Ladies and gentlemen, welcome to the Derwent London 2023 Q1 business update. My name is Mikola. I will be the operator for your call this morning. If you would like to ask a question during the question and answer session on today's call, you can do so by pressing 1 on your telephone keypad. I will now hand you over to Paul Williams, Chief Executive.
Good morning, everybody, and welcome to the Derwent London Q1 2023 business update. Office occupancy levels are rising. People are returning to the office, tube journeys are close to pre-COVID levels. London, and particularly the West End, is really busy. I am delighted to announce that we've had a record leasing quarter in Q1, with more than GBP 17 million of new leases signed on average, nearly 7% above ERV. The weighted average lease length for these lettings is 12 years to break. Three deals stand out in particular. The first is the letting of the 22,000 sq ft flagship retail unit at Soho Place to UNIQLO at a rent in line with ERV for potential upside. This consists of a base rent subject to annual indexation and a turnover top-up.
This highlights the positive impact of the opening of the Elizabeth line, which has led to a substantial increase in footfall. We're encouraged by the level of interest in the remaining four small retail units, which together total just over 10,000 sq ft. Second is the GBP 11 million prelet for 15 years on 106,000 sq ft to PIMCO at 25 Baker Street, one of our on-site developments, at a rent of more than 12% above ERV. As well as endorsing the quality of the building and the area, it is also a story of long-term growth, increasing their occupational footprint. The commercial element of the scheme is now 56% prelet or sold two years ahead of completion. Third is the GBP 2.3 million letting for 31,000 sq ft to Buro Happold at The Featherstone Building.
Our commitment to open the next DL/Lounge in our Old Street village alongside the building's high sustainability specifications played an important part in their decision. Across Central London, vacancy remains elevated at 8.3%. The West End, our largest core area, is significantly below the ten-year average at 3.6%. This compares to the City at 11.7% and Docklands at 14.6%. A large part of the supply is secondary assets. Our own EPRA vacancy rate has fallen from 6.4% to 4.9%. Sustainability is taking an increasingly central position in occupational decisions. Our developments have strong green credentials. Our portfolio is 100% compliant with 2023 EPC legislation, 86% for 2027, and 65% for 2030. This is substantially ahead of the wider market.
We have a fully costed program of works to ensure we meet the evolving legislation, believe the investment represents an opportunity to create value through broader repositioning of buildings. Alongside our developments, Derwent has long been recognized for its distinctive approach to refurbishment, we expect to do more of these over the coming years. As we're delivering an uplift in rents, these projects will benefit from a lower embodied carbon footprint. We expect to invest some GBP 30 million-GBP 50 million per annum in refurbishment, for refurbishments over the next few years. Investment activity across London recovered somewhat in Q1 2023 with a number of larger transactions. The uncertain macro backdrop means activity remains subdued compared to historic levels, a trend expected to continue in Q2.
Demand is mainly from cash buyers in the sub-GBP 100 million range. The West End is faring better than the City. At the start of the quarter, we sold 19 Charterhouse Street for GBP 54 million, reflecting a yield of 4.6% to lease expiry in mid-2025. This is a small asset for us with limited space gain potential, so we chose to recycle the capital, providing further firepower to fund future development CapEx whilst keeping our leverage low. Net debt reduced through the quarter to GBP 1.2 billion, resulting in an EPRA loan-to-value ratio of 23.1% and GBP 610 million of cash and undrawn debt. We have substantial capacity to finance the GBP 307 million of committed CapEx and take advantage of the potential acquisition opportunities that may emerge.
Turning to developments, our on-site projects, which together total 435,000 sq ft, continue to make good progress. At 25 Baker Street, construction works are now well out of the ground. Combined with the prelets from PIMCO and our low exposure to build cost inflation, this scheme has been meaningfully de-risked. At Network, demolition and piling works have completed, and basement works are getting underway. We also closed the signing of the main contract on a fixed price basis. The development pipeline, especially in the West End, is very constrained from 2024 onwards, boosting our confidence in the leasing prospects for these projects, which both complete in 2025. In summary, against a challenging macro backdrop, Derwent London remains well positioned as the nature of occupational demand continues to evolve. The way businesses work is evolving and hybrid is here to stay.
Demand is strong for our distinctively Derwent brand, amenity-rich, sustainable offices, and we see rental growth for the right space. We have a strong balance sheet, a portfolio that meets occupiers' increasing requirements, and a deep pipeline of regeneration projects that we expect will deliver attractive returns. Thank you. I'll hand back to the operator for any questions.
If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and you wish to remove your question, please press star followed by two. When preparing to ask a question, please ensure that your phone is unmuted locally. To confirm that, star followed by one to ask a question. Your first telephone questions today is from Pieter Runneboom from Van Lanschot Kempen. Please go ahead.
Hi. Good morning, team. One question from my side on the signing of. It was done above ERV, but is correct to assume that this does not take into account the 37 month rent-free?
Yes. I mean, the rent-free of 37 months is a 15-year lease and 100,000 sq ft, but very much in line what we'd expect and very much in line as to what the market would expect.
If you exclude the PIMCO lease from the leasing, the GBP 17 million of leases that were done in the first quarter, at 7% ERV. If you exclude that one, the whole lease how, what level were leases done compared to ERVs?
If you exclude the PIMCO lease from the GBP 17 million in total, you're at +1% of the overall ERV.
Okay. Great. That was my question. Thank you.
Thank you.
The next question is coming from Callum Marley from Kolytics. Please go ahead.
Good morning, all. Just two questions from me. It was noted in your full year that your ERV guidance in the 0-3% range. Just wanted to get where you think that may sit now. Is it closer to the lower end or the upper end of that range?
Uh, I think obviously first we're... Obviously, good morning. Um, obviously it's an average across the portfolio. Um, I mean, obviously the new lettings, the bigger better buildings are doing better. That we expect to continue to outperform. Uh, it's too early to change any guidance at this stage. All we can tell you is we've got good interest across, across the portfolio. We're delighted with the record first, uh, Q1 lettings. Um, so I think, you know, we'll probably have a look at where we are on guidance at, uh, at, at your entrance. At the moment, we remain confident of, of that guidance and hope that, uh, we would meet expectations.
Okay. Thank you. Second question, just given the polarization in the office market, between the best and the rest, with obviously valuations and leasing holding up well, where do you see opportunities there? Is there a case for you maybe to sell more of your prime buildings at a sharper yield and use that to add to your development pipeline going forward?
There is obviously a case. I mean, as we looked at the strategy and we, you know, if we look at how they performed at year-end, they very much outperformed the market, and they were I think they were down just over 3%. In fact, the new developments were up. I think the view is that we've been selling some of the smaller assets and keeping the greener, bigger buildings for longer. We see good demand in those buildings. If you look at our Brunel building, which is one of our regular performing assets, I think seven out of the eight occupiers are looking to expand their space. There, you know, it's good demand for that. It's not forever.
I think at some stage we will sell one of the bigger assets and re-recycle, and we'll look at how we can invest that money. For the time being, we're very happy with the strategy of keeping the better buildings for longer. Certainly, they're all very green and there's good demand. We will look at selling one of the bigger assets at some stage.
Thank you.
The next question is coming from James Carswell from Peel Hunt. Please go ahead.
Morning, James.
Morning. Quick question from me. I mean, you touched on the strong balance sheet, and I appreciate you obviously got a pretty exciting development pipeline. I'm just wondering what you're seeing in the investment market and given, you know, the repricing that's happened. Are you starting to see any interesting acquisition opportunities?
Well, we haven't seen many motivated sellers yet. Yet. Nigel, have you seen much?
I mean, there's been a bit more activity in Q1, I think about GBP 2 billion, whereas Q4 last year was very quiet at about GBP 700. Those sort of spread across long income type, big vacant building in the city. We're not really seeing much come through. We are hearing from the sort of banking side that there are discussions going on, you know, covenants and stuff on a few buildings, especially in the sort of, the ones that were acquired by the Korean investors over the last four or five years.
Obviously we've got the balance sheet to go buy. We'd like to see a bit more value in the secondary market to see where, you know. I think maybe expected for too long. I think, we think this polarization will continue, and we're ready to acquire if we see something where we can add some value. I think it needs to be a reasonable size because I think that's where you can turn the needle. I think, again, we've got plenty of assets within the portfolio. We've got a great pipeline to refurbishments. If we see some good value, we'd certainly look to acquire.
Great. Thank you.
Pleasure. Thanks, James.
This concludes our question and answer session. I would like to turn the conference back over to Paul Williams for any closing comments.
Thank you very much. Thank you everyone for listening in today. We're all around if you want to make a call, maybe give Robbie a call, for any further questions you have. If anyone wants to come and see the wonderful portfolio, please get in contact. Thank you all for your support and have a good day and enjoy the coronation. Thank you very much.
Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect. Goodbye.
This presentation has now-