London Portfolio review

Our market

We started 2011/12 expecting to see a limited supply of new office space coming onto the market, with demand around average levels. We ended the year with both supply and demand at lower levels than those forecast.

On the demand side, wider economic uncertainty impacted confidence and, in turn, requirements for space. Some occupiers requiring new accommodation chose to delay their moves. On the supply side, many developers found it difficult to raise the capital needed to advance developments. Others remained wary of making investments. Local Authority spending cuts and localism have also added complexity to the planning process in London.

Meanwhile, London's qualities as a leading financial and commercial centre continued to attract investors from around the world. As a result, the property investment market remained liquid throughout the year.

We remain consistent in our view that supply-constrained conditions will lead to rental growth, although these conditions are taking longer to emerge. The supply of prime office space will be significantly limited by the hiatus in the development market and we expect demand for the right space in the right location to increase as pent up demand is released. Our portfolio is positioned to take advantage of this.

Back to top

Our strategy

Our priorities are to develop first class space in central London and strengthen income streams through rigorous asset management. We are working to maximise returns as we move through the cycle. As early-cycle developers, we gain the benefits of competitive construction costs and rising rental values. We are progressing a well timed and well managed development programme. We have a clear plan for every asset. And we do not hesitate to realise and recycle the value in an asset if a more attractive opportunity appears.

Back to top

Our performance

The London Portfolio, valued at £5,579m at 31 March 2012, produced a valuation surplus for the year of 3.9%. West End offices were up 4.9%; City offices were up 4.3%; and central London retail up 2.3%. Included within these figures are properties within the development programme, with a surplus of 7.7%, while proposed developments fell in value by 15.9%.

The Portfolio produced an ungeared total property return of 9.2%, although this underperformed the sector benchmark (central London) in the IPD Quarterly Universe by 2.5%. The underperformance reflected our exposure to the Victoria market and the actions we are taking to transform this part of the West End. We are confident our actions will prove fruitful. Offices underperformed the benchmark by 2.0%, while our central London retail properties underperformed the benchmark by 5.0% after strong outperformance of 10.3% last year.

Rental values in our like-for-like portfolio (excluding units materially altered during the year and Queen Anne's Gate, SW1) increased by 2.5%, made up of 0.8% for West End offices, 2.4% for City offices, 2.3% for Mid-town offices and 3.7% for central London retail. Like-for-like voids were 2.5%, compared to 3.8% at March 2011. Void levels on the like-for-like London retail assets were 1.4% (2011: 5.0%) and London offices were 2.8% (2011: 3.3%).

Net rental income increased by £7.8m to £289.0m. Overall, like-for-like investment properties showed no growth in net rental income as a large surrender receipt of £4.8m was offset by lower income from properties being refurbished. The development programme saw net rental income increase £15.5m over last year, driven by £14.1m of net rental income at One New Change, EC4 following completion in October 2010. Income from properties sold in the last two years declined by £11.1m. Properties sold this year, which included Eland House, SW1 and 110 Cannon Street, EC4, contributed net rental income of £22.4m of which £3.2m related to the release of dilapidation provisions. The loss of rental income from properties sold this year is likely to lead to lower net rental income next year in the London Portfolio.


 31 March 2012
31 March 2011
Like-for-like investment properties 228.3 228.3 -
Proposed developments 9.4 9.4 -
Development programme 17.8 2.3 15.5
Completed developments 6.4 4.7 1.7
Acquisitions since 1 April 2010 - - -
Sales since 1 April 2010 22.4 33.5 (11.1)
Non-property related income 4.7 3.0 1.7
Net rental income 289.0 281.2 7.8
Back to top

Sales and acquisitions

During the year we made £623.8m of sales, at 3.8% above the March 2011 valuation. The majority of these sales were made in the final quarter of the year. The net yield on disposals was 3.7%. We spent £211.9m on capital expenditure and acquisitions. We maintained a disciplined approach to buying, preferring to focus on investment in developments as we believe this remains the best way to capture rental growth in current conditions. Transactions included:

  • Eland House, SW1
    This was an ageing 23,500m2 building occupied by a single government tenant at risk of exercising their option to break the lease in 2016. We have a growing portfolio of new assets in the area, so we opted to sell the building during the year, generating £171.1m.
  • 110 Cannon Street and Martin House, EC4
    These buildings were at the preliminary stages of a major 6,810m2 refurbishment. The sale raised £48.5m, crystallising early virtually all of our anticipated development surplus.
  • City Forum, EC1
    We sold this proposed residential development for £40.8m early in the year, in keeping with our focus on development within our core geographical market.
  • 15 Bonhill Street, EC2
    Having completed our business plan for the asset, we sold this 10,220m2 office building for £33.1m in January 2012.
  • Victoria Circle, SW1
    As part of our site assembly of Victoria Circle, we acquired two buildings for
    a total of £15.2m - one at 166-172 Victoria Street, SW1; the other at 81-85 Buckingham Palace Road, SW1. Having completed the assembly we then transferred the entire Victoria Circle holding to a new 50:50 joint venture with Canada Pension Plan Investment Board.
  • Arundel Great Court, WC2
    We have signalled that we will not carry out all our development prospects ourselves and choices have to be made. Having prepared this site for a proposed 61,700m2 development we elected to sell it for a total consideration of £245.5m. From this price we believe other schemes within our pipeline will make more attractive returns.
Back to top

Asset management

We continue to look for smart ways to lengthen and strengthen our income streams. During the year we let or restructured more than 87,800m2 of space. New lettings were completed on average at 12.2% above ERV. We restructured a number of leases due for renewal this year, and our weighted average unexpired lease term increased on the like-for-like portfolio, completed developments and acquisitions to 9.9 years (31 March 2011: 8.9 years).

Key activity during the year included:

  • Moorgate Hall, EC2
    Mace Group has taken all of the office space for its new headquarters under a 15-year lease. Mace will complete a phased move into the 6,220m2 building by 2013, as other occupiers leave.
  • Harbour Exchange, E14
    Telecity has more than doubled its space to 24,280m2 in a 30-year deal. British American Tobacco plc has agreed a ten-year lease on 5,440m2, having exited 2,410m2 at Arundel Great Court, WC2, ahead of our proposed redevelopment there.
  • Oxford Street, W1
    Our Oriana joint venture completed the development and letting of a new 13,650m2 store to Primark, which is expected to open this autumn.
  • 40 Strand, WC2
    Refurbishment of the 8,850m2 office space was completed in March 2012 and the new 15-year lease to Bain & Co is now in place.
  • 14/22 Southwark Bridge Road, SE1
    In return for some minor refurbishment expenditure, we entered into a new 15-year lease for 5,190m2 with Motability, who previously occupied under a lease expiring in December 2012.
  • 16 Palace Street, SW1
    In return for a surrender of 1,910m2 of space, we have restructured leases over 3,740m2 with 3i to expire in 2025 rather than in 2020. We received a premium from 3i which more than covers the cost of refurbishment of the surrendered space. Once refurbished we will re-let this space.
Back to top


We have made excellent progress on our development pipeline and increased our focus on the West End. Our work in Victoria, SW1, is set to transform the area into one of central London's most desirable places to work, live, shop and invest.

Key activity in the year included:

  • One New Change, EC4
    On opening in October 2010, the retail element of this development was 100% let and the offices are now 86% let. During the year, CBRE Global Investors Ltd and SMBC Nikko Capital Markets Ltd took space in the building.
  • 123 Victoria Street, SW1
    The refurbishment of 21,110m2 of office and retail space is progressing well and on schedule to complete in August 2012, a slightly revised timetable following a transaction with Natwest Bank which will enable us to improve the office reception area. Fashion retailer Jimmy Choo has pre-let 3,440m2 on a 10-year lease, which it intends to use for its office headquarters.
  • Wellington House, SW1
    We have now pre-sold all 59 of the residential apartments for a total of £90.4m at an average selling price of £1,426 per sq ft. The scheme is on schedule to complete in July 2012.
  • 62 Buckingham Gate, SW1
    Construction is well underway on the 24,160m2 of office accommodation and 1,450m2 of retail this development will bring to the heart of Victoria. The scheme is on time and to budget for delivery in spring 2013.
  • 20 Fenchurch Street, EC3
    We are working with our joint venture partner, Canary Wharf Group, to deliver this world class 64,460m2 office building in spring 2014. We expect this to be the first of the next generation of tall City developments to complete. Early interest is very encouraging and 8.0% is in solicitors' hands.

With a number of schemes, we have secured planning and can be flexible on timing to match market conditions while working to maximise income. These include:

  • 1 & 2 New Ludgate, EC4
    This mixed-use 35,050m2 development of high quality office, restaurant and retail accommodation will replace two 1960s properties. Demolition work has been completed. Construction will take approximately 22 months to complete from instruction. We will time our start point to ensure we deliver the scheme at the right point in the cycle.
  • Kingsgate House, SW1
    Westminster City Council has granted planning consent for our plans to redevelop this building into Grade A office space, retail units and 100 prime residential apartments, totalling 31,980m2. Two new buildings will replace the existing office block. The public realm will be extended to include an attractive courtyard bordered by new shops and restaurants. Demolition has started since the year end and at this stage we have committed to complete the substructure and build to ground floor level to give us maximum flexibility. The earliest date for completion of the scheme is April 2015.
  • 1 New Street Square, EC4
    Planning consent has been granted by the City Corporation for a 23,670m2 office and retail development. The new development will replace three existing buildings with one dramatic building. The existing buildings are leased, in the main, until December 2012.
  • Victoria Circle, SW1
    In February 2012 we formed the Victoria Circle Limited Partnership, a 50:50 joint venture with Canada Pension Plan Investment Board, to own and develop Victoria Circle. The proposed development will comprise five new buildings occupying an island site opposite Victoria station. When complete, the full scheme will provide a spectacular 84,670m2 mix of residential, office, retail and public amenity space.

Other development projects in the course of design include:

  • 20 Eastbourne Terrace, W2
    We continue to work on plans for the 7,700m2 final phase of this regeneration project. Proposed Crossrail station works in the Paddington area are likely to impact the timing of this scheme.
  • Portland House, SW1
    We are making good progress with our plans for the remodelling and conversion of this 29,490m2 office tower into residential apartments and aim to submit a planning application to Westminster City Council in the coming financial year.
  • Oxford House, W1
    We aim to submit a planning application for the redevelopment of this 1960s building, located opposite the proposed western entrance to Tottenham Court Road Crossrail station, into new retail and residential space.
Back to top

London Portfolio looking ahead

We continue to see an imbalance between supply and demand for high quality space in the medium term. Supply-constrained conditions are emerging slower than we expected this time last year, but we expect them to remain for longer as forecasts for the supply of new office developments were cut substantially during the year. A significant proportion of existing stock is unsuitable for the contemporary needs of occupiers and there is a higher than normal level of lease expiries due from 2013. This combination of factors will mean companies with office requirements will find they have less choice.

To put this in context, long-term average take-up of Grade A space in central London is 585,000m2 per annum. The take-up in 2011 was 510,950m2. The combination of current Grade A vacancy and forecast development completions which are not pre-let will only provide in the region of 370,000m2 per year in 2012, 2013 and 2014. Tall building developments in the City continue to attract media attention, but the current development commitments will make only a modest contribution to total floorspace.

Central London's residential and retail markets remain strong. London is the only city in Europe that can claim to meet the prerequisites for a truly global city - high quality of life; exceptional business infrastructure; a strong talent pool; excellent access to markets; good communication links; and a clear and reliable legislative framework. Uncertainty elsewhere serves to underline London's enduring strength as one of the world's most dynamic and successful cities.

Against this background, we will build on the advantages gained through re-starting developments in London first. We have an attractive mix of high quality assets with strong revenue streams. We have a clear plan for every asset and a pipeline of projects that will add significant floor space through development. We are well positioned.

Back to top