Thank you very much for joining us for our interim results presentation. It's great to see you all, and we really appreciate the time that you give us, so thank you for coming along. Now, first of all, I'm going to start by summarizing some of the key messages that we'll be giving you over the next 30 or so minutes. Essentially, we have carried on where we left off at the year-end, successfully executing on our growth strategy. You'll hear about our strong operational performance so far this year, delivering some excellent leasing well ahead of target, and leading us to reiterate our rental value growth guidance.
We've made further accretive acquisitions and significant sales ahead of book value, and our developers have created more premium spaces timed to deliver into a market that is starved of such quality, meaning that we are well set to deliver both strong income and value growth. To help us tell this story, we have a full agenda as ever for you this morning. I'll start with a reminder of how we're delivering on our very clear strategy before giving you an update on our market opportunity. I'll then run through our successful six months of acquisitions, sales, and developments before Nick looks at our exciting fully managed growth and our results. I'll then wrap up with our outlook before opening the floor to you for Q&A. As ever, we have the full executive committee team here to help answer any questions you have.
Plus, we also have our newly promoted Rebecca Bradley as Customer Experience Director and Simon Rowley as Flex Workspaces Director, and congratulations to them on their appointment. Before we get into all of that, first of all, can I just say, as this is probably Nick's last session before Pastures New, I just wanted to pay tribute to him, to thank him for his exemplary leadership across multiple facets of life at GPE. He's been a great partner to me, and I know to many of you, and to all of our colleagues at GPE over the past 14 years. I know you will join me in wishing him well. Nick, thank you. Let's start then with our strategy.
To do so, I want to remind you of our investment case, essentially the six fundamental pillars upon which our strategy is built, and you can see them here. In approaching each, it's always been about doing what we said we would do. First, prime central London. It's the largest city economy in Europe. It's outperforming the U.K. overall, and it has decent forecast jobs growth. We have been and will continue to be focused on 100% prime locations only. Second, we create and manage premium luxury offices across our HQ and our Flex products. It's where the richest seam of customer demand exists, and our strong leasing and rents rising supports our position, with space under offer today materially ahead of ERV. As I'll show you later, even after substantial growth, they're still affordable, especially given the price inelastic nature of many premium customers.
Third, contracyclical capital allocation. You'll recognize the chart at the top, raising capital, the green circles, and buying when markets are cheap, as was the case in 2009 through 2013, and again last year, developing into the inevitable supply crunch before selling completed business plans as markets recover, and then returning excess capital to shareholders shown by the pink circles. We've bought well, GBP 390 million, including CapEx, since our rights issue last year. We're developing some of the best space in town, covering 36% of our book, and we have rotated towards sales, as we said we would, more than GBP 290 million sold so far this year, 1.7% above book value, and including one Newman Street, the largest single asset sale in the West End year to date. Fourth, driving innovation, leading the market in the creation of sustainable spaces and in our customer experience offer.
we've delivered a world first in our circular economy activities at 30 Duke Street, and our award-winning CX team is helping grow our unique Flex offer toward our 1 million sq ft target. All of this activity is always with a strong balance sheet and within an LTV range of 10-35%. So far this year, we've delivered a record financing, maintaining high liquidity, and have kept LTV low at 28%. Sixth, strong EPS and NTA growth, and we are on target to deliver a 10%+ return on equity over the medium term, with more than three times earnings per share growth. With a strong strategy and supportive fundamentals, we have had another successful period of delivering on our promises. Let's have a quick look at our half-year results and our outperformance despite the challenging U.K. economic and political backdrop.
Now, as you can see on the chart on the right, our excellent leasing continues, GBP 37.6 million in six months, the same as in the whole of last year, 7% ahead of ERV, leasing faster than underwrite, and with strong appeal to AI-led customers, now up to 23% of fully managed spaces. We have a further GBP 10.3 million under offer today, a very strong 31% ahead of ERV. Our rental values were up 2.6%, with prime offices up 3.3%, bringing the total to 6.8% over the last 12 months. Our vacancy rate remains within our target range at 6.9%. Our customer retention rate remains high at 76%, well ahead of target, and we've made an attractive acquisition at a discount and sold at a premium. More on these deals later. All of this activity has helped us deliver healthy financial results for the period.
Proforma rent roll up 29%, with our average office rents up almost 10% over the last 12 months. Our valuation was up 1.5% over the first half, with developments up 6.1%, delivering NTA growth of 2% and earnings growth of almost 85%, still with low LTV at 28%. As we think about what next, we have created a fantastic platform for further growth. Income growth of some 64% by FY 2027, or more than 140% in the medium term led by Flex. Big development surpluses of circa GBP 300 million to come, with potential for upside from there. We'll buy more, we'll sell more, all supported by a London economy that continues to deliver GDP growth ahead of the U.K. overall. Significant growth to come.
Now, talking of London, let's have a look at our markets, and in short, we expect supportive leasing conditions to continue, with best rents to rise further despite the challenging macro backdrop. Now, why do we think this? In short, because supply and demand conditions in London are both supportive and much stronger than the U.K. picture overall. First, demand for space is strong, driven by jobs growth. As you can see in the blue bars on the right, today there are 500,000 more jobs in London than there were at the time of the Brexit vote in 2016. Oxford Economics expect the number to continue rising by some 200,000 between now and 2030, equating to roughly 20 million sq ft of new demand. Second, take-up remains robust, with 5.1 million sq ft signed in half one ahead of the 10-year average.
Third, active demand—that is, companies looking for space right now—is still way ahead of the long-run average. It is dominated by banking, finance, and digital sectors, with the latter responsible for some 40% of U.K. GDP growth, with AI-led businesses creating jobs in London today. History shows us that two-thirds of them will only lease prime space. Plus, contrary to many commentators' perception, way more companies today are looking to expand their space take than contract it, 55% versus 14%. These companies are going to struggle to find that space. They will run into a supply drought that is extreme and shows no signs of abating anytime soon. Bottom left, we have updated our forecasts that deliveries, shown by the purple bars, are very low, and we know that new starts are at lows not seen since 2010.
We think that commentators continue to overestimate deliveries, and CBRE's forecasts are shown here by the pink diamonds. Now, either way, if you divide the long-run average take-up of 4.6 million sq ft per annum into the amount being delivered, we think we will need to build 84% more every year than is currently planned to meet this demand. That is as high a shortfall as we can remember. It is not as though customers have much choice from existing space. The current Grade A vacancy rate in the core West End is only 0.3%. As a result, we think further rental growth is coming, focused on prime spaces and continuing the theme of the chart bottom right, highlighting the very clear bifurcation between the best and the rest that we have seen since 2023. Remember, overall, rents in London remain affordable.
In both the City and the West End, they are still only 5%-8% of the average London business's salary cost. Conditions then that most definitely play to our strengths with our 100% core prime locations, 94% near an Elizabeth Line station. Turning to our investment markets, we think that there is good evidence to back up our view of six months ago that they are now recovering, albeit slowly. Capital values are rising, up 6% in nominal terms since our capital raise last year, shown on the right, driven by rental growth and tight investment supply. Prime yields shown bottom left are now either stable or mildly falling.
Investment volumes are also up by 63% in H1 2025 compared to last year, and many more larger lots are now trading, as you can see bottom right in the green bars, with 19 deals of over GBP 100 million already traded so far in 2025, up from 11 last year, with a further eight currently under offer. Plus, institutions are buying again, accounting for only two of the larger deals done last year, but 10 so far this year, or more than 50%. With equity demand up since May to GBP 23.5 billion, the multiple of demand to supply at 4.8 times remains steady and relatively supportive to pricing. We will continue using these improving conditions to take more selective acquisitions and sales, crystalizing surpluses, and more on this in a minute. To sum up then with our market outlook, which supports strongly our strategy.
For rents, whilst business confidence has weakened since May, healthy demand and a dearth of prime supply has helped us deliver rental value growth in our forecast range that we set out at our finals, as highlighted at the bottom, and so we maintain our expectations for this year overall of growth between 4% and 7%, driven by prime offices up 6%-10%. Looking at yields, whilst the political backdrop has probably weakened since May, we think improvements in investor confidence and likely lower interest rates could push prime yields in further, especially where rental growth is a real prospect. Given that, let's turn then and look at our investing and developing activities so far this year. You'll remember this slide from May, and it shows our successful deployment of the capital that we raised last year.
We've added to the four deals we told you about back then with the purchase of the Gable shown on the far right. That's five opportunities acquired since May 2024, all in line with our disciplined criteria, all in the West End, for a total of GBP 180 million or GBP 390 million including CapEx, and at only GBP 770 per sq ft and a whopping 57% discount to replacement cost. Three offer fully managed conversions, two offer major HQ repositioning, and each with attractive stabilized yields and ungeared IRRs. From here, more acquisitions, we have two deals in negotiation or under offer, all in the West End, and more sales to build on the GBP 290 million completed so far this year, with a further GBP 150-200 million in the near term and GBP 650-700 million identified for the medium term. Plenty of opportunity with more to come.
Turning then to look at some of the detail and starting with the acquisition of The Gable shown in yellow on the map. It sits in an area of London we know inside out and next to the Courtyard which we bought last year. We paid GBP 18 million or only GBP 409 a sq ft, some 77% beneath replacement cost, and with a current running yield of 6.4% until July 2026. We have two possible business plans here. First, a conversion to Flex. We are in design and talking to the planners, and the economics are attractive with a near 7% yield, but this does rely on vacant possession. If the government-based customer renews their lease, we will maintain our low-risk running yield of at least 6.4% and probably hold for a future Flex conversion.
Now, since we saw you last, we've also sold our completed and let development at 1 Newman Street to a U.K. institution shown at the bottom of the map. We received GBP 250 million, priced off a 4.48% yield, more than GBP 2,000 a foot, and 1.8% ahead of book value. A good sale of this completed business plan and showing both that there is liquidity at scale and strong prices for the best assets and reaffirming our long-held commitment to actively recycling capital into the next opportunities for us to drive growth. Talking of growth, let's have a look then at our development program, and taken together, we now have 11 schemes with three on-site HQ projects, already 71% pre-let, and three further Flex schemes on-site.
Across our four pipeline HQ schemes, we achieved two new planning consents in the past few months, and with The Gable purchased, we now have more than 1 million sq ft in the program, covering 36% of our book by area and delivering into the deep supply shortage that I referenced earlier. Looking then at our on-site HQ schemes, progress has indeed been good. At 2 Arlington Street, we are on time to finish in Q1 next year, although the surplus to come has reduced as the valuer has adjusted the cap rate up by 15 basis points. At 30 Duke Street, we signed our pre-let with Cundall, 6.5% ahead of ERV and nearly 12% ahead of the underwrite. As a result, we have captured some significant surplus, but there is more to come as we deliver our expected profit on cost of almost 40%.
At Minerva, shown bottom left, we are on time to finish in Q1 2027, and although costs are up since May, reducing the forecast profit to circa 15%, we are under offer on about 40% of the space at a substantial premium to ERV, which would drive our returns materially higher. Taken together, total area is up 66%, ERV is 174% higher, 99% of the CapEx to come is fixed, and we have GBP 65 million of surplus to come of current rents and current yields. They are all prime with exemplary sustainability credentials and have strong pre-letting potential for the remainder, with therefore healthy upside to capture. For the next phase of our HQ program, we have four fantastic schemes, each timed to deliver into the supply drought, with three in the West End next to the Elizabeth Line and one next to London Bridge Station.
At Soho Square, we're starting imminently and strip-out has begun. At Whittington, we've just received consent for our rooftop pavilion, and we're on site with preparatory works for this major refurbishment. We've also finally achieved planning at St Thomas Yard on the South Bank for an exceptional 184,000 sq ft park refurb, park new build project that will be significantly more profitable than our original tower proposals and will be starting here in Q3 next year. Finally, back in the West End, our Chapel Place project is in design, with planning discussions ongoing for a submission next summer. Big area and ERV gains and targeting a healthy minimum profit level, all next to major transport hubs and all with strong upside potential. Now, of course, we also have multiple growth opportunities across the rest of our portfolio too. You'll remember this portfolio stack.
I've talked about our HQ developments at the top, and in the middle sits our active portfolio management assets, representing 50% of the book and in many ways the engine room of the business. They are full of opportunity for us to grow rents and values, for example, on-floor refurbishments and their subsequent leasing to generate some GBP 47 million of income, capturing reversions of almost GBP 14 million, restructuring and regearing our interests, and prepping assets for major repositioning. This presents us with real upside. Their valuation is undemanding at just over GBP 1,000 a foot, with limited CapEx needed, and all of them are in prime locations. They include our Flex assets covering some 29% of our total book and where the growth potential is significant, as you'll hear from Nick in a minute.
Shown in yellow is the stabilized proportion of the portfolio where we will rotate out of completed business plans at high capital values per foot, potentially releasing more than GBP 800 million of capital to employ for much higher returns towards the top of the stack. Lots then to do for us as we execute our plan to deliver the substantial growth available to us. On which topic, and probably for the last time, over to Nick to dig into our Flex options.
Thank you, Toby. Good morning, everyone. I certainly did not need these when I started 14 years ago. Nor was I talking about our unique and well-established fully managed growth strategy, where we are successfully delivering premium hassle-free spaces for our customers.
Our leasing volumes continue to grow with more than a deal a week over the last 12 months, representing nearly 90% of all our sub-5,000 sq ft office lettings. Rents are growing strongly too, with these deals securing rents of GBP 37 million and, as shown in purple, regularly achieving more than GBP 250 a foot. As you can see top right, this is driving outsized performance well ahead of our targets. We're generating strong absolute returns with an average yield on cost of 6.5% and service margin of 35%. Relative to ready to fit, we delivered a 103% rent beat and a 61% 10-year cash flow beat. We've secured good lease duration too at just under three years.
Our fully managed spaces are today generating GBP 50 million of annualized rent, and we're currently managing GBP 25 million of OpEx and other costs across the categories shown in the green bar. With a gross to net of 50%, our annualized NOI is GBP 25 million or GBP 107 a sq ft. Once we factor in CapEx, along with fully managed specific corporate overheads, this results in an annualized net cash return averaging GBP 80 a sq ft or 40% higher than the ready to fit net rent. Much higher net cash returns than on a traditional basis and a customer base dominated by corporates, not SMEs. Our retention rate is strong at 75%, well ahead of our 50% underwrite, as our award-winning customer experience team delivers outstanding customer satisfaction.
The most common driver for customer non-renewal is needing more space than we can currently provide, as we experienced with our largest departure to date, a fast-growing unicorn status AI business who we'd already moved twice within our portfolio. Pleasingly, we were able to re-let their space within a month at a higher passing rent to Vanta, another high-growth company, with AI-led businesses now representing 23% of our fully managed customers. Our recently completed schemes are leasing quickly too. In the heart of Soho, Wardour Street is 100% let within two months of launch, including two pre-let floors. We have secured average rents per foot of GBP 279, with more than a quarter of the space let above GBP 300, together driving a valuation uplift of 10% in the half.
Our customers include those we've relocated from adjacent GPE fully managed space, an occupier of a GPE developed HQ building on Broadwick Street, as well as a new customer who decided to double their space take within a month of moving in. Over at Piccadilly, which launched last month, 35% of the space is already let or under offer at an average rent of GBP 296 a sq ft, although we're breaking through GBP 400 on a smaller space. With an 11% beat to ERV and healthy interest in the balance of the building, the prospects look strong. Having more than tripled NOI over the last two years and our leasing velocity ahead of target, there's plenty more growth to come from today's GBP 25 million. We'll generate GBP 7 million of additional NOI as we finish leasing up the recent completions.
Our three on-site schemes, all in the West End, will deliver a further GBP 12 million, with our pipeline schemes expected to add another GBP 15 million, taking our fully managed NOI to GBP 59 million, so an organic growth uplift of 2.4 times. As we execute more acquisitions, total NOI would increase to around GBP 90 million if we grow Flex to 1 million sq ft. With more than GBP 19 million of additional service profit shown in blue, we will be creating additional value of more than GBP 200 million or more than GBP 200 per sq ft. Lots more income and value growth to come on top of the strong outperformance we are already delivering, with fully managed ERV growth and valuation growth of 11% over the last 12 months. Now, a few comments on our overall performance in the half year.
We delivered like-for-like value growth of 1.5% as the best continues to outperform, and EPRA NTA rose 2% to GBP 5.04 per share. As expected and in line with consensus, EPRA EPS increased 70% to GBP 0.039, and we're paying an interim dividend of GBP 0.029. Our consistent financial strength saw EPRA LTV falling to 28.2% and available liquidity rising to more than GBP 450 million as we transitioned to a net seller and secured our largest ever bank facility. Overall, we generated positive TAR of 3% and 7.5% respectively over the last 6 and 12 months, delivering prime spaces against a backdrop of ERV growth, with more to come as we continue to execute our growth strategy.
Our opportunity-rich GBP 3.1 billion portfolio is 83% in offices, where we experienced the strongest value growth of 1.8% and ERV growth of 2.7%, with retail ERVs up 1.9% in the half year and fully managed rents up 3.5%. With an overall valuation uplift of 1.5%, developments delivered the strongest performance up 6.1%, with GBP 30 million of surpluses captured in the half-year valuation. Yields were broadly stable, with our portfolio equivalent yield today at 5.5% and our reversionary yield at 6.7%, higher still at 8.7% on a share price implied basis. Finally, the best continues to relatively outperform at both an ERV growth level in purple and by valuation shown in green. In particular, our West End properties, representing nearly three quarters of the portfolio, again outperformed with capital growth of 2.9%.
As we continue to allocate capital to drive value growth, our almost GBP 700 million CapEx program is predominantly in the West End, combining GBP 290 million to complete our six on-site schemes shown in black, with approximately GBP 400 million for pipeline schemes in gray. You will find the usual scheme-by-scheme detail in the appendices. With a total GDV of GBP 1.8 billion, we will deliver further surpluses of more than GBP 300 million based on conservative 10% cumulative rental growth. You can see by the solid line, more than GBP 125 million should come through within the next 18 months based on profit release at scheme PC, although our pre-letting activities typically accelerate these. Plus, there is serious upside potential with further rental growth and some mild prime yield compression taking the surpluses to more than GBP 500 million or 130 pence per share.
On the right, our investing and leasing activities will clearly change the portfolio composition, with stabilized properties shown in yellow growing from 19% to 55%, all else equal. However, our recycling activities will evolve the portfolio mix further, with prospective sales of around GBP 800 million in the next few years, meaning active portfolio management properties shown in blue will again dominate, with Flex also representing around 40% of the office portfolio. In reality, our sales will likely be higher still given our disciplined capital management, as they were in the last cycle with more than GBP 3 billion of disposals. Plus, I imagine there'll be some acquisitions too to replenish the GPE development hopper. Now, we'll also be driving more income growth.
Like-for-like rental income was up 5% over the last 12 months, whilst rent roll was up almost 30%, standing at GBP 127 million today following the sale of Newman Street. Over the next 18 months, this builds by more than GBP 80 million or 64% and rises to around GBP 30 million in the medium term, an uplift of 142%, including the market rental growth we expect to capture. Of course, some of this uplift will be tempered through sales of stabilized properties, but there's still lots of growth to go for, and we reiterate our guidance for a threefold increase in EPRA EPS over the medium term. Nearer term, we expect EPRA EPS to roughly double to around GBP 0.10 by FY 2027 as we lease up our on-site development and reefer program, with more growth to come as we deliver our pipeline and capture market rental growth.
Once we factor in finance and other costs to deliver this growth, along with our likely earnings accretive sales, we anticipate annual EPRA EPS of 15-20 pence in around four years' time. As a result, we expect a stable dividend for FY 2026 with potential DPS growth thereafter. Whilst continuing to invest for growth, we've maintained our financial strength and capacity, including through proactive management of our debt profile. We've recently issued a new five-year GBP 525 million ESG-linked RCF, allowing us to redeem an early 2027 maturing facility and repay a higher margin term loan. We've also extended the maturity of our smaller RCF, and Moody's reaffirmed our Baa2 credit rating. When combined with our successful sales activity, LTV today is 28% as we continue to operate within our 10-35% through the cycle target range. Interest cover is strong at 15 times.
We've more than GBP 450 million of liquidity, and we've extended our average debt maturity to almost six years, whilst our weighted average interest rate remains in the fours. Looking ahead, as the bar chart shows, we expect LTV to remain above the midpoint of our through-the-cycle range as we invest for growth in a rising market. Remember, a couple of big sales can really move the needle and give us significant incremental acquisition capacity. Wrapping up with a positive financial outlook, we expect to deliver further property value and NTA growth in the second half and beyond, based on current market outlook and our active business plans. H2 EPS will likely be broadly in line with H1, and the capture of our organic rental growth opportunity will drive significant income and EPRA EPS growth moving forward, with an expected threefold EPS increase supporting our progressive dividend policy.
Our through-the-cycle LTV range and disciplined capital management will be maintained. Through the capture of attractive prime rental growth and the delivery of our development-led growth strategy, we expect FY 2026 TAR to at least match FY 2025 as GPE moves towards delivering a 10%+ annual return on equity. Of course, shareholder returns would be higher still should the share price discount narrow, so I'll certainly be holding on to my GPE shares. Whilst I'm not leaving just yet, as Toby said, this will likely be my last set of GPE results. It has, of course, been a privilege to have been part of such an awesome GPE team, and I'm also proud of my contribution to both the strategic evolution of the business and its very special culture.
I am also departing happy in the knowledge that GPE is in great shape, with an exciting growth strategy to deliver for shareholders and customers alike. As I look around the room with slightly blurry glasses, a massive thanks to all of you for your support, your challenge, and most importantly, your good humor and camaraderie. Given this is the 29th time that I have run through this presentation, I think it merits a very special thanks to both Stevie and to Rich and their teams for the uniquely special work that they put into putting this presentation together. Not only do I know that footnote 13 on page 99 will be accurate, I know that it will be accurate to at least one decimal place.
So, a massive thanks to you guys for leaving Toby and I to do the easy work of tapping the ball over the line. As I hand back to you, Toby, I must say it's certainly been fun. You're a good man, a great colleague, and there are many things I will miss at GPE, including your exceptional taste in wine. Over to Toby for the wrap-up.
Not, I should add, at this time of day. Thank you, Nick. Very good. Okay, let's wrap up then with our outlook. In short, it's all about delivering more growth as we continue doing what we said we would do. We think that our market opportunity is strengthening.
London remains Europe's business capital, will outperform the U.K. economically, and will generate jobs growth, driving healthy demand for space that will collide with a supply drought, meaning rents are and will continue to rise with the best buildings materially outperforming the rest. As a result, office values are rising. The investment market continues its recovery, with prime yield compression a real possibility. Meanwhile, we are focused fully on executing our growth strategy. First, capturing significant income growth of more than 140% in the medium term. Second, delivering development surpluses of between GBP 180 million-GBP 520 million just from our existing program, some 130 pence per share. Third, more acquisitions. Fourth, significant further sales of more than GBP 800 million, and always operating only in prime central London, majority West End, 94% near an Elizabeth Line station. All in all then, GPE is well set.
Our operational infrastructure is in place and is delivering, and our deeply experienced team, bound together by our collegiate culture along with our strong balance sheet, will help us generate an attractive return on equity, even more so for shareholders should our share price continue its re-rating to properly reflect the group's exciting prospects. GPE is in great shape with all to play for, and we can look forward to capturing our strong potential over the next few years. Now, I know some of you will have questions, maybe even for Nick, last chance. We'll have some microphones running around the room. As I say, we've got the team, home team, to help answer any of those questions that you may have. Who would like to raise something? Any hands? Yes, here at the front. Morning, Tom.
Thank you very much.
Yeah, I guess I'll ask the question to Nick. It's Tom Musson from Berenberg, by the way. You talk about the big growth potential in the business, and I think a tripling of EPS probably stands alone in the sector in terms of the growth outlook. If you can achieve that, there's lots of development surplus to come that will drive NAV growth. Fully Managed is a big part of that. Nick, I think you've led the charge on. Given the growth prospects, why is now the right time for you to move on from the business? I had a couple of follow-ups on a couple of the numbers, if that's all right afterwards.
Sure. I joined GPE 14 years ago. I thought I'd be here for five years, and I've been here for 14 years, and I absolutely love GPE.
Equally, hopefully, as we've articulated, not just in this presentation, but in all the presentations that lead up to this, there is a very clear strategy in place. There is a very clear and strong team in place. I love the sector. I'm just looking for something a little bit different. I think I was talking to one of our advisors who works at a similar business to Savills. His comment was, "You'll love it because it's very similar to what you're doing now, but it's very different." I am moving to a business that, like GPE, absolutely loves real estate. Unlike GPE, only central London, I'm moving to a global business, moving from a team of 150 to 42,000. I am very much, whilst GPE, I'm confident in the EPS growth that it will deliver. Savills is absolutely an EPS business rather than a balance sheet business.
Something to keep me energized. As I said, I will remain very invested in GPE, both financially, but also emotionally.
Very clear. Thank you.
If that is the only question, I will be delighted to leave it at that.
I did have just a couple on the numbers. The fully managed services income, net of fully managed services expenses, has just moved from being slightly profitable last year to slightly loss-making this year. Can you just help explain that dynamic there? Is that just a reflection of growth? The second one was, I think I saw that there was a material sort of GBP 3 million reduction in other property expenses in the EPRA P&L from GBP 4.1 million down to GBP 1 million. What was driving that? Thank you.
Nick, do you want to try the first one?
Yeah. Tom, you were referring to what is actually in the P&L?
Yeah. I mean, so one of the things that we've done this year within our own targets, so you know we are now incentivized specifically around delivering NOI returns in the P&L. At the moment, they're still lumpy because they're not particularly reflecting a significant amount of the income that we're yet generating. It also, we tend to take a hit upfront for the agent fees that we're and the broker's fees that we're incurring in putting the customers in place. I think you should expect to see the P&L reported NOI will be a little bit volatile as we go through the lease-up of the space. I would hope that over time, those margins improve because the cost of customer acquisition will reduce if we don't have a cost of customer acquisition, i.e., we keep customer retention rate high.
That is why I think you should expect to see over time an even bigger focus, particularly on the fully managed side around customer retention. As I think I alluded to in the presentation, the single biggest cause for us losing customers out of fully managed is we do not have enough space for them. That is not the only reason, but it is one of the reasons why we are looking to grow this part of the footprint. I am looking at Steve here on the property cost. My guess is probably on empty rates will have been lower over this period. Anything else material to cover?
Nothing material, but it was largely due to empty rates. We can get into the weeds offline. Thank you very much.
Thanks, Tom.
Thank you.
Callum Marley from Kolytics. Two questions, one on vacancy and one on artificial intelligence.
Is the new vacancy range that you've set of 6-7.5% a new target for this period? And then how do you explain the divergence relative to your close peer who has a vacancy of about half that?
Yeah. Thanks, Callum. So if you think, can we just go back to the contracyclical chart right up front, please, Rich? You do not want your portfolio full when everybody else has put their cranes away. Okay? You want to be contracyclical in the delivery of space when everybody else has run for cover, especially when there is an 84% shortage of demand against supply. So we actively want our vacancy rate up. So right at the beginning, I talked about being contracyclical in our approach, and that's exactly what we're doing here. We're developing into a serious shortage of supply.
We have now got CEOs from large financial institutions around the world saying London does not have enough space. We have companies looking six years ahead to try and forward purchase space. We pre-let most of our HQ developments, as you saw with Cundall during this year. You will have heard this morning that we are under offer on a good chunk of the space down at Minerva. You want to have vacancy at this point in the cycle, especially with rents rising. 6-7.5%, we are in the range. The single biggest vacancy that we have got in the portfolio at the minute, we have just finished, which is our Piccadilly Holdings, where we have just completed the repositioning of that building for fully managed. That is leasing up pretty well. Simon, I will come to you in a second just for a bit of color on that lease-up.
Again, great locations, great buildings, rents rising. It is now that you want vacancy. I would think we would be failing if our vacancy was zero. I want vacancy. With that point made, just talk a little bit about the color on how that is going and maybe just what we experienced in the core markets and maybe draw the distinction between the peripheral markets.
Yeah. Callum, we completed 170 in September, which was about a month after Wardour Street. Some people might have thought, "Why has Wardour Street let faster than 170?" One of the principal reasons for that is that Wardour Street was a building that was really easy to understand through construction.
If anyone attended our capital markets day back in February, one of the things I said at the time was that I thought we would pre-let some of Wardour Street. It was not in our underwrite. We do not tend to underwrite pre-lets in fully managed. We did manage to pre-let two floors in there because it was easy to understand. Conversely, 170 Piccadilly finished a month later. There are 13 units in that building. It is a heavy intervention, as mentioned earlier. It is a grade two listed building, so it is a much harder building to understand. Nevertheless, once completed, it looks absolutely fantastic. There are a number of you in the room who have seen it. That, in turn, has driven some absolutely incredible ERV beats.
As you can see, moving through GBP 400 per sq ft on some of this building was definitely not in our underwrite. But an average ERV of GBP 296 so far for the deals that we've done, 35% of the building let or under offer. We are really, really confident with the rest of that building. And we are more certain than ever that core locations, prime core locations are where we would like our space to be. There are examples around the market of fully managed space being released in areas where, frankly, the price of a cup of coffee that we make is the same irrespective of where you are in London. We want our fully managed buildings to be in these core locations, these clusters. We are building a much better portfolio of clusters of buildings.
That has allowed us to move companies such as we mentioned Wunderkind earlier, but others around the portfolio. That is helping that retention rate. Nick mentioned that is a big focus for the business. We have, in just this part of this year, done a really good job retaining customers. That is about 70% of the retention rate that we have managed to create does not involve broker fees. As Nick mentioned, the cost of doing that business is far less for us. It is a really important area. That is why the clusters work. The clusters will also work for reducing some of our operational costs as we are able to transfer some of the costs of our customer experience team across a wider portfolio. I am really excited. I mean, we have been doing this for about five years now.
Looking forward, some of the projects that we've got on site and the team that we've created really gives us a lot of confidence. Brilliant.
Thank you, Simon. AI.
Yeah, the second one. A few research papers have been published recently stating that entry-level positions in white-collar jobs are potentially being displaced by AI. How do you think about that long term, the different scenarios to your jobs growth figures that you publish in which AI adoption materially changes hiring needs and then ultimately the impact on office demand?
Yeah, really important question. One that we could spend all week talking about, so we won't do that. Just to give you a couple of thoughts to take away.
Mark, I'll come to you in a second if you wouldn't mind just expanding a bit on the sorts of companies you've seen in the market today in that space. I mean, one view, in fact, we asked AI what AI thought about white-collar jobs in London. It started with an analysis of white-collar jobs globally. One version of AI said to us that it thought 90-odd million white-collar jobs would be essentially disintermediated by AI, but 185 million would be created globally. They won't all come to London, unfortunately. It is an interesting debate as to exactly where they do go. Our experience would suggest that, by and large, they're going to places with talent, with infrastructure, with magnetism, with great buildings, clearly part of the equation, with universities that are world-leading in some of these topics.
It is for that reason that places in and around California and some of the eastern seaboard in the U.S. and the Golden Triangle around London are performing relatively well. It is why 23% of our customer base in fully managed is AI-led. They are not AI businesses, but they have AI in the description as a heavy part of what they are all about. I actually think there is an opposite side to this coin that you should take, which is that you should consider it as an opportunity. You should consider this as something that great commerce centers like London are going to capture more of the opportunity than most other locations. Just in terms of demand, what are we actually seeing right now from businesses in that tangentially related?
Yeah. As an overview, active demand is about 12.4 million, which is 26% up on this time last year.
Of that, TMT is around 15%. Of that, about 12% is AI-focused companies and 88% is non-AI. If you look, Toby's obviously mentioned the dominance of London in terms of its tech ecosystem, the deep pool of talent, world-class universities, and that regulatory environment. There are currently 382 companies that have been founded and HQ'd in London with more than 50 people employed. It is already quite a mature market. If you look at AI as a catalyst for demand, there is currently around 500,000 sq ft today of well-established companies. Some of the names that are out there that are either under offer, re-gearing on a short term, either have searches or are in negotiation, names such as OpenAI, obviously ChatGPT, they are currently under offer on 100,000 sq ft.
You've got Databricks who are looking for 100,000 sq ft and rumored to be in negotiation. Anthropic who are behind Claude, 50,000 sq ft. Palantir, who we know very well, next door to Soho Square, re-gearing on a short term because they can't find what they need. We're obviously hopeful that we may have further conversations with them next door. Synthesia, which is obviously the AI company that Nick referred to without referring by name. We took them at 1,500, sorry, yeah, 1,500 sq ft in Dewforce. They grew three times with us and then have moved to a managed facility of 21,000 sq ft. There's quite a lot of names that are out there.
The other thing I would also say in terms of is it a net promoter or a detractor in terms of jobs, if you look at the case study for San Francisco, currently in 2025, there are 5.6 million sq ft occupied by AI companies. That has moved up from 2.7 million in 2021. If you look at the prospective job numbers, which is around 50,000 new jobs accretive, then that could lead to about 16 million sq ft of new requirements up to 2030. That averages out at about 2.7 million sq ft per annum through to 2030.
We believe if you look at what is going on in London, what we are seeing in San Francisco, we think that the prospects are positive rather than negative for us.
Not complacent, mind you.
We will always make sure that we are realistic when coming to market with spaces. We have some good interest in businesses in that line of work. Okay, where else can we go? Yes, Neil, right at the back. We will need a microphone, please. Thank you.
Good morning. Neil Green from JP Morgan. Just one question. Given the progress you have already made on disposals and the quite sizable pipeline of disposals that you are earmarking, how do you think about leverage and potentially even excess capital down the line should acquisition opportunities become harder to find, please?
Good question. Thank you, Neil. We have a long track record, as you know, of returning when we have not been able to find a more productive use for the capital post-sale. You can see that from the pink circles in the middle there.
We gave back broadly GBP 600 million to shareholders, having raised GBP 300 million at the beginning of the cycle last time round. This time round, we've already raised the GBP 300 million. Let's see what happens. The same mantra applies. We will give back where it is excess to our needs, and we cannot make an attractive return for shareholders on it. Last time round, it was interesting. A number of shareholders said, "Why don't you hold on to it because you might be able to use it, and we don't really want it back." We said, "Frankly, that's your problem, not ours. Our problem is whether we can use it accretively or not. If we can't, you are going to get it back." We did share buybacks. We did a capital restructuring and a capital return. We've done all variations of it.
We would do them again if we were not able to find enough accretive opportunities to re-employ that capital post-sales. Scale is one reason I hear people arguing for not giving back capital. That is not relevant to us. Return on capital employed is the thing you should look at. We will not simply hold capital for the sake of feeling a bit bigger if you cannot use it productively. Shareholders should know that we will give it back if it is excess. If we do not give it back, it is because we felt we have found a great series of opportunities to employ it for an accretive return. Yeah, Max.
Thanks, Maxime to Deutsche Numis. Maybe just kind of follow-up question to Neil on that capital recycling point and talking about kind of liquidity at the larger end of the market.
If you cannot sell some of those assets, are there other assets you can kind of pull in and out? Perhaps a theme that we are seeing a little bit at the moment is this sort of disposals below book value, which I think has not really been a problem for you guys so far, but just some of your views on that as well.
Okay. If you would not mind coming in, Dan, in a second on how you are seeing the landscape playing out from here. First up, Max, again, good question. What I think the correlation I think you need to be clear about is between sales ability, getting that deal done, and quality of asset. Right? Quality is not just the way it looks.
It's where it is, who's in it, what the rental position looks like, what its transport interchange, the hub near it looks like, the public realm immediately around it, dare I say, even its feng shui. Right? This whole idea of the way that building sits and feels matters. Now, we've just sold the largest single-asset trade in the West End. We have not encountered a problem with scale. It was ahead of book value. That tells you that our valuers are broadly getting right what the market is willing to pay for an asset as they should. As we go from here, one thing that is very clear is that Hanover Square is in that list of stabilized assets to Alderman Bree, both buildings where we essentially will have delivered our business plan.
We've got some rent reviews to do, as you know, in Hanover before we consider that. Wells & Moore is currently in the market. These are quite big assets, especially 2AS and Hanover. We'll be testing the outer envelope, I think, of scale when we get there. We're not there at the minute. The evolution of the market will be interesting to see. We will not be overly concerned about hitting book value. Okay? We will be principally concerned about the forward IRR from the price on offer. If we do not think that that is sufficiently accretive to shareholders, the opportunity cost is much more powerful. We'll take the money. Given the quality, and I said before, I think Hanover Square is one of the best buildings in Europe, therefore the world. I mean that. It's an unbelievably good asset.
Wells & Moore is out there testing the market at the minute. 2AS will be a 20-year lease to Clifford Chance, off a rent which was struck in 2021, 2022, there or thereabouts, so probably reversionary. These are great quality assets, and I think they will do well. Dan, just in terms of market dynamic?
Thank you. I think at the moment, the market dynamics are such that we've seen lot sizes start to go up. I think the Newman Street asset we sold a few weeks back, that was the biggest asset in the single-asset deal in the West End through this part of the cycle and for several years. It really sets a marker. I think you're starting to see not only lot sizes, you're starting to see new investors in the market as well.
Against that backdrop, the volumes are up to, I think it was 63%. On the top left there is the stat that we've quoted. Not only are you selling bigger assets, there are more institutions in the market who are typical buyers of the mature finished product that we've got, stabilized product that we get at the end of our recycling process. I think the landscape for sales is very good and definitely improving. Newman Street set a new benchmark, the likes of Hanover and 2 Arlington Street, which again are a step up in scale. As the market evolves, those larger lot sizes will become digestible by the market. If you look at, Rich, I think it's page four, if you just look at our cyclical part of the chart that we always look, this is where we want to be buying.
These pieces here, and that is why we have been conducting such an intensive acquisition strategy over the last 18 months. Five done, one under offer, hopefully done by Christmas. No pressure, Alexa. We are buying exactly at the right time. We are also selling those mature stabilized assets as that part of the market. We talked about it six months ago, different parts of the market get hot at a different time. At the moment, those core assets have become attractive because those institutions are coming back in, like the stabilized assets. The value-add part of that curve has been hot for a while. Obviously, we do not want to be selling into that. That is the product we want to be buying. Have we been going into the market and buying value-add assets in competition with a bunch of other people? Not really.
Most of the stuff that we've been doing has been off-market. If you look at the map of the acquisitions that we've done, two or three have come from the City of London. Those have been one-on-one interactions, not in processes. We are seeing that our acquisitions are playing to the curve there. Our disposals are playing to that part of the market that's warming up. The general landscape is improving such that over the next 12 months, the larger assets such as 2 Arlington Street and Hanover will become liquid at the right times.
Rich, can you just jump to slide six? One of the things you might be thinking is selling at that point on the curve is not necessarily the right answer. The reason is that there is a complicated bifurcation going on between the best and the rest. Right?
If you are slightly off-pitch or there is something wrong with your building, you are going to struggle to sell it, which is the sort of stuff that Dan has described we have been buying. If you look bottom right, the reason we are now willing to sell some of the buildings we are is because we have seen this bifurcation run riot through rents. Those prime rents have really grown. It is that differential that is now allowing us to sell prime assets at really strong numbers that I do not think was the case even 12 months ago. That change is quite dramatic.
The sales institutions with a low cost of capital who are buying. Our forward look on those does not hit our cost of capital, but it is fine for those buyers.
Thank you, Dan. Thank you, Max. Any more for any more?
We are just past the hour. Yes, we've got a couple of it here. Yeah, Zach.
Yeah, thanks. It's Zachary Gage from UBS. A couple of questions related to returns, then hopefully quite straightforward ones on EPRA earnings. Firstly, you seem quite bullish on near-term yield compression. I'm just wondering how you reconcile that with the value is moving out the yield on Alderman Reed Square by 15 basis points. I'm sure you've seen the latest MSCI data for the London office market and West End turning negative in October and flat ERVs for the last two months in the West End. Sort of following on from that, you're looking at your 10%+ ROE medium-term target. Can you give any more color on when you expect that to be realized? I think at the end of FY 2025, you guided to more growth to come.
It now sounds a little bit like this year is in line with last year, as opposed to necessarily growing from there. The straightforward question was, is the tax credit you received included in the EPRA earnings number?
Fabulous question, Zach. I mean, you say I sound a bit more bullish. You sound a bit more bearish. We will get you to the right place at some point over the next few years. Putting that aside for a second, Nick, if you could do with the second one and maybe the third, unless Stevie, you want to do with it. On the yield point, funny enough, the further they move the yields out, the more bullish we are going to get on compression, especially in an environment where yields are going to be driven.
We know they're driven by interest rates and an environment where interest rates are likely to come in. I mean, I think the issue with that is scale. It's just that it's a big building. It's going to be GBP 400 million-ish, there or thereabouts, and that is a rare part of the market. That's my challenge for the team when we come to selling that one. More broadly, we are bullish on prime product. I mean, for reasons Dan has just described, we think that really good assets in really good locations are gold. They are irreplaceable, by and large. We're not talking about the peripheral central London markets. We're talking about core 100% prime, which is where we're focused. That's why, if anything, we've concertinaed it even more over the last five years than you would have seen us.
I'm not sure we'd buy Whitechapel again, put it that way, unless it was unbelievably cheap. It was quite cheap at the time. As those peripheral markets get less relatively attractive to the prospective customer base, we get less interested from an acquisitions perspective on them. If you are in the core, I've said it before, it's incredibly powerful. We think we'll sell very well because we're leasing very well. That's the first point. On the second one,
Rich, you got 54. I mean, we were clear that the aspiration around the 10%+ TAR was one for the medium term. We set out the breakdown of that in the appendices. We said at the beginning of this year that we expected this year's TAR to be in line or ahead of where we were last year. We've maintained that.
I think it's fair to say it will be my successor who stands up here and talks about a 10% TAR rather than me. I think that is something looking at our own business plans, we look like we're set to deliver in FY 2027, 2028. In terms of the tax credit, yes, it is in EPRA earnings in accordance with the guidance. That being said, we are not anticipating it has a material impact on the overall numbers. We still stand by the guidance that we gave on EPRA earnings at the beginning of the year, irrespective of that credit. It's a one-off. We don't expect to repeat it. In accordance with EPRA guidance, you include it.
Sorry, maybe just to follow up, if I can. I think everyone largely understands the prime versus secondary debate. How much of your portfolio is prime versus secondary?
Because presumably you have a prime guidance and an ERV guidance. It must be some form of blend of the two.
In an ideal world, at this point in the cycle, thinking contracyclically, in an ideal world, what you want is raw material that is in some way needing attention in prime locations. Okay? That is, to me, the Holy Grail. What you can see in GPE is some, if we can go to the capital stack, please, Rich, some buildings in yellow, which are reaching the end of their GPE life because we've done things, all of the things we can to them. Their prospective numbers are not good enough for us. Back to Dan's point about there'll be some institutions out there with a lower cost of capital than us. They'll be happier holders than us.
The majority of your book, in other words, the blue and above, needs to be prime location buildings that you can improve. You have a business that's really interesting. If you're simply stuffed full of all the yellows, right, and this idea that you just collect income-producing assets that are yellow, you are a proxy to market moves. You are nothing more than a beta story. Right? If you want to be an alpha story that's creating something of value, you go above the yellow and you focus on things that you can do things to to generate rent growth, net area gain, higher quality buildings in great locations. That's the underlying, which is why we started this presentation with 100% prime central London.
If you look at, I think you could probably argue that Whitechapel is the only building in our book which would not qualify in the 100% prime central London. That's the only one. The rest of them are, and the rest of them will be improved over time. We will transmission, we'll basically capture growth in the blue section, turn it into a yellow tradable asset, and out she'll go. That's been our model for as long as I can remember. It feels, if you go back to slide the cycle one, please, Rich, it feels much more alive today than it did in that really difficult period post-Brexit all the way through COVID, where, frankly, markets we felt should have corrected and did not because the monetary response was so aggressive.
It took inflation, which was the consequence of and QE unwind, for capital values to come off sufficient for us to get interested again. We are back into a really dynamic cycle, which feels like a good place to be. On that note, I think I am going to draw proceedings to a close. I think we have given plenty of time for Q&A. Thank you very much. Just to wrap up from me then, this story today is all about our excellent leasing, which is all about our excellent positioning and our financial strength, looking forward with a lot to do over the second half, to your point, but a lot to do over the next few years. I am very excited about that, as I hope you are. Thank you all for coming.