Good morning and welcome to Derwent London's 2025 interim results presentation. As well as me, you will hear from Emily, Damian, and Nigel this morning. I shall then wrap up before Q&A. However, before I start, I hope you've seen today's announcement that Nigel has made the decision to stand down from the board with effect from March next year. I'm delighted that he will stay on as a consultant, working alongside our talented team. Nigel has been integral to the success of Derwent over many years, indeed, 37. He asked me not to mention that number, but it is 37 years. On behalf of the board and everyone in the business, past and present, I wanted to pass on our many thanks. Thank you very much indeed, Nigel.
We've delivered another good operational performance since the start of the year with GBP 13.8 million of new rent agreed, open market lettings with 10.5% above ERV. Our total accounting return in the first half was 3%, or 7.3% over the last 12 months. Our two on-site projects at 25 Baker Street and Network both complete this year, and we expect them both to deliver attractive returns. We've made good progress on our next phase of West End projects. At Holden House, work started earlier this month, one at 50 Baker Street, building on the success of 25 Baker Street opposite. I'm delighted that we've agreed a new headlease, unlocking this striking project ahead of the start next year. London has enduring appeal, and the key drivers of the office market are strong.
There is a significant shortage of supply, with limited expected development and low existing availability of the right space. Demand remains well above the long-term average, and many occupiers are in growth mode. As a result, businesses are thinking proactively to secure the right space. The competition is translating into sustained rental growth. Now, the outlook. Following growth of 3% in the first half, we are reiterating our four-year ERV guidance of + 3% to + 6%. When combined with our earnings yield and development profits, we are confident we can deliver an attractive total return over the medium term. Consistent outperformance. Since 2020, our total property return has outperformed the MSCI London Office Index by an average of 230 basis points each year, and by 120 basis points in the first half this year. Strategic reshaping to stay ahead of the continuing evolving office market supports our long-term outperformance.
Over the last five years, we've invested nearly a billion pounds in the portfolio and have sold or contracted to sell a similar amount of property, which includes GBP 215 million this year to date. Proceeds have been reinvested into our regeneration-led total return business model with 1.5 million square feet of highly profitable, class-leading, well-located space either completed or currently on site. Now, turning to our key differentiators, which drive our outperformance. We are a London specialist with the right product in the right location and the right approach. We have a unique design-led vision for each building based around a set of core principles. We like to be disruptive and push boundaries while ensuring we deliver in space which is adaptable to the evolving needs of occupiers. We know, however, that occupiers want more than just great space. They also want a close relationship with their landlord.
Our clustering approach allows us to leverage our scale to provide high-quality amenity like our lounges in a cost-effective way on a portfolio-wide basis. We're seeing the benefits of this in leasing and asset management activity. Many of you will have been around our portfolio, which is in well-connected locations along the Elizabeth line, and you will be familiar with our larger HQ space and our smaller, more flexible fitted units. Reducing carbon through the development and operational stages of a building's lifecycle runs through all that we do, including exploring new and innovative building materials and methods. We continue to build on our circular economy strategy. Now, confidence in our total return. Now, looking at the total return and starting with earnings, our long WALT gives us good visibility on income.
Combined with a focus on capturing reversion and controlling costs, we anticipate our earnings yield on NTA in excess of 3%. Now, capital growth. Yields have peaked, and we expect ERV growth to be sustained over the coming years. As a result, valuations are rising. Alongside proactive asset management activity and ensuring we own the right buildings in the right locations, we expect to outperform. Finally, developments. Our next three schemes all have planning, and we have an extensive pipeline of major projects and refurbishments, which we will contend will make an ongoing positive contribution to our total return. Thank you. I will now hand over to Emily.
Thank you, Paul, and good morning, everyone. Occupiers are planning their real estate for the long term. Businesses are increasingly looking further ahead to secure space ahead of anticipated supply constraints and positioning themselves for the future, showing commitment to London. Good quality, sustainable, and intelligent design is still driving the majority of occupier demand. Location remains paramount, with the Elizabeth line having sharpened the focus on micro-location and occupiers prioritizing transport connectivity. For businesses making real estate decisions, it is also about the strategic role the office plays and what it says about their business. Offices are strategic tools for talent attraction and retention. Businesses want and need environments that people want to come to that reflect their values, drive productivity, foster collaboration and well-being, and support their brand identity.
Looking now at market fundamentals, take up in H1 2025 reached 5.2 million square feet, with 70% of that being grade A space. What's particularly encouraging is that around 80% of this activity was expansion-led. We've also seen significant withdrawal of sublet space as tenants take floors back for their own growth. Alongside sustained above-average active demand, these are trends we expect to continue. In respect of supply, the pipeline remains tight, with 11.8 million square feet under construction through to 2029, which is just 7.1 million of that speculative, equating to only seven months' equivalent average take up. With 40% already pre-let, the market continues to absorb new space, with ongoing pressure on available stock in the medium term.
Central London's overall vacancy stands at 7.8%, but when we focus on grade A, it drops sharply to just 2%, and in the West End, it's even lower at 1.4%, demonstrating the scarcity of premium options in the right locations. Now, looking at our own leasing and asset management activity, we've delivered GBP 13.8 million of lettings, renewals, and regears so far this year. Open market lettings were on average 10.5% ahead of ERV, and we have a further GBP 3.8 million of rent currently under offer. Our furnished and flexible offer continues to perform well, with H1's transactions agreed well ahead of adjusted ERV. We've also seen strong leasing momentum at The White Chapel Building, where the recent letting to B offices means the office space in the building is now fully let.
A great story of active asset management, strong relationships, and expansion is reflected in the deal to Adobe at White Collar Factory, where they've taken more space and extended their lease through to 2033. Retention remains high, and our EPRA vacancy is just 3.7%. Rent reviews have also delivered meaningful uplifts, with GBP 16.7 million settled in the first half, on average 5.4% above previous rents. A standout example was at the Brunel Building, where Sony Pictures rent review resulted in a 13.5% uplift over the previous rent and a 10.4% outperformance on ERV. At Derwent London, we recognize that forward-thinking businesses consider three factors with each real estate decision: the quality of the place, the flexibility and design of the space, and the strength of the partnership with their landlord, developer, and investor. Our focus is to deliver excellence in each of these pillars.
As London specialists and industry leaders with a strategically located Central London portfolio, we consistently set the standard for best-in-class office environments, underpinned by a strong brand, a proven track record, and a distinctive approach to partnership. The quality of the Derwent London offer can hopefully be brought to life as we now look a little more closely at our exciting pipeline. Our major schemes, alongside our refurbishments and future pipeline, amount to a potential 2.2 million square feet over the coming years, all of which reflect exciting opportunities for regeneration. We're confident that development activity will deliver strong and improving returns as ERVs move in our favor, inflation on construction costs settle, and the rates environment hopefully continues to improve.
At this stage, we're committing to schemes where we know we can deliver profit on cost with a comfortable range of 15% - 25% and with opportunity to better this. In terms of those on site, we're on site at 25 Baker Street and Network, both due to complete this year, as well as Holden House, which we've commenced this month. Across these three schemes, there is good potential to outperform the current 15% profit on cost projection, and we expect to deliver a yield on completion in excess of 6.5%. By way of update at 25 Baker Street, whilst we have physically completed the building, we await sign-off from the building safety regulator, which is expected imminently.
As you are aware, the offices are now 100% pre-let, and we have now let more than 50% of the retail space to Atis and Notto, with good interest in the remaining units. In addition, the sale of the residential apartments is progressing well, with contract exchange on 23 of the 41 private units for GBP 113.1 million. At Network, which is due to complete at the end of the year, this beautifully designed Piercy & Co scheme is progressing well on site, and the quality of the product is outstanding with its beautifully crafted facade of scalloped concrete. Additionally, this building will be our lowest ever embodied carbon intensity delivered, likely to beat the number you see here on screen, well surpassing our 2025 target and already likely to be very close to our 2030 target. Occupier discussions here continue with good momentum.
At Holden House, we will be delivering a best-in-class West End redevelopment behind a retained facade and opposite the Elizabeth line. Demolition has now commenced, and a contractor has been appointed under a pre-construction services agreement. This scheme, designed by architects DSDHA, will comprise just over 110,000 square feet of office space with a new prominent entrance on Rathbone Place, as well as circa 20,000 square feet of retail on Oxford Street. PC is anticipated H2 2028. The scheme will deliver large rooftop amenities, event space, and terraces, as well as characterful internal space around a beautifully designed atrium. As with all our developments, Holden House will deliver best-in-class sustainability credentials. Moving now to some comprehensive refurbishments where we're on site. Firstly, Middlesex House. We're repositioning this beautiful 1930s warehouse, enhancing arrival spirits and end-of-trip facilities, as well as adding a fantastic rooftop terrace.
This will enable us to move rents on substantially, with PC anticipated in the first half of next year. With a variety of size of units across the building, we will be offering both Katte and Katte Plus space. At Stephen Street in the West End and Oliver's Yard at Old Street, we're carrying out significant rolling refurbishments on office floors and are simultaneously providing enhanced amenity and outdoor space at both. In addition, we'll be degassing both buildings and improving environmental credentials. In doing so, these works, we can move rents on significantly. Now, onto our near-term pipeline. At Greencoat and Gordon, we will be delivering a comprehensive refurbishment of two Victorian warehouses. The scheme will comprise 108,000 square foot over seven floors and multiple units.
The building boasts an abundance of character and will be maximizing its inherent features throughout the scheme, bringing the stunning architectural heritage of the building back to life. At 50 Baker Street, we've now agreed our re- gear with the Portman Estate, as you've heard from Paul, and are due to commence in H2 2026. Just north of 25 Baker Street and on a one-acre island site, this is an exciting prime West End scheme designed with AHMM. The office building will have a dramatic and prominent entrance and voluminous reception. It will comprise 236,000 square foot, of which 18,000 square foot is ground floor retail. There will be seven floors above ground, the largest of which will be a unique 34,000 square foot. Large floor plates with 360-degree aspect will allow for light and bright office floors.
As you would expect, the scheme also provides for a huge communal roof terrace with uninterrupted views and generous amenity throughout. In addition, we'll be delivering 17 residential apartments on the site. Finally, looking at the longer term and our next phase of redevelopment, we have further projects totaling a combined circa 1.2 million square foot at Farringdon Road, Blue Star House, Old Street Quarter, and 230 Blackfriars Road. These projects offer a range of opportunities from a comprehensive office refurbishment to mixed-use urban generation. At Blue Star, we will shortly be submitting a planning application for a change of use to hotel and hope to achieve an uplift in floor area of over 50%. At Old Street Quarter, we continue to work through a detailed study and expect to submit a planning application for this exciting mixed-use urban generation project during the course of 2026.
You'll be hearing more on these projects at year-end. Hopefully, that provides a summary of the exciting schemes we have ahead as we continue to invest in and position our portfolio, driving returns and value in the longer term. I shall now hand over to Damian.
Thank you, Emily, and good morning, everyone. Firstly, the financial highlights. EPRA NTA increased in the first half to GBP 31.87 per share, and adding back the dividend paid, our total accounting return was 3%. After the 4.2% TAR in H2 2024, this takes it to 7.3% over the last 12 months. Gross rental income rose to GBP 109.1 million, but net rental income and EPRA earnings were marginally lower than in H1 2024. Our dividend remains well covered, and we're increasing the interim dividend by 2% to GBP 25.5 per share. It has also been a busy period of refinancing, and though borrowing levels are a little higher than at December, we expect them to fall back in H2. The movement in EPRA NTA per share in H1 2025 includes an upward revaluation movement of GBP 0.46 per share compared to a GBP 0.84 decline in H1 2024.
This is the main change, and the other figures are very close to last year. Turning to EPRA earnings for the first half, these were GBP 58.6 million or GBP 52.2 per share. Compared with H1 last year, gross rents were up and admin expenses down due to lower staff costs. However, property expenditure increased to GBP 14.5 million. As we guided in February, net finance costs have also risen, a result of higher average borrowings and refinancing fixed-rate debt in a higher interest rate environment. The gross rental income movement compared to H1 2024 takes account of lettings and asset management, which added GBP 6.1 million of income. However, breaks and expiries took rent down by GBP 3.3 million, and GBP 1.2 million was lost from disposals. On a like-for-like basis compared to this time last year, gross rent was up 3.1% and net rent 1.9%. More details are in appendix eight.
As noted earlier, property expenditure has increased, with irrecoverable service charges rising to GBP 4.1 million in H1. This was due mainly to higher voids, partly on space taken back for refurbishment. Property costs have also increased to GBP 8.6 million, and at our lounges and other customer service facilities, the running costs rose to GBP 1.8 million. The net cost is GBP 1.3 million, as we also received GBP 0.5 million of rent and other income from these facilities, and they offer important amenities to help attract and retain our occupiers. Now, turning to project expenditure across the portfolio, developments and refurbishments included in investment property incurred GBP 69.6 million plus capitalized interest and staff costs. A further GBP 1.4 million was invested in the residential apartments for sale at 25 Baker Street.
We also incurred GBP 3.1 million at our new solar park in Scotland, taking total expenditure for the first half up to GBP 74 million, including capitalized interest and staff costs. The total was GBP 84 million. Future estimated CapEx is shown on slide 33. Expenditure in H2 is forecast to be very close to H1 at GBP 88 million, and there's a detailed breakdown here on the chart. Note that we expect capitalized interest and overhead to be about GBP 6 million in the second half, in other words, GBP 4 million lower than in H1, and that's due to practical completion at 25 Baker Street, which is expected imminently. Estimated future EPC upgrade costs are GBP 86 million. Now, moving to refinancing highlights, these include the issue of new GBP 250 million seven-year unsecured bonds at 5.25% in June, followed shortly by the redemption of GBP 175 million of convertible bonds at maturity.
We've also arranged and extended several bank facilities. These include signing a fresh four-year term in July on our main GBP 450 million revolving credit facility, plus two one-year extension options. Cash and undrawn facilities at the 30th of June increased to GBP 604 million. The weighted average interest rate on our borrowings through the first half was 3.6% on a cash basis. Following refinancing, it ended the half year at 30th of June at 4.1%. After last week's 25 basis point base rate cut, the average interest rate on our borrowings has fallen to about 4%. We'll be expected to remain through to the end of the year, maybe a little lower if there is a further base rate cut later on. Looking to 2026, we have GBP 55 million of private placement notes and GBP 175 million of LMS secured bonds due to be repaid by March.
These have a combined average rate of 5.6%, and with both fixed and floating rate debt pricing close to 5%, we forecast that our overall rate will fall in 2026 to about 3.9%. Some more debt summary figures on the next slide. Note that the maturity profile on the right is shown after the latest refinancing. We plan to invest a further GBP 88 million in our projects in H2. Borrowings are forecast to fall later this year as we have circa GBP 180 million of contracted sales to complete. GBP 54 million of this is the Francis House sale, with a balance from the residential and retail disposals at 25 Baker Street.
To conclude, our balance sheet is in strong shape, and while we expect earnings to decline a little in the short term due to higher interest costs, lower capitalized interest, and the take-back of space for regeneration, our total accounting return outlook is the highest for several years. Thank you, and now over to Nigel.
Thank you, Damian, and good morning. Slide 38. The portfolio saw a valuation uplift of 1.2% in H1, and this follows on from the return to growth we saw in the second half of last year. This was from a mix of rising ERVs, asset management activity, project delivery, and a slight yield tightening. Our on-site developments, 25 Baker Street and Network, which are nearing completion, were up 4.3%, and they have delivered 30% capital growth over the last two and a half years. They represent about 13% of the portfolio's value.
Overall, we saw a property total return of 3.1% in H1, which was another good outperformance against the MSCI Index, which delivered 1.9%. Also, the positive rental growth story helped us achieve a small outperformance against the MSCI All Property Index, and this is encouraging for our market. We continue to invest across the portfolio with GBP 74.1 million in our developments and refurbishments. I'm sure you're all aware of the government's recent announcement that intends to prohibit upwards-only rent reviews. This came as a surprise to the industry, particularly due to the lack of consultation. It's very early days on this, and the sector will consult with the government. We think the market may consider alternatives to the rent review models, such as fixed uplifts. Turning now to rental values and yields. Valuation ERVs were up 2% in H1, continuing the trend we've seen since 2022.
The West End was up 2.4%, and the city borders 0.4%. The stronger West End trend looks set to continue, especially in the space-constrained market. Our average office rent is just under GBP 52 a square foot. This ticked up a little, and with a top-top rent of only GBP 63 a square foot, this supports continued growth. This is now flowing through to positive rent review settlements. Yields have leveled off, supported by the increased investment activity. Our equivalent yield moved in four basis points to 5.69%, mainly through asset management activity and specific events rather than a cyclical movement. Now, we'll look at the usual buildup of ERVs. Annual passing rent is GBP 208.9 million, slightly up from December 2024, mainly due to contracted uplifts coming through. Overall, there is GBP 114.3 million of cash reversion in the portfolio.
As shown, GBP 37 million of this is contracted uplifts, so already in the accounting rent roll of GBP 207.3 million. The balance of GBP 77.3 million is a 31% reversion in the portfolio and will be subject to appropriate rent-free spreading when let. The developments at 25 Baker Street and Network could have GBP 34.5 million. Over 60% of this is pre-let. There are then smaller projects in vacant space. The reversion for future rent reviews and lease expiries of GBP 20.5 million is up 12% since year-end. It is feeding through to valuations and will flow through to the income statement as these events come through. As you've heard from Emily, Holden House is now on site, so we've shown the impact on the right of this chart. We've deducted the ERV on the existing building and then added the scheme's ERV. This will take the portfolio ERV to over GBP 330 million.
Now, the investment market. This continues to improve with transactions of GBP 3.3 billion in the first half, which is already 70% of last year's total. Small lot sizes continue to be liquid, especially those in the West End. However, some larger lot sizes were traded, which is encouraging. We expect this trend to continue. The strong rental outlook, as well as London, is an enduring appeal, and expectations for a reduction in finance costs support a recovery in volumes. On sales, we were busy with a mixture of activity. An owner acquired Pentonville Road. A U.K. pension fund is acquiring Francis House. At 25 Baker Street, further progress was made with pre-sales of the residential apartments. Overall disposals, we expect to receive over GBP 200 million this year.
On acquisitions, we made a small purchase adjacent to our 90,000 square foot Morelands property, where we extended the head lease from 112 years to 160 years. Some good asset management here and a long-term development play. Finally, a brief sustainability update. The team continued to work with our occupiers to get energy usage down, and this was down 9% in the first half. Firstly, our intelligent building systems, which are using AI software within them to monitor the usage and then adjust it. Also, the benefits of our EPC upgrades over the last 18 months are starting to cut consumption. This was mainly the installation of air source heat pump at Stephen Street and plant upgrades at 17 Gresse Street. On embodied carbon, we firmed up our circular economy strategy last year, and this is being implemented at Holden House redevelopment.
There is good opportunity for reuse, including existing fit-outs, the raised floors, and structural elements. At our 100-acre solar park, we've completed site prep and the support frames and now onto panel installation. Completion of the project and power generation is anticipated in H1 next year and should produce over 40% of the managed portfolio's electricity. Now, back to Paul, and thank you for your kind words earlier. Thank you.
Thank you very much indeed, Nigel. Now, to the summary on page 45. As you have heard, we are well positioned for growth with a great portfolio and a strong balance sheet against a more favorable property market backdrop. Rents are growing as demand continues to outpace supply, and yields are past their peak. We are committed to our next phase of West End developments and refurbishments, with the next phase commencing in early 2026.
We will continue to recycle capital to ensure we stay ahead of market trends. We expect ERV growth of +3% to +6% in 2025, with further growth to follow. We've delivered consistent outperformance at both the property and corporate level, and with the strongest total return outlook for several years, we expect to deliver sustained long-term value. Thank you. We will now take questions from the room and from those who have joined us remotely. We'll start with the room. There are microphones for those that want to ask some questions. Working?
There's a hold.
Okay.
Sorry, novice. Adam Shapton from Green Street. One specific one, and then one more general one, please. Just on the lounge costs, is there seasonality to those costs? As we look at the higher level in H1 versus the previous H1, should we expect the same increase, a similar increase in H2 versus H2?
I think we're now reaching a fairly steady state.
That's how I know.
It's been building up in volume, and I think we can say that the costs should stay roughly where they are now.
Okay. Understood. Thank you. A more general one on capital allocation and sort of capital market signals as they pertain to Derwent London. There are a few ways to think about share price discounts. One is that your shares are at more than at least a 25% discount to your reported values on an unlevered basis. Implied EPRA yield is above 6%. I'm not talking about sort of daily share price moves, right? This has broadly been the case for about three years now. Thinking about that versus the 15% - 25% profit on cost you're underwriting for projects, I don't know what that would equate to in a yield on cost underwrite. Can you talk about the deliberations that you and the board have about the appropriate pace and nature of net external growth, in particular of those capital market signals on the equity side? Obviously, you know we know where your marginal cost of debt is too.
It's a good question. Obviously, we'll focus on the business, and we're taking a long-term view, investing into the portfolio. Obviously, the board considers various options as to what best use of capital. I don't particularly want to shrink the business, and buybacks could do that. Whether or not they are a long-term benefit is open to question, but we would consider all options. At the moment, we have an exciting pipeline going forward. We're consistently beating ERV. Our new lettings are 10.5%. We think the market is settled from a sort of investment yield point of view. We think we're past the peak. Hopefully, we could see further growth going forward. Damian, do you want to add to that?
I think it's interesting. We've had a period of quite substantial pricing adjustment in the sector. That seems to be coming to an end now. We've got rents growing as strongly as they have for some time. We've got pretty stable yields. There is a shortage of good quality products out there, and our job is to supply that. We believe that can provide attractive returns for our shareholders at the same time. This is a time to have faith, I think, and look forwards. These are great products that we're creating. Good products, the rents are growing much more quickly than they are for less good product. If you can improve the overall quality of the portfolio, you can get better returns going forwards as well.
Just to be clear, attractive returns for shareholders at the share price rather than on the basis of NTA. That's the key, I think, for investors, right? That's what you're underwriting.
We are underwriting off the metrics that we use, which is project profit on cost, yield on cost, and everything else. You buy the shares at the share price, ultimately.
Okay, thank you.
Thank you, Adam. Who's next? Please, you've got the microphone there. Yeah, please.
Yeah, morning, team. It's Zachary Gage from UBS. I mean, kind of linked a little bit to the share price reaction this morning. Trying to think about why that reaction's been fairly negative. Obviously, NTA has come in lower than consensus. Looking at your capital growth numbers versus peers, I think you're 1.6% for the West End. Shaftesbury was 3.4% for their office portfolio. GPE, different reporting period, obviously, but I think it was 2.8% for the six months to 31st of March. That's quite a bit stronger than the numbers you're reporting. Could you give any insights as to why you think perhaps your portfolio is not getting the same level of capital growth, which obviously feeds into NTA and a 3% total accounting return for the first six months of the year? That's a little bit below your target return level.
Also, feeding on from that, I think as we discussed, the market really wants to see some larger core office disposals. It sounds like the market for that is picking up and there's more potential buyers out there. Is there any reason why we shouldn't be seeing that coming through in the second half of the year to prove that or get some evidence of that debate over where the shares are versus the underlying asset values?
Nigel, you want to start? Do you want me to start?
Yeah. I mean, the portfolio is a mixture of core income and opportunities. We didn't put the slide in this time, but the higher value properties have outperformed. They've outperformed probably consistently for the last three or four valuations. We didn't put it in, but the same message was here. There is a bit of a drag from the rest of the portfolio. You need to take a little bit of a longer-term view on those, on the likes of the Holdens and the things that are coming through. Over the short term, you're right, but I think over a longer period, as we've shown with the MSCI Index, we've been outperforming every year for the last X number of years. Over a longer period, I think it under, you know, that's the real picture than a sort of micro last six months valuation.
We're obviously gearing up for the next phase, and you've got some schemes starting. When buildings become near the end of their vacant possession time, values will decline a little bit. You know, when you gear up to improve your space, you're going to get some good returns going forward. Anything else, Zac, at all?
Yeah, just on the sort of the larger office disposals and appetite for, you know, your sort of core holdings.
You've seen, we've seen an increase in turnover this year, which is, you were saying, it's 70% of what it was last year. If you drill down into that, it's quite encouraging. You've had bigger lot sizes being sold, Hanover Square, Manchester Square. You've also had owner-occupiers with State Street buying in a big chunk, 300. You've also had value-add opportunities. The spectrum of buyers is there, which is typical of a more standard market. We just need more activity, and we need a bit more, probably, debts moving in the right direction, and I think it'll unlock that. If you go look at what's happening in Europe, they do get big transactions over there, but the cost of debt is a lot lower. I think we need a little bit more on the debt side, but the rental growth side is coming through. It's happening.
Yeah, please.
Thanks. Morning, it's Thomas at Berenberg. Just a couple of questions. One on market supply. I just wonder if you can give us a sense of the depth of activity in the refurb market. You know, you yourselves have got a decent amount of refurb work going on at the moment. I just wonder if you can give any color on whether you're seeing more competing new supply coming from that refurb part of the market, especially with more tenants choosing to stay put and perhaps what it means for longer-term ERV growth.
Yeah, I think it is picking up. Obviously, the carbon story would suggest that more refurbishment will be encouraged. We're certainly picking up with ours, with our Middlesex Houses and our Greencoat Houses. Emily, have you seen a big uptick in?
I think the market is very much retrofit-first from a planning perspective. That is definitely going to be a feature. I think it's important to note that from a market perception perspective, it doesn't just need to be new build to be the good quality. That tier below brand new build, you know, ground up, is still very much in the good quality bracket of the marketplace that we talk about.
Thanks. Second question, Damian, you're mentioning earnings will just run a bit lower in the short term. I just wonder if you can give a bit more color on where you expect them to trough out. Just to clarify, that would be EPRA earnings, so excludes profits on your resi sales.
Thank you. I mean, I think we've got rental growth now, which is at or around the increase in our general costs. After a number of years when rental growth has been running below cost inflation, we're now at a position where you can expect rents and overheads to move in the right direction. I think rents will outperform overheads. The main issue for us at the moment is that interest costs are higher. We've refinanced and the cost of our debt has gone up, and it's true across most of the space at the moment. We have this situation where when we complete bigger projects, the capitalized interest goes down as well. I think in the second half, we're going to see earnings fall by GBP 4 million or GBP 5 million, that sort of number. That should be it, I think, for now.
After that, we should see the capitalized interest move up as the projects become more mature, rents will grow, and we should see, I think, some growth in earnings going forward.
That's helpful. Thank you.
Anyone else? Please, yeah.
Good morning. Neil Greer from JP Morgan. Just one. You've outlined the activity to come in the development pipeline, and obviously, comments are around demand and supply being very much in your favor. How do you think about the pre-letting of those projects as they get closer to completion, please, or would you perhaps wait until they are nearly finished? Thanks.
We've obviously been very pleased with the pre-let that we achieved at 25 Baker Street. Historically, West End has not been such a pre-let market, but encouraged by interest, we've got Network, but the market is growing, as you quite rightly point, and we see some good ERV growth. There's always a balance between taking a pre-let and taking off the table and de-risking versus waiting for the market to grow. Emily, would you like to add a bit to that?
Yeah, I think there's two things. I think ERV is moving in our favor, so we've always got to strike a balance of making sure we're getting tomorrow's rents. The other thing to look at on the projects themselves is the size of the whole asset, but also the floor plate size. At 50 Baker Street, for example, you've got very large floor plates. Holden House, you've got more akin to Brunel Building or Network Building, 15,000 - 20,000 floor plates. That makes a difference on how early occupiers are generally out. The market is the length of time that occupiers are in the market is extended, as we know, in terms of people are coming out earlier, window shopping for longer, etc. We'll be there ready to capture the interest when it lands, but there are multi-factors feeding into when you pre-let and transact.
Thank you very much, Neil. Any other questions from the floor? Right. Have we got any questions on the telephone? Do we know? One question.
Yes, question from Paul May from Barclays. Please, go ahead.
Hi guys. A couple of questions from me. Obviously, all the focus on NAV and NTA movement and share price performance is not the case that the shares are down because your earnings are a miss and probably a further miss than was expected as a full year. I think you saw this as a full year as well. Our share price fraction was negative. We've seen it with others. I was just wondering at what point does earnings become a core focus for you and sort of driving cash flow? Admittedly, as you say, the next six months is going to be tough, but then we're going to see that growing. Just wondered, does that become a greater focus for you or will you always be more focused on the capital side?
Damian, do you want to add to Paul's question?
Yeah, Paul, we've always been focused on earnings. I think if you follow this over the last few years, you'll know that. Clearly, we are also a total return business, so it's getting a balance between earnings and creating value. This has always been an earnings business. I think you'll be, if you look at our earnings profile compared to our main peers, they've been pretty impressive. Yes, very much earnings focused.
Let's get it up and it's right.
Yeah, that's good. I think the point was in the statement is a lot of total return commentary. I think the earnings, the first mention of like-for-like earnings or rental growth wasn't until page 12. Getting back to that earnings progression, I think we'll certainly see a reaction in the share price. The other one, I think it's been mentioned a few times, the supportive rate of movement will see the market improve. The U.K. five-year swap is basically flat since January 2023. That's despite base rates going from 3.5% to 5% and back down to 4%. The kind of funding cost for a lot of owners has basically been the same for the last over two years now, yet the market's still not particularly strong. What level are you hoping or expecting rates to get to to get that support in the market?
Surely for that to happen, we're looking at a weak economic outlook, which then has an effect on the rental side. Just wonder what you're sort of looking for or expecting.
First of all, certainly for us, the gilt is as important or more important than the swap. That has been much more volatile, and we've seen those rates come off a little bit in the last few months. Clearly, lower rates are more attractive for borrowers than higher rates. I think it's important to look forwards. At the moment, the investment market is focusing more on the rental growth outlook than on anything else. I think it's a combination of all those things. These are quite small marginal movements that we need, but the combination of stronger rental growth, more stable yields, and gradually slightly falling debt costs, I think, is quite helpful in this market.
Okay, sorry. Last one, apologies if I missed it in the presentation. I think the statement mentioned some capitalized admin costs have increased. Just wonder what level that is, where it was, and where it's increased to. I imagine that will also work as a headwind in the second half. Is that right?
The number was GBP 1.4 million for the first half. This is essentially some of our development team who work on specific projects, and we've been capitalizing their costs. It's quite a small number, as you can tell.
Thank you very much.
Thank you, Paul. Any other questions from the telephone? Anything on the webcast, John? Thank you very much for today's attendance. We're all around late. If anyone wants to come and give us a call or have a chat afterwards, thank you very much indeed for your attendance, and have a good summer. Thank you very much.