Good morning, everyone, welcome to the presentation of Landsec's 2023 full year results. When we launched our strategy, back in late 2020, it was based on two clear and simple principles. To focus our resources where we have genuine competitive advantage and to maintain a strong balance sheet. Since then, we've done exactly that, and as a result, we are in excellent shape even though global economic and financial market conditions have deteriorated materially over the past year. Inflation and interest rates are up sharply and credit conditions have tightened, which has put pressure on values across every asset class, including property. On our1/2 year results six months ago, we said we expected this pressure to continue, which it has.
Whilst the political situation has stabilized somewhat since then, interest rates remain volatile, making it difficult to predict where they will eventually settle, although we think it is unlikely that this will be back at the level seen for much of the past decade. This is important for two reasons. Firstly, our strategy was never based on the idea that this ultra-low rate environment would persist, and neither are our decisions now based on a hope that interest rates will fall back to those low levels if we wait long enough. Our resolve to sell GBP 1.4 billion of mature offices over the past year underlines this. Secondly, and most importantly, this new reality plays directly to the strengths that we've been building since 2020.
At that time, it was difficult to find value in a world where there was generally someone else who was willing to borrow more at artificially low rates and so pay more. That game is over. As such, we should begin to see more interesting opportunities begin to emerge. Although, as we said six months ago, we think it will take some time for the full impact of higher interest rates to work its way through the system. Now in terms of capital allocation, we've remained decisive and firmly focused on future returns. We have now sold GBP 2.4 billion of assets where our ability to add further value was limited. We've been selective in our new investments, focusing only where we see a clear opportunity to create value, principally in development, in major retail destinations, and our mixed use pipeline.
We've reduced financial leverage with net debt down, LTV down, and our net debt to EBITDA ratio down. Our strategy remains the right one, and our three key competitive advantages remain our high-quality portfolio, the strength of our customer relationships, and our ability to unlock complex opportunities. These have served us well over the past year and should continue to do so in the future. Our success in executing our strategy means we have the opportunity to look forward to growth. Whilst part of the wider market is likely to be looking backwards to deal with leverage or refinancing issues. Our portfolio is ideally positioned to benefit from the concentration of customer demand on best-in-class space, resulting in improving rental growth prospects. We've reduced our exposure to areas where we see lower returns and created optionality to invest in higher return opportunities.
We continue to unlock complex situations that are accretive to returns, and we plan to explore options to further enhance growth by leveraging our clear platform value. Our strong capital base, with an average debt maturity of more than 10 years, no need to refinance any debts until 2026, underpins the resilience of our returns as we aim to deliver an 8%-10% return on equity over time and to grow our attractive earnings and dividend yield. Turning to our operational results, we continue to see a sharp divide between occupational demand and what is happening in capital markets. In London, we delivered another year of strong leasing, driving further ERV growth. We crystallized strong returns on assets where future returns looked more modest.
Our current development pipeline is now 60% pre-let or in solicitor's hands, with deals over the last 12 months on average 11% above ERV. In retail, we delivered a marked pickup in leasing with GBP 38 million of lettings signed or in solicitor's hands on average 9% above ERV and occupancy up to 94.3%. We've expanded our portfolio at highly attractive returns and retail sales have continued to grow. In mixed use, we received planning consent at O2 Finchley Road for our 1,800 homes master plan. Combined with further progress at Mayfield in Manchester, we can now potentially start works on site at both of those schemes later this financial year. Financially, we delivered 4.4% growth in underlying EPRA EPS, and that's towards the upper end of our guidance for low to mid-single digit growth.
This was supported by our strong operational performance with 6% growth in like-for-like net rental income, whilst our dividend for the year is up 4.3%. Our return on equity and EPRA NTA have clearly been impacted by the rise in bond yields, which put upward pressure on valuation yields. This was mitigated by our successful disposal program. As a result, our LTV was down to 31.7%, and net debt to EBITDA was 7x at the year-end. Now, irrespective of wider economic conditions, we remain convinced that delivering sustainably is key to our long-term success. In that regard, we have made further progress with our ESG ambitions. Our energy intensity was virtually flat year-on-year, despite the increasing utilization of our portfolio compared to the initial months post-lockdown at the beginning of last year.
We remain on track to reduce energy intensity by 45% by 2030 versus our 2013-2014 baseline. We'll start the first retrofits of air source heat pumps as part of our net zero investment plan later this year. If we had not sold over GBP 1 billion of mature offices, the share of EPC B or higher rated offices in our portfolio would already be around 50%. Our debt would also have been GBP 1 billion higher, which to us is more important.
As a result of those disposals, EPC A or EPC B rated offices are down slightly to 38%, but this will increase back to 44% by the summer as our current developments complete, and to over 50% by 2025 as the first benefits from our net zero investment plan kick in, before then moving up to 100% ahead of 2030. We recently also announced our new science-based target to reduce our emissions, aligned to the new Science Based Targets initiative Net-Zero Standard. That's the world's only framework for corporate net zero target setting that's in line with climate science. This target significantly increases the scope of our carbon reduction ambitions, as it now includes all of our reported Scope 3 emissions and restates our target relative to a more up-to-date 2019-2020 baseline.
Last month, we launched our Landsec Futures Fund, as part of which we will invest GBP 20 million by 2030 to enhance social mobility in the real estate industry and power 30,000 people towards the world of work. All this and more ensures that Landsec remains at the forefront of driving change in our industry. With that, I will now talk you through each of our key business areas in a little more detail. Starting with Central London. We sold GBP 1.4 billion of offices during the year, all of which had been successful investments for us, with an average 10% IRR over the time that we had held them.
Given that these assets were fully let to single customers for an average of around 20 years, there was not much more we could do to add further value. As the look forward return at the price we sold them was in the mid-single digits, we therefore decided to sell. That means that we've now sold GBP 2.2 billion of offices since late 2020, virtually all of which were in the City or Docklands. This has significantly improved our future return prospects, as it has freed up capital to reinvest in our pipeline, but also because 74% of our portfolio is now located in the West End and Southwark. That's where we believe rental growth prospects will be stronger there than in the City.
Now, we remain of the view that overall demand for conventional office space is going to reduce as a result of more hybrid ways of working, but that the impact of this is not going to be uniform across every location. Now, we previously said that we expected large HQ type space or areas which offer little reason to visit beyond simply work to see a more significant reduction in space requirements. Whilst we said we expected demand for attractive, energizing, well-connected places to be much more resilient. Now, the chart on the top right of this slide illustrates how this is beginning to happen. With around 75% of all space available for subletting in London located in the wider City and Canary Wharf submarkets. Whilst in the areas where most of our portfolio is focused, subletting availability is minimal.
While we continue to see some customers upsizing, others taking less space, it is clear that for virtually all, quality has become the most important decision driver. Our strong leasing performance following our record leasing last year shows we are well positioned for this. We signed or are in solicitor's hands on GBP 48 million of annual rent on average 5% above valuer's assumptions. Our occupancy increased to 95.9%, which means our vacancy rate is1/2 that of the overall London market. Our West End portfolio is essentially 100% occupied. We continue to see strong demand for our Myo flexible offer and occupancy there is now up to 92%. We're planning to open three new locations in the autumn. Underlying the appeal of our space to our customers, less than 1% of it is being marketed for subletting.
Our development projects are similarly well-placed. The well-timed sale of 21 Moorfields in September crystallized a very healthy 25% profit on cost. We have continued to see strong leasing activity across our three other schemes. These three projects are now 60% pre-let or in solicitors' hands, up from 38% six months ago, with deals over the past 12 months on average some 11% above ERV. Even further above the expected ERV when we originally committed to those projects. Looking forward, we expect that the growing shortage of Grade A space will drive further growth in rental values for the best space. As such, we expect to see low to mid-single-digit growth in ERV across our London office portfolio this year, with growth in the West End towards the higher end, growth in the City more muted.
We have already seen a reduction in new development starts across the market. We expect that to continue. New supply in two years'-three years' time is going to be down accordingly. Our decision to commit in the autumn, GBP 55 million to early works at Portland House and Timber Square, means that we've managed to maintain program for delivery of those projects into a supply-constrained window in late 2025. As returns look attractive, demand remains strong, and future supply is reducing, we will be committing to the full development of both of those schemes imminently. Moving now to retail, where demand for the best destinations continues to grow.
This reflects the fact that for major brands, online and physical sales channels are increasingly seen as being interconnected, and that an element of online sales continues to shift back to stores as the pandemic impact on consumer behavior begins to wear off. Indeed, key retailers such as Next or Inditex have recently indicated that online sales are unlikely to be as big a share of their overall sales as they had previously been anticipating. Whereas online pure play businesses such as Zalando have shifted their focus from growing market share to improving profitability. As such, we continue to see brands invest in refocusing on fewer, bigger, better stores. Especially so as the profitability of operating that physical space has further improved, given the roughly 30% reduction in business rates that came into force last month.
This continues to drive a tangible increase in demand for space in our locations. The overview on the right of this slide illustrates this, with 57 recent or current events where brands are either upsizing their space, relocating to our centers from elsewhere in the city, or where we're expanding our relationship by introducing those brands into new locations. While we expect brands will continue to rationalize store numbers, many are seeing above average sales growth in our centers compared to their overall store portfolio. With pressure on margins for both online and offline from inflation and a squeeze in consumer spending, we expect the flight to Prime to continue as secondary locations remain challenged. We continue to see the benefits of our investments in strengthening our retail team and changing the way we operate to focus on brand relationships rather than simply on assets.
We've seen continued growth in brand sales, and that supported strong growth in leasing. We signed GBP 27 million of lettings during the course of the year, which is up 35% versus last year, on average, 8% above ERV. As a result of that, occupancy increased 110 basis points, now stands at 94.3%. We're not really seeing any sign of a slowdown in that trend, despite ongoing concerns around cost of living. We currently have GBP 11 million of lettings in solicitors' hands, that's 28% higher than this time last year, and they are on average 11% above ERV. Overall, we therefore expect to see low to mid-single-digit growth in retail ERVs in the year ahead.
Our growing brand relationships and the trading insights that we get from the growing amount of turnover data we collect increasingly provide a unique perspective on our prime retail destinations. We've previously highlighted that we saw value in this space, given that sales have largely recovered to pre-pandemic levels and leasing continues to build, while values remain down at peak pandemic distress or peak online penetration levels. This disconnect has widened further in the last six months, as values were marked down further based largely on sentiment, even though operational performance continued to improve. With subjectivity and valuations elevated, we believe the latter is a more relevant benchmark and continue to see an attractive opportunity in the future returns that are on offer.
We demonstrated this very recently when we bought the debt secured against the 50% stake of St David's, which used to be owned by Intu. We did that via two separate transactions with two different lenders, and subsequently, we completed a loan-to-own restructure. All of that allowed us to get 100% control of the center at a material discount to the latest book value and at an attractive income return of 9.7%. That looks especially good given that occupancy has been growing and we've been leasing space there 10% above ERV across the course of the past year. Now on to the third part of our strategy, mixed-use urban neighborhoods. The structural trends underpinning our decision in 2020 to expand in this space still stand.
Be it demographic growth, driving demand for more homes, urbanization, or the fact that the lines between how people live, work, and spend their leisure time is increasingly blurred and will have an impact on the future of cities. Our long-term pipeline remains significant, and we've made material progress during the year in bringing forward several key projects. At Mayfield in Manchester, we agreed a land drawdown with our joint venture partners, which effectively allows us to develop 100% of the first phase of this site ourselves, and that will cover around a third of the overall project. At Finchley Road, we received resolution to grant planning consent for our 1,800 homes master plan. In Glasgow, we're on track to submit a major planning application shortly.
All of that means that this part of our business is now getting to a stage where it is no longer simply about a pipeline, as we could actually start to deploy our first capital into development later this year. All these projects are highly sustainable. They're located in some of the U.K.'s highest growth urban areas, and they're all immediately adjacent to major transport infrastructure. Given the mix of uses and the ability to phase CapEx commitments, they continue to offer a balanced risk profile with attractive target IRRs in the low to mid-teens. Turning to our two most advanced projects, at Mayfield, we're preparing detailed plans that could allow us to start on site late this year with the first two office blocks.
They will offer 320,000 sq ft of highly sustainable space in what is a very attractive location. The overall cost should be around GBP 150 million, with an expected yield on cost of around 8%. We expect to make a decision on timings this autumn. At Finchley Road, we were delighted to receive a resolution to grant consent for our scheme in late March, so we're now finalizing planning, progressing detailed designs. Subject to this and obtaining vacant possession, we could start enabling works on site towards the end of this financial year. We will, of course, make any decision to commit capital in view of wider economic and financial market conditions at that time. But ultimately, these schemes continue to offer significant long-term optionality and growth potential.
With that, I will now hand you over to Vanessa to talk you through the financial results.
Thank you, Mark. Good morning. Market conditions have changed considerably over the year, with growing disconnect between the strong occupier demand and the investment market, where the sharp reduction in transactions makes current property valuations more subjective. However, the strength of our business can be seen through the quality of our earnings and strong capital structure. Let me turn to our financial headlines. Our strong operational performance is reflected in a 10% increase in gross rental income and EPRA earnings. We benefited from a GBP 22 million increase in surrender premiums, adjusting for this underlying EPRA EPS was up 4.4%- GBP 0.501. I'm pleased to say this is towards the upper end of our guidance of low to mid-single digit growth.
In line with this, our dividend is up 4.3% to 38.6 pence, which reflects a dividend cover of 1.3x . As a result of the interest rate rises, valuation yields increased and the impact of this was partly mitigated by leasing, which drove 3.6% ERV growth. However, EPRA NTA per share was down 11.9% to 936 pence. We have further strengthened our balance sheet with asset disposals and financing activity. Our net debt is down almost GBP 1 billion and LTV is down to 31.7%. Our net debt to EBITDA ratio has also reduced to 7x at the year-end. Turning to EPRA earnings in more detail.
Gross rental income was up GBP 61 million, driven by three factors: the increased surrender premiums, which I referred to earlier, accretive acquisitions, and strong growth in like-for-like income, which I'll explain in more detail shortly. Direct property expenses were stable. Prior acquisitions increased direct costs by GBP 7 million, which was offset by a GBP 6 million decrease in like-for-like costs as a result of increased occupancy and cost savings. Last year, we initiated an organizational review to accelerate the execution of our strategy and to improve platform scalability and operating efficiency. This contributed to cost savings which have offset inflation, and our admin expenses have remained flat against last year, in line with our guidance. Whilst inflation remains elevated, we expect admin costs to be down slightly in the year ahead as a result of ongoing efficiency improvements.
Interest expenses increased by GBP 13 million, principally due to the acquisitions that we made in the prior year, plus a small increase in variable rates. We expect interest costs to increase slightly this year, reflecting a small increase in the average cost of debt, which is now fully hedged at 2.7%. Our EPRA cost ratio reduced to 25.2%, and we remain on track to reduce this towards the low twenties over time, principally driven by the efficiencies from investment in technology and our operating model review and procurement savings. Gross rental income was up 10% overall and 6% on a like-for-like basis with positive growth across all segments. In Central London, we delivered 4.2% like-for-like growth from new lettings, strong growth in Myo income and Piccadilly Lights.
Across major retail, like-for-like income was up 1.9%, with growth in occupancy and turnover income partly offset by some negative reversions of historical leases. This year, we see the significant over-renting in leasings in retail reset. We're expecting like-for-like growth to pick up the year after. In subscale, the strong recovery in hotels and some leisure upside resulted in an 18.2% growth. The net impact of our investment activity was GBP 13 million. This was principally reflecting the full year impact of prior acquisitions. The GBP 22 million increase in surrender premiums reflects a lease surrender that we agreed in Southwark to create a new development opportunity next to the recent scheme at The Forge, and the lease restructure in Deloitte at New Street Square earlier in the year.
The latter unlocked the opportunity for a major lease regear with Taylor Wessing elsewhere in the estate and the successful disposal of One New Street Square in January. Turning to portfolio valuation. The marked increase in interest rates meant that property transaction volumes slowed materially across the globe. In the UK, yields reset quickly as a result, that was especially during the fourth quarter of calendar year 2022. Despite ERV growth across all key segments, this meant that the value of our property reduced by 7.7%. Our Central London portfolio was down 7.3%, as the increase in yields was partly offset by a 4.7% increase in ERVs. That was at the top end of our guidance of low to mid-single digit ERV growth for the year.
The ERV growth in the city was solely due to a major lease restructuring at New Street Square, with the associated refurbishment CapEx taken as a cost in the valuation. Adjusting for this, the city ERVs were flat. Following our recent disposals, around 70% of our Central London portfolio is in the West End, which has proven more resilient than the city, and we expect the stronger outlook for rental growth in the West End to continue. Developments were down slightly with strong ERV growth from recent lettings, offset by softer valuation yields. The reported value of our major retail assets was down 6.4%, where valuers moved yields out based on sentiment in the absence of comparable transactions. However, in our view, the improvement in income and occupancy that we deliver is the most important factor than sentiment.
In mixed use, the value of our completed assets at Media City proved relatively resilient. Future mixed use developments were down as these are valued based on their existing use, and we manage income on a short-term basis to create the flexibility for our development plans. Across our subscale assets, hotels were resilient, but leisure was down 15% in the H2. This principally reflects the Chapter 11 of Cineworld, who continue to operate and pay rent, and its recapitalization since the year-end is a clear positive. Looking forward, whilst property values have started to stabilize in recent months, investment activity remains low and we are mindful of the wider market uncertainty. However, we expect prime assets to return to growth well before secondary property, where occupational demand is more questionable.
We expect major retail destinations to be more resilient than the lower yielding sectors. As a result of rising yield the rising valuation yields, EPRA NTA was down 11.9% for the year. This includes the impact of disposals, which completed GBP 144 million below the March 2022 book value, but crystallized a 25% profit on cost and a 10% IRR. Including dividends, our total return was - 8.3%, which again was highly impacted by yield movements. To illustrate this, our income return on EPRA NTA was 5%, whilst ERV growth added 2.5% and developments added 0.8%. Resulting in a positive return of just over 8% before the impact of year movements.
Where others in the market paused or they slowed down activity last, since last summer, we have continued to progress our strategy to drive our future returns. This slide shows the impact of our capital decisions. We have now sold GBP 2.4 billion of the GBP 4 billion target that we set out in late 2020, including GBP 1.4 billion over the past year. We continue to recycle capital further this year, and we're ready to act on opportunities that we expect to arise in the markets as they adjust to the higher interest rates. As we said in November, we believe that the full effect of the increase in interest costs will only work its way through the system over time. Our performance is underpinned by our sector-leading balance sheet, which we further reinforced during the year.
Our strong investment grade credit rating provides good market access, and we have the lowest corporate bond spread in the sterling real estate market, which gives us a clear competitive advantage. During the year, we reduced net debt by GBP 0.9 billion, and we issued a GBP 400 million green bond, which increased our average debt maturity to over 10 years. As a result, we are now 100% hedged. We also have GBP 2.4 billion of undrawn facilities providing substantial flexibility, and we have no need to refinance until 2026. Our LTV reduced to 31.7%, although LTV is not a great measure to judge leverage when the approach to valuations varies widely in different markets. More importantly, our net debt to EBITDA fell to 7x at the year-end, and 8x on a weighted average basis over the year.
This is one of the lowest in the sector, and it reflects the strength of our capital structure and our earnings profile. The strength of our balance sheet puts us in a great position to take advantage of current market conditions. Let me summarize with our performance outlook. Our sector-leading balance sheet and significant progress with the repositioning of our portfolio positions us well for future growth. We expect strong occupier demand from our high-quality retail and our central London assets to result in low to mid-single-digit ERV growth in the year ahead. We have a consented pipeline of around GBP 4 billion, which is expected to deliver double-digit returns. Combined with our attractive earnings yield, this underpins our aim to deliver an 8%-10% annual return through the cycle.
Short-term movements in valuation yields are beyond our control, we are unlikely to be precisely in that range every single year, but this target is what we base our decisions on. This year, we expect EPRA earnings per share to be broadly stable with last year's underlying GBP 0.501. This includes around GBP 10 million impact from the start-up cost of our Myo expansion, the investments in IT, and the final overrenting in retail resetting. We expect continued growth from operational performance to broadly offset this, and the fact that we are likely to remain a net seller of assets in the near term. We expect EPS to return to growth the following year.
However, we expect dividend growth of a low single-digit % per annum as our current payout is at the lower end of our policy range of 1.2x-1.3x cover by earnings. There will undoubtedly be some interesting opportunities coming out of the current market dislocation, and given our strong position, we are well-placed to benefit from this. With that, I'll hand back to Mark.
Thank you very much, Vanessa. I will now wrap up with how we view the current environment, what you can expect to see from us in the year ahead, and then we'll open up for Q&A. The past year has seen the most striking divergence between occupational markets and investment markets that I can remember. Interest rates, inflation have surged following a decade of unprecedented central bank stimulus and credit conditions have tightened. That's resulted in a material slowdown in investment activity and downwards pressure on asset values. Even though customer demand for the best assets, best locations remain strong and rents are continuing to grow. Whilst it's impossible to predict where interest rates will settle over time, we've positioned our business for a higher, for longer scenario.
As in a long-term context, the artificially low rates over the previous few years appears the aberration, not the adjustment that we've seen in the past 12 months. Unwinding a decade of excess liquidity was never gonna be a smooth transition, and we're mindful that there may be further risks in the system as the world continues to adjust to a new higher rate reality. We said six months ago that this adjustment would have a negative impact on return on equity in the short term, which of course it has. Whilst the recent stabilization in property values belies a low level of investment market activity, we do expect prime values to return to growth well before secondary. This reflects the increasing recognition amongst customers, be it in offices or in retail, that the quality of space is pivotal to attracting key talent or customers.
More so than ever, the key ingredients for growth are portfolio quality, balance sheet strength, and an ability to unlock opportunities, all areas where Landsec scores highly. To sum up, markets continue to adjust to a new reality, which means the short-term outlook remains unsettled. We have built positive momentum in executing our strategy despite these headwinds. As a result, we have a high-quality portfolio that's well-positioned for growth, a strong balance sheet that is ready for growth, and a skilled team delivering value through our existing assets, but also ready to seize new opportunities. Meaning that, over the longer term, we will be able to deliver better returns for our shareholders. Our strategy remains the right one, and we will continue to build on the strong momentum in each part of our business.
We'll remain decisive in monetizing assets where we can't add further value. We expect the balance of disposals from here to shift more from London towards our sub-scale sectors. In the near term, we will probably sell more than we buy initially, and that's reflected in our earnings guidance. We will progress our two near-term developments in London, whilst continuing to maximize optionality in our future pipeline, which could see us start first works on site at two major mixed-use schemes as well in the next 12 months. Our balance sheet is strong. Preserving that strength remains a key priority. Although we have significant headroom to invest, the size of accretive opportunities in our existing pipeline and across the wider market is such that it will likely exceed our own balance sheet capacity over time.
We also intend to explore opportunities to access other sources of capital to accelerate our overall growth and enhance our returns. The successful execution of our strategy means we have a high-quality portfolio which is well-placed to cater for the future demands of our customers, resulting in improving prospects for growth. Whilst our strong capital base puts us in a great position to capitalize on the opportunities that will no doubt arise as the market continues to reset. The outlook for the next few years is ideally suited to the competitive advantages of the new Landsec. As a result, we're excited about the future. Thank you very much, ladies and gentlemen. With that, I will now open for Q&A. We've only got three potential sources of questions out here in the room, and I'll start there.
Hopefully, we've got a roving mic on its way. I will then move to questions from the conference call, and then lastly, with any questions coming from the webcast. Please feel free to raise your hand if you've got a question. Oh, the microphones are in the chairs. I'm sorry. Forgive me. technology. Miranda, why don't you start?
Miranda Cockburn, from Panmure Gordon. Just in terms of valuation, just interested, your portfolio fell in value by around about 5% in the H2 of the year. That was obviously very significant outperformance of the MSCI IPD, which even if you take out industrials, fell by sort of 10%-12%. Can you just sort of talk through the rationale behind that? Are we starting to see the differential between the good and the bad in terms of offices, et cetera, retail? How do you see that?
I mean, I think it is very much that. I mean, I think that, you know, I suppose the adage in property historically has just been how important in particular location of assets have been, and well-located prime assets have always significantly outperformed inferior assets. I think we're now adding to that a much more acute sense of importance of the quality of assets, be that their sustainability credentials, be that the amenity that's offered around offices, whether they are attracting a big enough share of catchment in retail assets. This divergence is just gonna become more and more acute. At the wrong end of the market, if you like, you know, we've already got 20%-25% of excess retail property across the U.K.
We could well see, not probably to that extent, but we've said our, you know, view is there's probably a 20% reduction in demand for conventional office space, but it's gonna be at that same end of the market. I think this divergence is gonna continue. I think MSCI, you know, is very helpful from a sort of trend and directional perspective, but actually what's in MSCI relative to what you've got in our portfolio, and I guess some of the other, you know, listed REITs, it's a, it's a very, very loose proxy, I think, in terms of... I wouldn't read too much into direct performance of the two, but very helpful directionally.
Just a couple of other small questions. One, just in terms of what's the valuation yield of St David's as in your the current valuation obviously versus the 9.7% implied yield?
I.
Yeah, the transaction was close to the year-end, so it's in a similar position to the acquisition.
The 9.7% would be at a bit of a discount to what but it's not gonna be a material discount at this stage.
Lastly, just in terms of your sub-scale portfolio, which is about GBP 1.3 billion, obviously that's been sub-scale for a while now and it's, you know, you're looking to sell. Over what time period do you think we could see that all, you exiting out of that?
I think you certainly expect, as you indicated, to see disposals during the course of the year ahead. As a reminder, we've got a hotel portfolio, retail parks, and leisure parks within that subscale portfolio in roughly equal 1/3. Now, I think from there, the hotel portfolio has seen the strongest recovery post COVID. I think that's also where the investment market is most liquid. That's probably going to be one of the nearer term disposals from there. Retail park market, I think is starting to see capital return, debts returning in modest quantity. I think you could see us sell retail parks on a more like on a piecemeal basis than a portfolio basis. Leisure parks, I think more challenged in terms of immediate disposal prospects.
You know, concerns over consumer spending, most of those leisure assets are cinema anchored. Whilst we expect cinema performance to pick up quite materially later this year and into next year as the production slate. You know, there was a sort of impact on films not being produced back in COVID that's led to a bit of a dearth of releases in the last six months-12 months. That changes from later this year. I think that would probably, we'd wanna see that come through before looking to exit from any of the leisure assets. Broadly that order, but it's gonna be over the next three or so years in total. I've another question here, and then we'll go to Paul behind.
Hi, Sam Cotterell . Thanks for the presentation. Got a couple of questions, if I can. On your retail destination, you've got a 4.4% like-for-like sales above pre-COVID levels. Is that inflation adjusted given the last of a few years now? If not, are you sort of expecting further growth back to those levels on a real terms basis, or is this more of a new normal?
The 4.4% will be a nominal number, so it will include inflation. Certainly you'll see, you know, price inflation is in that number. It's not a sort of like-for-like pure volume. I do certainly feel for the reasons we've outlined, that we're going to see a couple of trends continue in our sector, or in our centers, I should say. We are gonna see more retailers upsizing and locating into our centers. From a total sales point of view, there's room for occupancy still to grow a little bit further. For those strong retailers that are in those locations, the mix of online, offline has started to change because of the profitability pressures on doing online business.
That is gonna continue to drive in-store sales. I firmly expect us to see growth. From a rents point of view, we've got ERVs, sorry, rents, resetting this year that Vanessa talked through in the presentation. Once we're through those, I think from next year, we'll then start to see that sales growth translate more naturally through to rental growth.
Thanks. On sort of the future capital allocation, you indicated that you expect there to be some opportunities for investment as of the impact of rates comes through the system. Can I just ask sort of what sectors you're expecting those opportunities to be in and at what sorts of pricing you'd expect it would that sort of settle at the best opportunities? Would that be funded purely from disposals, or what's your sort of headroom on LTV that you feel comfortable with in the near future if there's some economic uncertainty?
Let me talk about the sectors, and then I'll ask Vanessa to comment on balance sheet headroom. When we launched our strategy back in 2020, it was very important that we focused our resources, you know, capital and people, where we have genuine competitive advantage. I think that's a really important principle to run any business by. It'll still be the sectors that we have expertise in today where we'll be looking to deploy capital. We obviously have a London development program, which is, you know, a very attractive program that's gonna be delivering into a supply-starved window in late 2025, but I think we will see other opportunities emerge in London over time. Mixed use, I've talked about the projects that are ready to deploy capital into.
I think we've got a pretty substantial mixed use pipeline that we'll be able to deploy capital into pretty consistently in the years ahead. Unlikely to be adding material new mixed use projects in the near term, given the scale of what we've got. Retail, I think we indicated back with our strategy that we wanted 20%-25% of the portfolio to be in major retail destinations. It's sort of high teens at the moment, so there's certainly room to invest more from a portfolio allocation point of view in retail. As, you know, we've done that with St David's, we'll continue to look for opportunities within that overall sector.
As to pricing, I think we made quite an important point in the presentation that prime values are going to turn a corner and return to growth well ahead of secondary. It is really challenging to judge when occupied demand is going to provide any sort of underpin to secondary. I think as a result of that, you are gonna see capital concentrating at the prime end of the market. I'm not expecting to see sort of super distressed pricing, but I think we will see, you know, very high quality assets available at sensible prices. Vanessa, sort of balance sheet headroom.
I've mentioned in the presentation, as there's GBP 2.4 billion of headroom that we've got available at the moment. In terms of LTV, when we launched the strategy in late 2020, we talked about a target range for LTV to operate between 25% and 40%. That's where we've got our sort of set capital operating guideline, and that was through the cycle. Probably about 18 months ago, we said in the current climate, we expected to be operating in the range of 30%-35% at this stage. We're at the lower end of that range. I think that combined with the headroom, puts us in a strong position.
Thank you.
Paul, and I'll go then to Max.
Thank you very much. Paul May from Barclays. Just wanna focus on this 8%-10% long-term return that you're targeting, which is in excess of, say, real estate, 6%-8% long-term returns. Just wondered over what time you're expecting to deliver that, whether you can break that down between income and growth? Given your rolling cost of debt is, say, 5%, give or take at the moment, which is higher than probably when you set up your financial targets, you're probably looking to have less debt on that, I assume, just moving forward. I think you mentioned alternative sources of financing earlier.
Finally, to hit those returns, assuming, or I assume you're not expecting a material increase in long-term rental growth from, the say, 1%-3% that real estate has delivered over the historic long term. You'd be assuming a material fall in yields or increase in yields, sorry. Particularly, say, on offices, if you're looking at offices from the current levels. Thank you.
Sure. Thank you, Paul. Let me explain what that 8%-10% is 'cause the reason that I think it's important that we refer to that within our statement is that We have to make in our business long-term decisions about where we allocate our capital, and in doing that, we've got to judge what's the right return that we should be making for the risks that we're taking. You know, the GBP 1.4 billion of assets that we sold, a sort of mid-single digit return that we were expecting on our assumptions meant that wasn't a good place to keep capital. Low double digit, these are all unlevered returns, by the way. Low double digits returns on development. I think low double digit returns that will be available unlevered on prime retail in the current market.
Those look to us much more interesting. When we put all of that together, we think that leads us back to a world where ungeared returns for property are gonna be, you know, high single digits. This is where they probably were pre-financial crisis. They were pulled down by cheap money. They've got to gravitate back upwards. When we put that sort of through our model of how much we're gonna be able to recycle capital and maintain the balance sheet strength, et cetera, of the business, it leads us to feel that that 8%-10% is about right. How does that break down? Historically, we've been, you know, targeting, I think, on our previous returns of roughly 50/50 income versus growth. I think we're probably pointing to slightly more growth as a proportion of those returns.
Interesting point you make on the 1%-3% growth that real estate has historically delivered. The point I made a moment ago, I think, in response to Moran's question about actually this bifurcation of demand, I really think that's gonna deliver much stronger growth at the prime end of the market, and there's probably never been a more dangerous time to look at averages than the market we're in at the moment.
Cool. Thank you very much. Then just one on, so the difference between retail and offices. As you say, obviously, retail's been through a structural change. Yields have moved out a lot. They were sort of almost arbitrarily moved out in the final quarter last year on, you know, just a view of the valuers. Offices have been much more resilient on the yield side, but operationally, you're probably getting to a point where there's not a massive difference between the two in terms of, like, the better retail and the better offices. Is there an argument to be made that you see far more attraction in U.K retail than you do in U.K. offices, or at least in London offices at the current stage?
It's an interesting relative call. I mean, I think what we're looking at is delivering best-in-class office product in well-connected locations with all the amenity and that tick all the sustainability credentials is gonna deliver, you know, really strong returns. Obviously, there's more risk involved in the development aspect of that. I think on a risk-adjusted basis, therefore, the prime catchment dominant retail looks to offer, yeah, a better return. In terms of how much capital we could deploy over what sort of period of time, I think it's really important that we continue to grow and develop that platform in London development. There is opportunities if we can unlock them within primary transportation. Of course, you're buying at a, you know, 7.5% yield, 8% yield.
Rents are substantially reset, or will have done this year within that sector. If that returns to growth as we expect, then, you know, a 7.5% cap rate, 8% cap rate is not the right cap rate for that sort of investment.
Thank you.
Max, at the front here.
Hiya. Max from Numis. It was just a quick follow-up question on the leverage side of things for Vanessa. As you begin to sell down some of the higher yielding subsectors, subscale sectors, should we expect that net debt to EBITDA to kind of go back up a little bit? Will you try and keep it around that sort of 7x ? 'Cause it's obviously come down quite a lot this year from everything you sold.
Yep. We have a capital stated sort of capital operating guideline to target to operate with a net debt to EBITDA below 9x . I would expect us to be within the 7-mid-7x going forward. It will all obviously depend upon the timing of our reinvestment into the development pipeline as well as, you know, other assets. I think broadly speaking, we would be below 8x . I'd, you know, a bit below where we've got that operating guideline at the moment.
Okay, thanks.
I don't think I have any more questions in the room. I've got a couple on the webcast I'll go to momentarily. Let me just check on the conference call line first, if we've got anyone dialed in that has a question.
There are currently no questions on the line.
Great. Thank you very much. two questions from the webcast. Firstly, from Philip Small, asking, can we elaborate on other sources of capital for future growth? What are we exploring? What kind of structures? The basis of making reference to that within our results this year is that if we look at the scale of opportunities from Central London, we look at what we've got in a mixed-use pipeline over multiple years. We look about the attractions that we see in retail. They certainly in totality exceed any balance sheet capacity that we would have whilst maintaining the strength of financial structure that is such an important part of the Landsec story. Of course, we've got choices as a business.
We can scale back the level of opportunities that we pursue. We could choose to take leverage up, which as I've indicated, is not something we would be prepared to do. We could move at a slower pace over a longer period of time. When we look at the opportunities that are out there, we do think there is significant benefits to having scale across these and then a real opportunity to leverage value from the platforms that we have in each of those three businesses. Hence why we will be looking at how we might partner with third-party capital to pursue some of those strategies, some of those opportunities.
It's too soon to talk about what those structures may or may not look like. I think it is very clearly signaling that the scale of opportunity that we believe we can capitalize on as a business is ahead of what we would be able to sort of fund independently. A technical question on Argonaut or the security structure. Is GBP 9.6 billion of assets in the security group a constraint on asset management? What are the sector waiting requirements in the pool, please? That's from Mike Prew, Vanessa.
We do use the Argonaut structure to fund the group. Primarily that's our main funding facility. We have a pretty broad balance of assets that aligns to our main portfolio. The exceptions of what probably wouldn't be in there would be with Media City, where that's in a joint venture and it's got its own separate security pool. Other than that, most of our assets are would be in there.
Great. Thank you. Mike, I think if you've got some more specific questions on the asset pool and that structure, then please do reach out to us directly and we'll do our best to help answer. I'm told that we've got no further questions on either the conference call or the webcast. Hopefully we covered everything that people wanted to ask in the room. Let me wrap up there just by saying thank you very much for your time this morning and have a good day. Thank you.