Ladies and gentlemen, good morning. Welcome to the Landsec interim and results presentation for the six months to September 2021. I'm delighted that we're able to deliver these results in person today, but also of course that we're able to stream live for those unable to attend this morning. I'll shortly give you an overview of the first half and six particularly important themes before Vanessa gives you more color on financial and operational performance. I'll then give us a strategic update before moving to Q&A. So the six particularly important themes that I mentioned. First, positive business performance and building strategic momentum. Now, given the pandemic affected 2020 comparatives, it will not be a surprise that the key indicators are all positive year-on-year.
The recovery has certainly been at the stronger and the more sustained end of the expectations range from six months ago. More importantly, the business recorded its first increase in net asset value per share for over five years. Second, robust leasing performance in London with investor demand driving down prime yields. I said six months ago that we expected prime rents to be resilient, with perhaps low single-digit falls and that there was the prospect of some yield compression. In both cases, the actual picture has proven stronger, particularly so in the case of yields, where large amounts of capital chasing finite amounts of prime stock has pushed yields down and there is more to go. Third, a strong retail leasing performance over the past couple of results presentations.
I've talked about rents approaching sustainable levels, and the evidence to support this has been increasingly encouraging in the first half. Like-for-like sales up across our retail estate, vacancy down, and lettings ahead of ERV. Fourth, we have made excellent progress in accelerating our mixed-use strategy, most obviously with the Media City and U+I transactions announced earlier this month. Strategy in this part of the business is moving from talk to action. Fifth, a continued focus on capital discipline, and we have continued to maintain a strong balance sheet over the period. Net debt was neutral, cash generation strong, and we retain excellent portfolio liquidity. Finally, leading the way on net zero.
Having been the first commercial real estate business to set a science-based target five years ago, we are today the first to set out a fully costed plan to 2030 to support the transition to net zero. Now turning to each of these themes in a little more detail. The business delivered a 3.7% total return for the six months, with every major segment contributing positively. Arguably more important, however, is the momentum we've been able to build in executing our strategy. A year ago, when we launched our new strategy, the capital recycling element of our plans was unsurprisingly focused on disposals. As things have progressed and the outlook has become, if not settled, at least less unsettled, we've been able to focus increasingly on investment opportunities. We now have excellent visibility of new opportunities and potential returns across each area of our business.
This allows us to assess relative return prospects and to be more decisive in our capital allocation decisions as a result. You've seen this with the recent announcements we have made, and it's a theme that I will return to later. This strategic progress also shows in the steps we have taken in changing our culture, the importance of which I outlined last year. Now, we still have plenty to do, but Landsec is already a more agile business, closer to its customers, and more readily able to respond to changing conditions. Put simply, we are now making more of the undoubted potential of our talented people. Now turning to London, and firstly, occupier markets, where our performance has been encouraging.
12 office leases completed or agreed in the period, covering GBP 25 million of rent at levels supportive of ERVs, which have themselves increased by 1.2% over the six months. We have seen a noticeably sharp increase in activity levels since September, with people increasingly prepared to make decisions about existing and future space requirements that were previously being put off. We have active interest over 250,000 sq ft of new space, and this step change is also clear at a market level, where take-up in the third quarter was up 59% on the previous quarter and is now back close to the 10-year average, despite the unprecedented disruption of the past 18 months. Space under offer now sits above the 10-year average at 4 million sq ft, indicating a strong end to 2021.
Now, over the past few months, I've met with a lot of our office customers, and in particular, those that are making decisions about space now. Consistently, the feedback I've heard is the importance of quality, flexibility, and sustainability in their decisions, all areas where Landsec scores highly. Consistently, the discussions are about how their space is best used rather than how much they need. From a supply perspective, the pandemic has seen a number of ongoing build programs delayed and new construction starts pushed back. Forecasting delivery is therefore tricky, but relative to six months ago, we now expect a number of previous 2022 completions to be pushed back into 2023, with a knock-on effect into 2024 and beyond.
N2 and Lucent, which together represent around 50% of new West End supply under construction and offer certainty of delivery to occupiers, are well placed in this regard. Now in terms of the investment market, I commented earlier that yields contracted in the period and that there is more to go. This is borne out by our own experience. Last week, we completed the sale of Harbour Exchange, an office and data center with 20 years of unexpired income, for GBP 197 million and a 4% initial yield. This is around 4.5% ahead of the most recent valuation. Based on other active discussions concerning potential asset recycling, I'm confident that we will see further tightening across the London portfolio in the second half.
In retail, we have seen meaningful levels of leasing ahead of the ERVs for the first time in quite a while. 181 leases covering GBP 60 million of rent completed or agreed on average 3.3% above ERV. This reflects a generally strong operational performance across the board, with like-for-like sales overall up an average 0.5% versus 2019 since the 5th of April, and vacancy down to 7.5% at the period end. Outlets were particularly strong, so were out-of-town shopping centers. City center malls lagged earlier in the period due to COVID restrictions, but have performed strongly since September. On the investment side, liquidity is beginning to return to the shopping center market. Importantly, senior debt is beginning to become available.
For our own part, with increasing conviction in the affordability of rent levels, we continue to believe prime retail yields look attractive on a relative basis. Of course, shopping center rents are down just under 40% from peak. Value is down around two-thirds, so it's only right to be cautious from here. However, our thesis remains that we are seeing a flight to quality among brands and among shoppers. With prime rents at sustainable levels, vacancy will increasingly be concentrated in inferior locations. The mixed use or urban opportunities element of our strategy has been the smallest part of the portfolio to date and the least developed part of our strategy. That is now beginning to change.
Through the acquisition of a 75% stake in Media City and our recommended all cash offer for U+I, both announced earlier this month, we have materially accelerated our investment potential in this part of the business, with a combined GBP 1.1-1.3 billion of potential investment into high quality mixed-use projects achievable over the short to medium term. Both transactions show the more agile and entrepreneurial approach we're prepared to take in executing our strategy. In the case of Media City, you can see that we're able to increase our investment in mixed use without needing to dilute earnings at a group level. The proposed U+I deal also brings complementary front-end skills ideally suited to mixed use projects. Our existing projects are also progressing, with planning applications on track at both O2 Centre Finchley Road and Lewisham Shopping Center.
A focus on capital discipline will continue to be an important feature of our business and our strategy. You'll hear more from Vanessa shortly, but there are three key areas I would highlight. Firstly, modest leverage. Last year, we reduced our LTV tolerance to a core range of 25%-40%. Net debt has remained flat over the past six months, and we continue to operate firmly within our target range. Secondly, we are focused on matching the timing and quantum of disposals and reinvestment. Now, of course, this is not an exact science, but we will seek to control both cash drag and leverage levels appropriately so that shareholder returns are not disrupted by portfolio recycling activity.
The much greater visibility that we have of investment opportunities across each part of the business, coupled with good portfolio liquidity, means that we are now much better placed to do this. Finally, we are focused on increasing optionality in our development program, which we see as key to preserving flexibility and agility across our business. We've already shown this with our recent acquisition announcements, and we are also pursuing plans to boost optionality in our existing portfolio. Now in 2016, Landsec became the first commercial real estate business in the world to commit to a science-based carbon reduction target. In 2019, we increased our ambition to align with a 1.5 degree global warming scenario. That requires us to deliver a 70% reduction in carbon emissions by 2030 relative to a 2013-14 baseline.
Now we've already achieved a 55% reduction, and today we are setting out fully costed plans to support the remainder of our target. GBP 135 million to be invested across our existing portfolio over the next nine years. The details of which Vanessa will cover later. Now, this investment is in addition to everything we're doing in new developments, where every project committed to since 2019 has been designed to be net zero, both in construction and in operation. The Forge in Southwark is due to complete next year and will be the first such building to meet these criteria. Our plans keep us ahead of minimum energy efficiency standards, requiring an EPC-B certification by 2030 and align fully with 2050 net zero pathways as set out by the Carbon Risk Real Estate Monitor, or CREM.
We are proud to be maintaining our sector leadership position in helping to tackle climate change. I'm now gonna hand you over to Vanessa.
Thanks, Mark, and good morning, everyone. I'm pleased to be able to present my first financial update at Landsec after a rather busy first six months in the role. I've seen the real benefits of the cultural change that Mark has initiated, and we have increased our momentum with our strategy. Following the challenges of the pandemic, this has been a year of recovery and meaningful transition for our business. The recovery has been at the stronger end of our expectations, and we are well-placed to deliver our strategy. It's worth noting when we're comparing the performance against the previous period that there are some one-off gains following the impact of the pandemic last year. I'll highlight these as we talk through our performance.
EPRA earnings were up 56.5%, and that's primarily due to the favorable movement in bad debt, with no further provisioning required in the period. Today, we declared our second quarterly dividend at GBP 0.085. That brings the dividend for the first half to GBP 0.155 per share, up 29% on the same period last year. Our policy is to pay an annual dividend in the range of 1.2-1.3 x cover, and we expect to be in line with this policy for the full year. In terms of our balance sheet, EPRA Net Tangible Assets per share were GBP 10.12, and they're up 2.7%. This was driven by the earnings and the valuation surplus.
Group LTV has reduced marginally to 31.8%, and our balance sheet remains robust. Our total business return over the six months was 3.7%. Looking at EPRA earnings in more detail, gross rental income was GBP 11 million lower for the first half of last year. The gross rental income from our like-for-like portfolio is up GBP 14 million, which reflects the recovery in our variable income and includes GBP 7 million of surrender premiums, and this is partially offset by the higher average vacancy over the period and lower rents from lease re-gears. CVA and administration activity has reduced rental income by GBP 15 million, which predominantly relates to the insolvency activity in the last financial year. This year, we've only had two occupiers enter into insolvency. That's a dramatic reduction from the 58 that we had last year.
Of course, it's reflecting the moratorium on enforcement action. The net impact from acquisitions and disposals also reduced our rental income by GBP 10 million. We sold Seven Soho Square and one and two New Ludgate last year, and then two retail parks in the first half of this year. We have GBP 2 million of increase from the acquisition of Fifty-Five Old Broad Street. Our direct property expenditure increased to GBP 25 million, and this is primarily due to the significant increase in letting and operational activity, and the release of the historic Landflex provision in the first half of last year. In line with the opening up and the trading and the improved rent collections, we have not needed to take further bad debt provisioning.
This has resulted in a favorable movement from a GBP 87 million charge to a GBP 3 million release in the current year. Overheads have increased due to the level of business change activity that's taking place across our organization, and one of my priorities has been to review the cost base to right size for the future. We're targeting to bring our EPRA cost ratio back towards 20% over time. That's from the current level of 23.7%. I will update you further on our progress with this at the year end. Over recent months, we've experienced a high level of operational activity, which I'll cover in more detail by segment.
Starting with the Central London offices, where we have been particularly active as our occupiers are proactively reviewing the use of their space as workers return to the office. Over the first half, we have completed and we've agreed 12 lettings totaling GBP 25 million of rent. The rent on the prime Grade A London offices remains resilient and it's supportive of ERV. There is an increasing focus on sustainability, well-being, and flexible space, all of which play to our strengths. Office utilization has increased over the recent months as confidence in the workplace safety and public transport has improved. Utilization has progressed to an average of 55% of the pre-COVID levels, with a midweek high of 67%.
Vacancy across the London office portfolio has marginally increased to 4.4%, and this was expected due to the completion of the Dashwood House refurbishment. Moving to London retail. As we're well aware, the recovery here has been slower. Vacancy in this segment has increased to 11.9%, and this includes the surrenders that we've taken on the retail units under Piccadilly Lights. The vacancy across the London retail will enable us to reposition the ground floor amenities to adapt to current trends. However, Piccadilly Lights are trading well with strong bookings giving us the confidence that income will be back to 2019 levels by the end of the year. Rent collections over the first half of the year have also recovered. I'm pleased that we've now collected 100% of our office rents and 83% of London retail.
Across our regional retail portfolio, the period has been characterized by the phased reopening and the easing of restrictions, which has translated into a strong trading recovery for the majority of our occupiers. This in conjunction with the level of operational activity in the recent months leaves us with a positive view on the outlook for our retail portfolio. We've experienced a high level of leasing with 181 lease events at 3.3% ahead of ERV. The vacancy across our shopping centers and outlets has reduced by 130 basis points to 7.5%, and we have further deals in our pipeline which should suggest that this trend should continue. In common with the wider sector, footfall across the portfolio is down meaningfully versus 2019.
With higher conversion rates and transaction values, our like-for-like sales in September continued to strengthen, and they increased to 3.8% ahead of 2019. This has also supported our progress with agreeing rent concessions, and we've now collected 92% of our regional retail rents. The recovery in operational performance across the hotel and leisure sectors has been stronger than we expected at the start of this financial year. Vacancy has reduced across the retail parks and leisure, and there's been a strong recovery in hotel occupancy since August. Cash collections within our leisure assets have been a bit slower as a result of the cinemas, where we were waiting for the impact of the bond release on trading before we finalized the rent concessions and payment plans.
Looking forward on earnings, there are two principal factors that are affecting income over the next two- years. First, the rate of continued operational recovery, and second, the impact of net investment. I set out our view on those factors here, although I make no assumption with regards to the market rental growth. Overall, we see upside in gross rental income from the operational recovery over the next couple of years of around GBP 27 million. This includes the reasonable leasing up of void space, the reversions to ERV, and ongoing improvements in variable rents. On net investment, Mark mentioned earlier, our approach to capital discipline is to align the timing and the quantum of net investments so that we manage our net debt position and protect income.
The GBP 42 million increase shown here reflects the expected impact on income from the committed developments and acquisitions together with the known and planned disposals. This assumes disposals of GBP 1.3 billion overall, which is approximately a third of our GBP 4 billion target, and that's focused initially on Central London. We see potential growth of up to GBP 69 million in income associated with these factors. While this does not illustrate the full impact of our strategy and it's not intended to be a forecast, it shows that there's income upside in our plans from here. At 30 September, our combined portfolio was valued at GBP 11 billion, with valuation growth of GBP 81 million in the first half. Our portfolio has seen growth on a like-for-like basis of 3% and a GBP 33 million development profit.
The majority of the COVID allowances that were introduced last year across our retail and leisure assets have been reversed given the strength of our operational performance. This contributed GBP 40 million in the overall valuation gain, and we have GBP 11 million of COVID provisions remaining where the recovery from the pandemic has been slower. I'll cover the major movements by segment. Starting with Central London, which is valued at GBP 7.5 billion, and it currently equates to 69% of our total portfolio. The London office assets, their values increased by 1.6% over the first six months, and that's reflecting investor appetite for the higher quality assets. We saw like-for-like rental growth of 1.2% and yields compressed slightly.
We've recognized GBP 33 million of development profits. That's primarily been on 21 Moorfields as the construction nears completion and the yield re-rating reflects the high quality and long income prelet. This has partially been offset by increased costs at The Forge and Lucent. London retail was slower to recover from the pandemic, with a further valuation decline of 6.7%. However, since September, we have seen a notable increase in F&B demand across the London portfolio. A contributing factor to that decline is two agreed surrenders under Piccadilly Lights, which I mentioned earlier. We've taken the benefit of the surrender premium in our income, and we've revalued the assets on a vacant possession basis. The other major asset in Central London portfolio is, of course, Piccadilly Lights, where the value's increased as brands are committing to take space, recognizing the global reach of this iconic landmark.
The rate of decline in the regional retail portfolio slowed markedly over the period, with clear signs of stabilization in the second quarter. This stabilization reflects the improved trading performance for our occupiers and a reduction in our vacancy, which has supported the release of the COVID provisions and only a modest yield expansion. Regional shopping center valuations fell by 4.1%, reflecting a 1.8% decline in like-for-like rental values and a 16 basis points of yield expansion. Our outlets performance was stronger, with valuations increasing by 1% as the sales and occupancy rebounded post-lockdown, and sales are now consistently ahead of 2019 comparatives. Our urban opportunities portfolio consists largely of the retail assets that we're planning to redevelop. They're currently valued on an existing use basis, and they're therefore aligned to the wider retail valuation sentiment.
This portfolio fell in value by 3.4%, a combination of the rising vacancy rates in suburban London shopping centers, but also the impact of our vacant possession strategies. Our subscale segments is a combination of hotels, leisure, and retail parks, where the overall value increased by 5.9%. Leisure has stabilized over the past six months, and the value of our assets increased by 4.2%. This is due to a combination of the yield compression, the release of the COVID allowances, and then two significant re-gears and lease extensions with Snozone. Retail park valuations increased by 15.6%, with over 100 basis points of tightening in yields, reflecting the rapid recovery in the investment market. We've taken advantage of this, and we've disposed of two retail parks in the period at 12% above their book value.
As the market continues to strengthen in our subscale sectors, we will continue to dispose of these assets with confidence over time. This slide provides the details on our London development pipeline, where we've got four schemes in progress totaling 1 million sq ft, with a current market value of GBP 931 million. The cost to complete these projects is around GBP 467 million, and we've also shared our yields on the market value and the cost to complete. If you compare this with the prevailing London office yields, you can see that we anticipate further development profits as we complete these schemes, boosting our total returns. We have potential to invest around GBP 440 million on two consented schemes. That's Timber Square and Portland House.
A third scheme that's in the design and planning phase is Red Lion Court. We've maintained a conservative gearing and a strong liquidity position over the first six months of the year, and our balance sheet is well positioned to deliver our strategy. Our debt metrics have remained strong, with good recovery in our earnings and cash collections. Our net debt has remained neutral at GBP 3.5 billion, which, combined with the growth in valuations, has reduced our LTV to 31.8%. We continue to have strong liquidity, with GBP 1.6 billion of headroom. As set out in our strategy review last year, our core LTV target range is 25%-40%. If we're taking into account the current environment and our ongoing activities, I expect to maintain our LTV percentage below the mid-thirties for the foreseeable future.
We continue to manage our financial and operational risk prudently, and our funding structure provides the flexibility at the right cost to deliver our strategy. Mark reminded you earlier of our sector-leading credentials in tackling climate change and the establishment of a GBP 135 million net zero transition investment plan. Clarity around our transition to net zero is important, so going forward, I'll report on our investment progress towards a low-carbon business. Our plan covers Scope one and two emissions and a proportion of Scope three. At the bottom chart here shows the component parts of the net zero transition from here to 2030. Last year, our emissions were down from 80,000 in the 2013-2014 to 52,000 tons. As you can see, the largest benefit comes from the ongoing decarbonization of the grid.
Our GBP 135 million investment complements this in two ways. First, by replacing the existing boilers with electrical alternatives, such as air source heat pumps. The second is by reducing the energy demands of our buildings through optimizing our systems. We've already trialed AI management at Victoria Street with encouraging results. These actions are expected to reduce our carbon emissions by 9,000 tonnes. Of course, we are collaborating with our occupiers to reduce their energy consumption. The combined effect of these actions will reduce the energy intensity of our buildings in line with best practice CRREM pathways and minimum energy efficiency standards. This ensures that we achieve our science-based targets to reduce carbon emissions by 70% from the 2013-14 baseline by 2030.
To reduce the embodied carbon, all new buildings designed since 2019 are net zero in construction and operation. With our first net zero building, The Forge, completing next year. We will offset our residual emissions from developments through the verified schemes in line with the UK Green Building Council principles. That's carbon credits that are permanent, unique, and incremental. This is the right thing to do for the environment, and it maintains a prime portfolio for our occupiers. It reduces the risk of our buildings becoming obsolete, and it prepares us for the upcoming legislation. For our customers, it's going to become decision critical. To summarize, we're experiencing a strong recovery from the pandemic, and our operational performance is improving. This provides us with a positive outlook on earnings and confidence that we will continue to recover over the coming months.
Our development pipeline and our asset recycling program is progressing well. We've strengthened our approach to capital discipline, and our balance sheet is well positioned for the strategic transition of our portfolio to optimize our total return and deliver enhanced shareholder returns. Thank you. I'll hand back to Mark.
Thanks very much, Vanessa. Now, when we announced our new strategy in October last year, we talked about our core purpose. Sustainable places, connecting communities, realizing potential. Now, being a truly purpose-led business is vital to success in today's world, and is only becoming more so. Now, I also talked about four pillars to our strategy, optimize Central London, reimagine retail, grow through urban opportunities, and realize capital from subscale sectors. This was critical to prioritizing our activities at the time. A year on, and with momentum building, we can now be more precise and a little simpler in defining the key elements of our strategy. We're focused on three key areas, Central London offices, major retail destinations, and mixed-use urban neighborhoods.
What binds these three things together is the importance of a sense of place to their enduring success and to that of their surrounding areas. We strive to create, curate, and activate places that inspire people, unlocking value for all our stakeholders. As I mentioned earlier, our clarity around these focus areas has allowed us to establish very good visibility of potential investment opportunities in each, and along with our existing portfolio, form a clear-eyed view of relative return prospects. Our improved organizational agility and portfolio optionality allows us to act on this insight with speed and conviction. I touched on the key elements of our Central London view earlier. The themes are well understood and generally in line with what you will have heard from our listed peers. Strong occupier demand for the best space with a focus on quality, flexibility, and sustainability.
Supply of this quality space constrained largely because of a lack of new speculative supply over recent years as a result of Brexit or Brexit uncertainty, and with a recent slowdown in construction starts, this tightness of supply is unlikely to change quickly. If the strength of occupier demand continues to grow, particularly driven by well-being and sustainability concerns, then we could see rents push through previous cyclical ceilings. On the investment side, strong investor demand has driven yield contraction, and there is more to come, pointing to strengthening values. We're also seeing investors move up the risk curve to secure product. Pursuing so-called build to core strategies, which is increasing competition for prime, widely marketed development sites, and could squeeze development margins in those situations.
With that backdrop, we will continue to take advantage of strong investor demand to recycle capital out of assets with limited value add potential into growth opportunities across the group. We will deliver our committed pipeline into this improving market, focus on leasing it up and maintain optionality on other progressable projects, such that we can respond quickly and decisively to further strengthening and occupier demand. Beyond that, we will increase medium-term optionality in the portfolio, both by unlocking opportunities in our existing assets and by selectively pursuing acquisitions where we have a clear competitive edge. We will also continue to scale up our range of offerings, Myo and Customised to complement Blank Canvas, unlock asset management upside through working closely with our customers to deliver their needs and of course, deliver our net zero transition investment plan to consolidate our sector leading position in this space.
You can see this in what we've achieved in the first half and what we're focused on moving forward. On asset recycling, we completed the sale of Harbour Exchange and have further disposals planned for the second half. On development, we have undertaken a full review of programs and budgets across our committed projects with our contractor partners to underpin our confidence in the position that Vanessa set out earlier. We have 1 million sq ft of committed development on site and are ready to progress with Timber Square and Portland House, a further 675,000 sq ft of consented space at the appropriate time. If space under offer across the market remains at elevated levels into 2022, we are likely to move quickly on these projects.
We expect to submit a planning application for Red Lion Court before the end of this financial year. On leasing, we now have two of 10 floors let or with terms agreed at Dashwood and are seeing good momentum on the balance. Myo occupancy is recovering quickly. In Victoria, occupancy is just under 70% and climbing. At Dashwood, we now have terms agreed on nearly a quarter of the Myo space and continue to see strong demand. Myo rents are in line with plan. We also have 250,000 sq ft of active interest in new space across our pipeline, and beginning to convert that interest is a clear priority for the second half.
With respect to medium-term optionality, we agreed a surrender of Three New Street Square with Deloitte and plan to convert the 40,000 sq ft there to Myo next year. We have other options to unlock value creation potential across our portfolio, as well as a small number of possible acquisitions under consideration. The Three New Street Square surrender and planned Myo conversion is a key part of scaling up our range of offers to customers, as is the acquisition of Oval Works, where we've conditionally exchanged contracts. We also intend to introduce Myo at Lucent, which will take Myo to around 140,000 sq ft in total across the City, Midtown, West End, and Victoria.
The presence of a flexible offer such as Myo is also proving positive in Blank Canvas leasing discussions, and we have clear plans to scale it beyond 300,000 sq ft over the next few years. Customized, our fit-out solution, could grow to a similar scale. Our thesis for retail remains clear. The pandemic has accelerated structural trends and brought us to a turning point much more quickly than would otherwise have been the case. It is clear that there is too much space. We estimate around 25% surplus, but we are increasingly confident that this will be concentrated in inferior locations as rents in prime locations are now at or around sustainable levels and brands concentrate their presence in those locations. If that proves to be the case, then equivalent yields in the mid-sevens for prime retail looks attractive.
We have to have the right plan to make the most of the situation. We need to have stronger, more strategic relationships with brands and a deeper insight into shopper behavior. Our retail business needs to be oriented towards our brand customers and our shopper guests. Our retail investment needs to be concentrated in winning locations, and we need to be conscious of the CapEx requirements associated with delivering the right footprint, the right lineup, and the right guest experience. How are we progressing with that plan, and what can you expect to see going forward? Well, we have already flagged the reduced vacancy across the portfolio and the lettings supportive of ERV. Behind those numbers are some interesting trends. We are seeing strong brands take the opportunity to upsize stores at these lower rents, allowing them to showcase their wider ranges.
Zara in multiple locations across our portfolio has been a good example of this. We've seen digital natives open physical stores to complement their online business. Amazon at Bluewater being the most prominent recent example. The introduction of leisure uses enhancing guest experience is having the desired results. The introduction of Gravity Active Entertainment at Southside, for example, has driven footfall levels above pre-pandemic levels with a knock on benefit for sales across the center. We have a healthy leasing pipeline and expect to build further on this momentum in the second half. Organizationally, we've now restructured our retail business to establish three core teams: brand account management, guest experience, and channel, and have hired senior retailer expertise to complement our existing retail property capability. We are now market-facing rather than inward-looking.
We now need to ensure we properly embed the new structure and the new ways of working, as it will be integral to the execution of our plans going forward. We are clear on our plans for all of our assets, both from a portfolio fit and a CapEx investment perspective. With investment market liquidity beginning to improve, we are likely to be active in both buying and selling over the next couple of years. As you know, mixed-use urban neighborhoods is a growth area we identified in our strategy last year under the banner of urban opportunities. It recognizes that the lines between where people live, where they work, and where they spend their leisure time are increasingly blurred. Now, these projects can be complex, but they represent a clear opportunity for Landsec to build genuine and sustainable competitive advantage.
Now, with our investment in this area initially very small, our plan has unsurprisingly been to accelerate this, both through expediting our own projects and in pursuing new opportunities to invest in mixed-use situations that are more progressed than our own. Recognizing the different nature of mixed-use projects, we have also focused on bringing the right skills to complement our existing capability. Progress over the last six months has been strong. We are on track to submit a planning application at O2 Centre Finchley Road by the end of this financial year, with Lewisham around nine months behind that. Public consultation there starts imminently. More significantly, the acquisition of a 75% stake in Media City demonstrates that there are attractive investment opportunities that fit our strategy. An established high-quality first phase that offers high income returns and growth prospects.
A significant second phase that offers development optionality from early 2023. A recommended all-cash offer for U+I brings complementary skills and access to a high-quality pipeline of significant mixed-use projects, more progressed in planning than our own projects. The clarity provided by our strategy means that we now have much greater visibility of potential investment opportunities across each of our three focus areas, and a clear perspective of the relative return prospects of each. Coupled with good portfolio liquidity and a more agile and decisive business, this means we can deploy capital in an informed way, confident that our decisions should be accretive from a risk-return perspective. I see this as a key strength of the Landsec business. The graphic on the right seeks to illustrate this based on what we are seeing in the market today.
All the returns I refer to are unlevered and are cap rate neutral. In central London, prospective returns range from the mid-3s yield available on prime long-let stock to low double-digit IRRs on speculative development. The strategy we have laid out will see us move slightly to the right on that spectrum from a current position that is weighted towards the long-let secure income end of things. In major retail destinations, we have confidence in the high income yield available and believe that catchment dominant locations can return to growth over the next couple of years. On that basis, returns that vary from around a 6% initial yield on outlets through a mid-7s equivalent yield on prime shopping centers to low double digits, with some allowance for growth, begin to look compelling, particularly given the high income component of that return and the lack of development risk.
A mixed use of urban neighborhoods can offer a blend of income, rental growth, and development-driven returns across multiple years, with the range shown here at mid- to high-3s for core income through to low-teens development IRRs being comparable to Central London returns, arguably for lower risk. Bringing together the different elements of our strategy and our view on returns, our plan for capital allocation and portfolio weighting is shown here. We expect a modest reduction in our London weighting over time, but within that, we will also be moving slightly up the risk curve in pursuit of more value creation opportunities to make the most of our competitive edge. London will, however, continue to represent the majority of our business, perhaps 55%-60% in the medium term, down from 69% currently.
Our investment in regional retail could increase a little, perhaps to around 20%-25% over time from 16% currently. Although our planned and ongoing disposal of retail parks, around 4% of our portfolio today and classified as subscale in this chart, means that the true overall shift in retail weighting will be less pronounced. We do, however, intend to concentrate on catchment-dominant locations that we expect to be long-term winners. Our planned CapEx investment into mixed-use urban neighborhoods over the next few years should see those projects represent between 20% and 25% of our portfolio in the medium term. It remains our intention to exit from subscale sectors, retail parks, leisure and hotels over time, but to do so in a way that crystallizes proper value for shareholders.
Taking into account our view on returns for each segment, we believe that this strategy can deliver mid to high single-digit returns on equity through the cycle, by which I mean before reflecting cap rate movements. That's split broadly equally between income and growth. What is important to note, of course, is that our pipeline visibility has improved materially over the past six months. Coupled with good portfolio liquidity, the path to executing on this strategy is clear. In summary, over the past six months, the business has built real operational and strategic momentum as we emerge from the pandemic. A positive business performance with a 3.7% total return. A business that is now more agile and moving at a faster pace, and one with a clear perspective on relative value and capital allocation. A business with clarity of direction and momentum.
Thank you, ladies and gentlemen. I will now open up to Q&A. I'm going to go initially for questions in the room. We have a couple of handheld mics. If I could ask you when you raise your hand, just to wait for the microphone so that we can pick up the question on the webcast. I will then go to the conference call, and then lastly to the webcast. Chris.
Hi.
Sorry, I forgot to do the sharing.
No, that's all right.
Q&A bit.
Chris Fremantle from Morgan Stanley. Just two questions, really. The first is just on the earnings trajectory. I think, Vanessa, you gave a good walk to get from starting gross rental income to ending. Can you just talk about the bits below that? You talked about the costs and a reduction in costs. Is there potential to release further provisions in future periods that could, you know, help the earnings trajectory in the near term? If you just talk a little bit about the moving parts below the-
Mm-hmm.
Gross rental income line, that'd be helpful. Secondly, you gave the figure on your carbon reduction plan and the GBP 135 million, which doesn't seem a huge number in the context of a GBP 11 billion portfolio. Where do we see that in the financial statements? Is that just sort of rolled up into your CapEx? Where does that actually come through? Is that going to come through in your income statement, or just a little bit of clarity on that would be helpful, please.
Yeah. Okay, thanks, Chris. From an earnings perspective, as you mentioned, we sort of laid out where we see some of the moving parts on gross rental income. From a net rental income and a cost perspective, we're targeting to have our EPRA cost ratio of around 20%. That will be delivered over time 'cause we're going through a process at the moment of some business change, and we're expecting to secure some benefits from some procurement activity as well. In terms of provisioning, the main provision that we have in our accounts is the bad debt provision, which we've laid out quite a lot of detail in the RNS on.
That really relates to is really one that we've carried forward from last financial year where we experienced more challenges with rental collections. In terms of the provision, we've released about GBP 3 million, which is quite a small element in terms of the first half of this year. That really reflects, I think, the progress we've made in agreeing rental concessions and receiving payments from our customers. On the current trajectory of where we're heading, we're well-placed, and we've got a fairly prudent provision in place. But it'd be wrong of me to necessarily say that there's anything at this stage that we expect to release. In terms of the other components, I mean, the other main components would be around our financing costs.
We've got long-term debt at a pretty stable cost of debt, so we'd expect that to continue on the same basis with a neutral net debt position. The second question you asked me was around the GBP 135 million investment into our carbon net zero investment plan, and that really relates to replacing. I would say about GBP 100 million of that relates to replacing the existing gas-fired boilers effectively and transitioning onto the grid, so using electric alternatives. That would be seen as a CapEx item as we replace those boilers, which would be in line with, you know, we would over time be replacing those. As we go through that between now and 2030, we'd accelerate that.
We would expect that to come through as a CapEx cost. The other cost, there's quite a significant proportion which relates to upgrading our building management systems and then implementing AI management as well. Again, that would be really reinvesting into our systems. Then we also would the costs also cover things like moving to renewable energy, such as solar panels. I think in answer to your question, probably the majority of it would probably be within CapEx and some within the OpEx.
Of course. Now, that gets us to our 70% reduction in carbon relative to our 13/14 baseline by 2030. There are still residual emissions at that point, which to be net zero, we would be offsetting, and that's not included within that GBP 135 number. Is there another question in the room? Got Oz at the front here. Just get you a microphone.
Morning. Osman Memisoglu at UBS. On the London office market, you discussed the prime end of the market being quite resilient, which I guess I agree with. What I'm interested in is how representative is that of the whole London office market, and what's happening in some of the lower quality space? Does that throw up opportunities for you? How much is that lower quality space struggling, given the work from home theme and the other things that are going on in this market? Thank you.
Thanks, Oz. Yeah, I think the most helpful answer I can give at this stage is it's still very early days. Our visibility, as you would expect, is primarily at the prime end. Certainly from the agents that we work with on space, they're consistently talking about how skewed that demand is. If you were to look at take up relative to availability generally, about 20% of available space is grade A, and it's accounting for, I think, just over 30% of take up. It is over-indexing in that sense. I don't think we're necessarily seeing a collapse in demand elsewhere within the market at this point.
I think it's still gonna be a case of waiting probably another six-nine months to see how demand settles down over that period of time. Whether that represents opportunities, I think is a really interesting question, something, as you would expect, that we keep a very close eye on. I touched on in the presentation that we have seen investors start to move up the risk curve, and we've seen it most obviously in widely marketed development sites. I think we could also see it elsewhere where capital chooses to work with a development partner or an expert asset manager to be able to reposition buildings to become grade A. I think there's just this simple lack of high-quality grade A product available that investors are having to find different ways to get that access.
We could see more competition there. It's one of the reasons we're so focused on acquisition opportunities in London, where we have a genuine competitive edge. The 55 Broad Street acquisition that we made niine-12 months ago, adjacent landownership to Dashwood, where there was a clear marriage value. There's those sorts of situations or existing relationships with landowners or occupiers that we will continue to leverage to find the opportunities to deliver the right sort of returns.
Thank you.
Any more questions in the room? I've got one I'll come to the conference call in a moment, but any more in the room first? It looks like I'm gonna move to the conference call. I think we've got a question on the call from Paul May at Barclays.
Yes, it's a question from Paul May from Barclays. Please go ahead. Hi, everyone, and hopefully you can hear me. Just got a number of questions I think linking on from Oz's a little bit with regard to London offices and demand there. Utilization of space is still fairly low. Not sure, given the U.K. is sort of fully open now, what really drives that higher from here. Just wondered when you believe occupiers will start to reflect that in their demand decisions for space, given we seem to be running at a peak level of around 55% of total occupancy in terms of utilization. Just wonder what your views are there. You mentioned around competition coming through on development of prime space.
Just wondered whether you see that putting pressure on rental levels moving forward as more of that supply comes on stream. Just moving into retail, you mentioned that you believe that we're reaching a sort of a bottom, and I think looking at your unlevered IRRs, you're expecting a 2%-4% medium-term rental growth per annum coming through on those prime retail assets. Just wonder what the drivers are there of that sort of higher than inflation expected rental increases coming on retail moving forward. Just on your three speculative developments for Lucent and n2, looks like you're losing value on those relative to total development cost. I appreciate yields are quite high on those. Just wonder when you expect valuation improvement to come through.
Is that just simply through letting up of those schemes over time? Thank you.
Cool. Thank you, Paul. Your first question's around office utilization, overall demand for London office space and what drives that from here. I think it's important to say that I think we are still seeing a reasonable amount of disruption in the rate of increase in utilization. For example, half terms, schools sending children home 'cause of COVID situations, people having positive COVID tests. I think there's still quite a lot of noise in the wider occupational market. I think your assertion that the U.K. is effectively back to normal and the economy is open, I think, is probably feels a touch premature at the moment. I think we are still gonna see caution from people over the winter months.
I think we're certainly not going to see anything from government that's going to dissuade people away from that. I think we're very focused, understandably, on maintaining an open economy and therefore discouraging travel, et cetera, unless it's necessary. I think all of those things are going to act as a suppression on perhaps the genuine demand for at least the next six months. For me, it's sort of spring, I think, before we start to see a difference. At the moment, our midweek utilization is at 67%.
I think it's probably the peak utilization that is the most relevant reference for long-term space requirements rather than the average, because of course, if everyone wants to be in on a Tuesday, Wednesday and Thursday, you need to have enough room for everyone to be in on a Tuesday, Wednesday and Thursday. I think with growth from 67%, to me, that still underpins our good resiliency in demand. All of the conversations I've had with the office customers I've met over the last two- months has pointed to them having been previously uncertain, still not clear about how they're gonna use their space or how often people are gonna be in, but more comfortable that they do need the space that they have. Now, that may well vary over time from occupiers.
It may well be that large financial service occupiers, for example, may look at opportunities to make savings in back office occupation of prime buildings. I think those cost-driven businesses perhaps will see some reduction. It's clearly not a part of our business that we are part of the economy, I should say, that we're particularly exposed to. For me, it's a six-nine-month view. Our own internal planning scenario, and I wouldn't want to give the impression that this is super sophisticated in terms of the analysis that's behind it, but it does feel as though we should be planning for 20% fewer people in Central London at any point in time compared to before the pandemic.
That's simply just people coming in and out at different times rather than there being a large number at the same time. I think the impact from a value and demand point of view is more pronounced in the retail and the ancillary space, and you've seen that in the valuation impact that's come through again in the first six months of this year. Even there, I think we're now starting to see a shift and an upward turn in demand. Anyone who's tried to book a table at a restaurant in London of late will probably have found it quite challenging. I think your point on development leading to competition is a really interesting one. Very early at the moment.
I don't see that necessarily in the near term accelerating supply coming to the market. I think it's more at the moment an indication of just how much capital there is trying to get exposure to the London market and just the level of competition that there is for that. Some of the most recent estimates we've seen from our agents would suggest that there's something like GBP 40+ billion of capital trying to invest in a market where there is probably GBP 6 billion-GBP 7 billion of product available at the moment. I think that's where the near-term impact is going to be. Clearly, we need to keep a very close eye on both how demand transitions from here and how the supply pipeline move forward, and that's why having flexibility in our pipeline is as important as it is.
I've not sat here saying we know exactly how demand and supply is gonna pan out for the next five years, and we're putting all of our chips on a particular outcome. We've got Portland House ready to go next year. We've got Timber Square ready to go next year. We've got quite a lot going on at the moment in our coveted pipeline, and as we see continued evidence of growth in demand in particular, we can press the button on those developments quickly and therefore keep ourselves well positioned within the market. You asked a question about retail growth, and there's always a risk of taking one of my graphs perhaps sort of too literally, but we certainly have indicated a view that I think there is the prospect of growth in the medium term.
We've got retailers looking to upsize within our centers. We've got retailers who weren't previously in our centers looking to relocate into them because they can see the strength in sales and footfall performance. We've got digital brands looking at establishing physical presence in those locations to support their online. I think we're seeing an increasing number of international brands perhaps looking at opening in the UK. I think all of this is happening because rents are now at a materially lower level. There's more operational risk. There's more link to turnover. You're typically base plus a turnover performance.
I think that means if we can deliver the footfall, we can deliver the shoppers, the brands, the right category mix, then I think we can see sales-led performance, and it would be that I think that would underpin our medium-term confidence in growth at or around inflationary levels. Finally, you asked about our three speculative developments, and the cost situation, and just the erosion of some of the margin. I'll ask Vanessa perhaps to comment on, I think, Lucent and Forge in particular.
Yeah. With Lucent and the Forge, I think what we've given there is a slight change in the program, and there's been a very sort of small increase in those costs. But effectively, those schemes are in line to deliver some returns. We've seen increased demand in those assets, and if you look at the yield comparisons that we've got, combined to where we see the prevailing London office yields, you'll be able to see that there's some upside to come on those schemes. There's still value accretion on the existing pipeline that's in progress.
With the Forge and Lucent, those are two of our projects within the pipeline where our approach to procurement has us taking a little bit more risk in terms of pricing. Where there has been inflationary pressure in the market, I think we all understand, there has been over the last six or so months, it has impacted on those. Now, the vast majority of those packages are now let, so the inflationary price risk on the cost to complete on those projects is materially lower now than it was. It'll be substantially less than 10% of cost to go where there would be any price risk. We have seen on some of our prospective developments where we're active in the tender market, there is some upward pressure.
At the moment, we are seeing tender returns still come in at within levels that would be you know, supportive of our overall appraisals, particularly taking into account the design and procurement contingencies that we always include within our underwrites. Paul, I'm hoping I've captured all of your questions adequately there, but please do tell me if there's anything that I've missed or if you've got any follow-up.
No. It's all good. Just one quick follow-up with confirmation. The peak utilization, you mentioned the 67, that's relative to sort of 85-ish% utilization pre-COVID? So 67 of 85, is that right?
That's correct. That's of pre-COVID-
Yeah
levels. I think I have to put a slight caveat to that office utilization pre-COVID was not something that was measured in a particularly sophisticated way. It is based on a series of data points and estimates pointing to around a 4.1 working day average week prior to the pandemic. I would hesitate in being too precise about the comparisons of pre-COVID, but that was, you know, how we based that estimate.
Fantastic. Thank you.
Thank you, Paul. Are there further calls on the questions I should say on the conference call?
There are no further telephone questions.
I'm now gonna turn to a couple of questions I have in front of me on the screen that have come in from the webcast. Can you please advise the regional retail rental growth you are underwriting in the next circa five years, including the impact of rent rate and occupancy? Also interested to understand how the negative 18.4% reversion will impact this growth, unless you think this will partly reverse given you're achieving rent ahead of the ERV. That's from Claire at Resolution. I think Vanessa had a chart showing gross income or illustrative gross income progress that did show a couple of the moving parts within the retail portfolio.
I might ask, Vanessa, just to comment on that first, and then I'll perhaps talk more generally about how we're thinking about the market.
In terms of the income progression chart that we've included in the pack, if we look at the retail, we've illustrated here how the negative reversion that we'd expect to see in our retail portfolio is expected to be offset by the re-letting of vacant space to more normalized levels. Also there's the aspect of variable income. Within our retail portfolio, we're starting to see the recovery of variable income come through as our occupiers are now open and trading, and we're starting to see that come through. Broadly, we would expect those three aspects of our portfolio to be broadly flat going forward, to effectively offset each other.
In respect to the question of sort of the five-year view, for I think underwriting purposes, you'll appreciate then, that we are still being cautious in our view. We've got six months of good evidence of lettings, supportive or slightly ahead of ERVs. I think we need to see a little bit more of that come through in the second half. I think we believe there is the possibility of the major retail destinations that attract the brands, reduce their vacancy, drive footfall and shoppers, that those would return to growth.
I think the increasing prevalence of turnover components to lease as leases should mean that for those strongly performing sectors that growth should be more immediate in terms of how it begins to come through within rent. I think we see the operational risk associated with that as being an opportunity to add value rather than being a sort of downside risk which might be the more sort of typical sort of fixed income proxy way of thinking about things. Operational risk in the retail estate I think is a real opportunity to drive growth. I don't think we're talking about market growth. I think we're talking about the opportunity really to drive operational performance at the assets that are gonna be winning locations within their catchments.
We have a second question from Tim Leckie at JP Morgan. At the full-year results, we mentioned there was potential to get vacant possession of some more medium-term potential developments earlier as tenants reposition post-COVID-19. Is this still a possibility or has the anticipated churn not come through? That certainly is still a possibility. We're working hard on. I talked about needing to find situations where we have a genuine competitive edge to unlock development opportunities. Certainly, finding those within our existing portfolio would be one of those areas that we focus on.
There are active discussions in a couple of areas as occupiers consider their longer term requirements, and there is the opportunity to concentrate into the highest quality space and free up some of the older, less flexible secondary space that they may occupy within our portfolio. I think that will continue to be a trend. Question from Andrew Gill. What percentage of the portfolio by value or ERV does the GBP 135 million cover in improving environmental credentials? Is there further CapEx required in the current or future development pipeline that's not included in this figure to meet future environmental obligations? Vanessa, do you want to tackle that?
Yeah, certainly. The GBP 135 million covers the whole of our portfolio with particular focus on the assets that we plan to retain in the portfolio. I think that probably covers the first part of the question. Then I think in terms of further CapEx required in the future, in terms of the development pipeline, what we're doing now as we're designing new developments in line with net zero carbon, both in operation and from an embodied carbon perspective, those costs are now being included within the cost of the development themselves. That's where we would expect to see those costs coming through.
The longer-term costs that aren't reflected would be the cost of offsetting residual carbon. Of course, beyond this gets us to 2030. This has us to a 70% reduction in our science-based targets. Now, if you look at all of the CRREM pathways and all of the stuff that was talked about at COP26 over the past two weeks, by the 1.5-degree scenario, it isn't achieved by getting to net zero to a 70% reduction in 2030 and then stopping. There is going to be further investment ongoing within assets. Beyond that, what we're doing is committing to all of the available technology and input that's there today, and we can hit our science-based targets as a result of doing that.
As new technology develops and emerges, as it will be required to do in order to drive emissions further, there are, of course, gonna be some longer-term aspects. I increasingly feel that the link between that investment and the rents that those properties are able to command in a market where that is a fundamental requirement of occupiers and increasingly regulators, I think should mean that the relative cost and return equation is something that means we shouldn't be overly concerned about costs that we can't recover through value. Question from Alan Carter, can you say a bit more on the scale of cost increases at Forge and Lucent? Is it embedded and the likely effect on yields on cost?
I think in terms of build cost overall at Lucent and Forge, in particular, where there was that greater exposure to procurement risk because of the way that we were taking those schemes forward. We've looked at cost increases that are in the mid-to-high single digits increases on the construction cost component of that, which I guess is crudely half of the overall development cost. As I think as I mentioned a moment ago, we now have packages substantially let across those projects, so cost inflation risk from here on those projects, in particular, should be minimal. It's all reflected fully in the numbers that Vanessa shared on the development slide earlier.
That increase in the percentage cost overall would have a consequential impact on yield on cost, you know, assuming rents remain consistent. I hope that answers that question. There are no further questions on the webcast. That was the third of the three ways in which people could ask questions. I think that hopefully means there are no further questions. Thank you very much, everyone, for either attending this morning or taking the time to dial in or to follow on the webcast. Thank you very much. Have a good day.