he added.

Derwent, which marked a long-awaited return to investment with the 146 million pounds purchase of the West End's Central Cross building in July, posted a 17 percent rise in first-half net asset value to 1,365 pence a share, against 18 percent six months earlier.

The value of its portfolio has risen by 10.3 percent, or 200 million pounds, since December 31, 2009.

Derwent shares gained 2.9 percent to trade at 1414 pence by 0844 GMT, ahead of both net asset value and a 1.2 percent rise in UK property stocks.

It booked pretax profits of 216.4 million pounds over the period against a pretax loss of 223.3 million pounds a year ago, supporting its guidance for high single-digit dividend growth for the 2010 financial year.

It has recommended an interim dividend of 8.75 pence.

ECONOMY

Derwent results coincide with renewed concern for Britain's economic health and the lingering threat of recession.

Ten-year gilt yields plunged close to record lows on Tuesday, after Bank of England policymaker Martin Weale said economic growth forecasts may be too optimistic, further spooking investors already worried about sharp public spending cuts and rising unemployment.

Bucking the gloomy outlook, Derwent achieved 125,700 square feet of lettings in its first half and a further 87,200 square feet since end-June, compressing its vacancy by floorspace to 1 percent, Burns said.

Investors will be watching carefully to see if Derwent can cut this even further as cost-conscious tenants make beelines for its offices, with average rents about 25 percent cheaper than its biggest rivals.

The overall vacancy rate is set to jump to about 9 percent when developments such as the Angel Building on the outskirts of the City of London complete later this year. Burns said he was confident Derwent could match the 5 percent growth in rents achieved since December in the second half of 2010.

About one-third of the office space at Central Cross could become available for refurbishment and reletting from 2011, when a 34 pounds a square foot average rent could move closer in line to the 40-pounds-plus rents at its Charlotte Building nearby.

The 24,000 square feet of retail space could achieve rents as high as 250 pounds a square foot for prime Zone A, a Derwent analyst presentation showed, citing the 300 pounds Zone A secured by Land Securities (LAND.L) in a recent letting nearby to Primark.

Burns said consistent rental growth would be crucial to driving property values going forward.

"We have a view that yields have to run out of steam some time even though the West End is a very special place," he said.

"I don't think the performance, in terms of valuation, will be as strong in the second half as it was in the first half. It will be finely balanced."

(Editing by Joel Dimmock and Andrew Macdonald)