London Portfolio review


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Robert Noel
Managing Director, London Portfolio

There has been a huge amount of activity in the London Portfolio this year.

We opened One New Change, our award winning mixed use development adjacent to St Paul’s Cathedral in October with the retail element now fully let. We sold our Park House development for just under £300m enabling us to realise virtually all of our anticipated profit ahead of schedule.

We formed a joint venture with Canary Wharf Group to develop 20 Fenchurch Street and we started on site in January. We’ve made good progress on our developments at 62 Buckingham Gate and Wellington House. We started two further developments at 123 Victoria Street and 110 Cannon Street and expect to start on site at 30 Old Bailey and 60 Ludgate Hill later this year.

The London Portfolio also completed some astute asset management deals with leasing activity being an area of intense focus to add value across the porfolio. Examples included a letting to Primark in Oxford Street and offices to Telecity at Harbour Exchange - both conditional on planning. We took a surrender of one lease at 40 Strand, simultaneously granting a new lease to Bain & Company over the entire building.

We also took back possession of one of the advertising panels at Piccadilly Lights for the first time in 17 years, allowing us to create new open market evidence significantly ahead of previous levels.

The outlook for our market and our portfolio of assets is positive. With our early mover advantage on development well-matched to emerging supply -constrained conditions in London, we are in an excellent position.

We have an attractive mix of high quality assets, a robust balance sheet, good access to capital and an excellent reputation. These strengths mean we are confident and able to address the opportunities ahead.


“We have made good progress with our development pipeline and we are in an excellent position, with our early mover advantage on development well-matched to emerging supply-constrained conditions in London.”



Progress on our key objectives for 2010/11

Outperform IPD

  • Our retail properties outperformed the benchmark by 10.3% whilst offices underperformed by 1.8%

Submit further planning applications to ensure we can meet demand for offices in a supply-constrained market

  • Planning applications submitted and approved for 27,920m2 at 110 Cannon Street, EC4, and 123 Victoria Street, SW1
  • Planning applications submitted for 34,850m2 at 30 Old Bailey and 60 Ludgate Hill, EC4; and 1 New Street Square, EC4 – formerly IPC Tower
  • Further application (submitted April 2011) for 31,650m2 at Kingsgate House, SW1

Let up balance of office and retail space at One New Change, EC4

  • At 31 March 2011 One New Change was more than 80% let in total, up from 46% at March 2010
  • 100% of the retail space was let on opening in October 2010
  • 73% of the office space was let at 31 March 2011 with less than 10,000m2 of office space available

Achieve retail lettings at Park House, W1

  • The asset was sold during the year, crystallising virtually all of our anticipated profit early and enabling us to recycle the capital

Achieve success with our nascent residential development programme

  • 54 of 59 residential apartments at Wellington House, SW1, have been pre-sold
  • Detailed design has commenced for our proposed residential development at Arundel Great Court, WC2, as well as at Kingsgate House, SW1 and Portland House, SW1
  • Further residential sites have been acquired in SW1

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How we create value

We aim to deliver growing rental income streams and higher asset values over the long term by:

  • Developing assets early in the cycle to maximise returns, recycling capital when appropriate
  • Understanding our customers’ changing needs, so we can adapt and evolve our products to meet their demands
  • Creating a high quality product to mitigate risk, generate strong demand and achieve improved rental performance
  • Managing our assets with rigour.

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Our market

In last year’s Annual Report we explained that London was moving towards supply-constrained market conditions. Events over the last 12 months have reinforced our view. Due to a lack of capacity in the debt markets, we also expect to see this growth cycle play out over a longer period than we originally anticipated. It remains difficult for many developers to raise the capital needed to advance their developments, and this underlines the value of our robust balance sheet and ability to raise finance to move forward with construction. In addition, obtaining significant planning consents could become more difficult in many parts of central London with the onset of local authority spending cuts and an increasing localist agenda.

We saw rental value growth throughout the year, with the aggregate rental value in our like-for-like London Portfolio increasing by 9.5%. This is the result of good demand in central London retail and sustained occupational demand for offices combined with a reduced construction pipeline, which has effectively narrowed choice for occupiers. The outlook for the London office market remains positive, as this limited supply will coincide with a higher than normal level of lease expiries from 2013, particularly in the City.

The number of high-profile tall building developments in the City may give the impression that future demand is already well catered for, but the floorspace these buildings will provide is relatively modest compared to the market as a whole. Added to this, demand has always been relatively robust through the cycles. Long-term average annual take-up of Grade A space in central London is 585,000m2 and the take-up in 2010 was 948,000m2, whilst current Grade A vacancy added to forecast development completions is only set to provide 455,200m2 per annum during 2011 to 2014.

During the year there were increasing signs that more parties were under pressure to sell assets. However, London continues to be attractive to a broad range of property investors from around the globe due to its position as a leading financial centre, relatively liquid market and legislative framework. As a result, the property investment market has remained competitive. Given the relative attractions of allocating capital to development opportunities within our portfolio, we will maintain our disciplined approach to buying.

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Our strategy

We remain focused on maximising potential returns as we move through the cycle and our current priority is to develop space in central London. We are comfortable being early cycle players as we gain the benefit of competitive construction costs, rising rental values and a liquid market in which to make sales, as and when appropriate. Our development initiatives are complemented by a focus on strengthening income streams through rigorous asset management activity.

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Our London Portfolio, valued at £5,735.0m at 31 March 2011, produced a valuation surplus for the year of 10.8% overall. West End offices were up 6.8%, City offices were up 12.0% and central London retail up 21.5%. Rental values in our like-for-like portfolio increased by 5.9% for West End offices, 8.7% for City offices and 22.2% for central London retail.

Our London Portfolio produced an ungeared total property return of 18.3%, underperforming the sector benchmark in the IPD Quarterly Universe by 0.1%. Our retail properties outperformed the benchmark by 10.3% whilst our offices underperformed by 1.8%. The return on our London offices would have been 0.9% higher had we adjusted for capital extracted from Queen Anne’s Gate through the 2009 bond issue.

Table 49 – One year performance relative to IPD

Ungeared total returns – year to 31 March 2011 Land
IPD Sector
Central London offices 16.0* 18.1
Central London retail 32.3 20.0
  • *Including Inner London offices. Source: IPD Quarterly Universe.

Like-for-like voids across our London offices were 3.7%, compared to 4.9% at March 2010. Some of this space is attributable to properties remaining vacant as we plan redevelopments, such as at 20 Eastbourne Terrace, W2; Victoria Circle, SW1 (formerly Victoria Transport Interchange); and Portland House, SW1. If these properties are excluded, the underlying void rate in like-for-like London office properties would be 2.5%. Void levels on the like-for-like London retail assets reduced to 4.4% (6.3% at 31 March 2010). This will fall further to 0.6% once the Primark letting on Oxford Street becomes unconditional.

Compared to last year, net rental income reduced by £7.1m to £281.2m. There was a marginal increase in net rental income on the like-for-like portfolio, but income was lost through sales completed last year, including Portman House, W1, and 1 Wood Street, EC2. The development programme and proposed developments also saw a decline in net rental income as new rents at One New Change, EC4 were insufficient to offset lost income from properties emptied for redevelopment, notably at 123 Victoria Street, SW1, and 60 Ludgate Hill, EC4. These reductions were partially offset by new rents from completed developments at Dashwood House, EC2, 30 Eastbourne Terrace, W2, and New Street Square, EC4.

Table 50 – Net rental income

31 March 2011
31 March 2010
Like-for-like investment properties 231.5 230.9 0.6
Proposed development properties 0.8 8.0 (7.2)
Development programme 4.6 7.2 (2.6)
Completed developments 34.7 26.2 8.5
Acquisitions since 1 April 2009 0.1 0.1
Sales since 1 April 2009 6.5 13.3 (6.8)
Non-property related income 3.0 2.6 0.4
Net rental income 281.2 288.3 (7.1)

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Sales and acquisitions

We have said consistently that we are in no hurry to buy, preferring to concentrate capital expenditure on our development programme which, particularly at this stage in the cycle, is a more effective method of capturing rental growth. We will maintain this discipline.

With significant capital expenditure commitments on development, recycling capital is key. We made £422.7m of disposals during the year, with proceeds exceeding the March 2010 valuation by 17.2%. The net yield on disposals was 1.1%.

Key transactions during the year were:

  • Park House, W1
    The site was sold for a total consideration of £296.0m, of which £71.0m is deferred until the earlier of practical completion or February 2013, enabling us to realise virtually all of our anticipated development profit ahead of schedule. We are managing the project while the purchaser is responsible for all construction costs.
  • 57/60, 62/66 and 69/71 Haymarket, SW1
    We sold our leasehold interests in these properties to the freeholder, The Crown Estate, for £52.9m, realising a marriage value gain.
  • 20 Fenchurch Street, EC3
    We sold a 50% share in our site at 20 Fenchurch Street, EC3 for £45.1m. This is covered in more detail in the section on Development and planning.

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Asset management

Once again, leasing activity has been an area of intense focus and we have succeeded in achieving value adding lettings across the portfolio. Key activity during the year included:

  • Thomas More Square, E1 (owned with The Cadillac Fairview Corporation Limited)
    We let a further 6,700m2 of space to News International for a term of up to 10 years, generating a further £2m per annum in rent. This takes total occupancy of the estate to just under 99%.
  • Oxford Street, W1
    Our Oriana joint venture has entered into a conditional agreement to pre-let a new 13,100m2 retail store to Primark. This will enhance the retail appeal of this area and have a positive effect on our nearby holdings.
  • 40 Strand, WC2
    We took a 4,720m2 lease surrender from an occupier and pre-let 8,730m2 of refurbished office space in a new 15 year lease to Bain & Co, doubling its presence in the building. Refurbishment works are under way and are due to complete March 2012.
  • Harbour Exchange, E14
    Telecity has entered into a new overriding lease for 24,270m2, up from 11,220m2, conditional on planning.

We have also taken steps to improve rental value by actively seeking opportunities to prove new open market evidence, including:

  • Piccadilly Circus, W1
    We have secured possession of one of the advertising panels at Piccadilly Lights, which has given us the opportunity to create an open market letting transaction for the first time in 17 years.
  • Cardinal Place, SW1
    We have also secured possession of 1,300m2 of offices which will be offered to the open market in September 2011.

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Development and planning

Just over a quarter of the assets in our London Portfolio are development prospects. These are either on site, with planning consent, or in design. The timing of these current and proposed developments means we are well placed to take advantage of the forecast market conditions in the capital.

In addition to the sale of Park House, W1, development progress during the year included:

  • One New Change, EC4
    In October 2010 we opened our exciting retail and office development adjacent to St Paul's Cathedral on time and to budget. In line with the priorities we set out for this scheme, the retail component was fully let on opening, while the drive for office lettings has taken place after completion and into a rising rental market. At the end of March 2011 the offices were 73% let, as compared to 38% let at practical completion in October.
  • 110 Cannon Street, EC4
    Planning consent was obtained during the year and work started on site in May 2011 for delivery of 6,660m2 of high quality refurbished office space by March 2012.
  • 123 Victoria Street, SW1
    This development will provide 21,110m2 of repositioned office space and retail shops. Planning permission was applied for, and obtained, during the year and work has started on site and is scheduled to be completed in June 2012 at a time when there will be few office completions in the West End.
  • Wellington House, SW1 (trading property)
    Wellington House will provide 59 residential apartments set for delivery in July 2012. We have pre-sold 54 apartments for £71.1m, which more than covers our entire development cost including land. Strong interest in this scheme has reinforced our belief that residential development should continue to be an important part of our central London strategy.
  • 62 Buckingham Gate, SW1
    This development will provide 23,450m2 of offices, together with street level shops and restaurants. Demolition work was completed during the year and construction is now well under way, with the scheme on time and to budget for delivery in spring 2013.
  • 20 Fenchurch Street, EC3
    During the year we formed a joint venture with Canary Wharf Group to take forward this world-class development in the City. Work on site has started, with completion to the ground floor level scheduled for February 2012. Construction of the superstructure will follow, with completion of the project anticipated in the spring of 2014. The property will deliver around 64,520m2 of space and feature an extraordinary public space on the top three floors.

Other development projects in the course of design include:

  • 20 Eastbourne Terrace, W2, where we are working on plans for the 7,700m2 final phase of this regeneration project.
  • 30 Old Bailey and 60 Ludgate Hill, EC4, which are neighbouring buildings where we have submitted a planning application for 34,850m2 of new office space. The earliest we can start demolition on site is July this year for delivery of the completed buildings in December 2013.
  • Arundel Great Court, WC2, where we have completed negotiations with existing occupiers and the freeholder and have started detailed design. The earliest we can start a phased demolition is early 2012 with completion of the new development of 61,870m2 of prime offices, retail and residential space in 2015.
  • Kingsgate House, SW1, where we submitted a planning application to Westminster City Council in April 2011 for 31,650m2 of shops, offices and residential apartments.
  • 1 New Street Square, EC4, where we submitted a planning application to the City Corporation in March 2011 to redevelop the existing IPC Tower to provide 24,080m2 of new offices.
  • Victoria Circle, SW1 (formerly Victoria Transport Interchange). Victoria is in transition as a number of Government offices are relocated and private sector businesses look to move in. This evolution started with our successful development at Cardinal Place, SW1, helping to attract strong interest in the area. Our 84,550m2 plans for Victoria Circle include a vibrant mix of offices, shopping and residential apartments in the area bordered by Victoria Street, Bressenden Place and Buckingham Palace Road. The required compulsory purchase order has been confirmed by Westminster City Council and we have started detailed design. We aim to seek a joint venture partner for the scheme this year.
  • Portland House, SW1, where we are working up plans for conversion and extension of this 29,490m2 office tower into residential apartments.

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Looking ahead

The outlook for our market and our portfolio of assets is positive. The fundamental drivers for continued demand for new offices and rising rents remain consistent with those we set out in last year's Annual Report:

  • Limited supply of new space due to the development hiatus during the downturn;
  • Higher levels of lease expiries from 2013 combined with a significant amount of existing building stock coming to the end of its economic life; and
  • Prospective occupiers using the end of leases to rationalise estates and move to buildings which are fit for today's corporate requirements, particularly in terms of operational efficiency, sustainability and staff recruitment and retention.

Against this background, we aim to build on the advantages we have gained by re-starting developments in London first. We have an attractive mix of high quality assets with strong revenue streams, a smaller proportion of other properties with a clear asset management plan to drive rental growth, and a pipeline of projects with planning consent to add significant floor space through development. We also have a robust balance sheet, good access to capital and an excellent reputation. These strengths mean we are well positioned to address the opportunities we see in this dynamic market.

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Key objectives for 2011/12

  • Outperform IPD
  • Obtain planning consent and start on site at 30 Old Bailey and 60 Ludgate Hill, EC4
  • Complete office lettings at One New Change, EC4
  • Progress on time and to budget at 62 Buckingham Gate, SW1; 123 Victoria Street, SW1; Wellington House, SW1; 20 Fenchurch Street, EC3; 40 Strand, WC2; and 110 Cannon Street, EC4
  • Secure a joint venture partner for Victoria Circle, SW1
  • Complete detailed design at Arundel Great Court, WC2

Table 51 – Yield changes – like-for-like portfolio

31 March 2010 31 March 2011
Net initial
Net initial
Topped-up net
initial yield1
London retail 4.8 5.4
4.2 4.2 5.2
London office 6.4 6.3
5.8 6.3 5.9
London Portfolio 6.0 6.1 5.4 6.0 5.7
  1. Net initial yield adjusted to reflect the annualised cash rent that will apply at the expiry of current lease incentives.

Table 52 – Rent reviews and lease expiries and breaks1

London Portfolio Out-
Total 2011-16
Rents passing from leases subject to review 47.6 29.1 52.8 37.1 19.7 8.1 194.4
Current ERV 45.6 25.3 49.3 36.0 20.9 8.5 185.6
Over-renting* (4.1) (4.0) (4.9) (1.8) (0.3) (0.2) (15.3)
Gross reversion under lease provisions 2.1 0.2 1.4 0.7 1.5 0.6 6.5
  • *Not crystallised at rent review because of upward only rent review provisions.
London Portfolio Out-
Total 2011-16
Rents passing from leases subject to expiries or breaks2 3.7 21.4 17.7 22.1 32.8 22.7 120.4
Current ERV 4.1 20.9 18.5 22.3 33.3 23.2 122.3
Potential rent change 0.4 (0.5) 0.8 0.2 0.5 0.5 1.9
  1. This is not a forecast and takes no account of increases or decreases in rental values before the relevant review dates.
  2. Includes lease expiries/breaks on properties subject to planning proposals for development or refurbishment totalling £0.5m passing rent outstanding: £10.4m in 2011/12; £7.6m in 2012/13; £1.3m in 2013/14; £13.1m in 2014/15; £1.9m in 2015/16.

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