Performance overview

The demand for commercial property investments in London has gathered momentum over the Half Year, fuelled by strong buying interest from overseas investors. A combination of the substantial fall in values from the peak, currency movements and the transparency of the market have made London one of the preferred locations for global investors. Occupier markets have encountered continued downward pressure on rental values, although we have seen an encouraging improvement in levels of take up of offices in the City market since the middle of the summer.

The revaluation of our London Portfolio resulted in a positive valuation surplus of 0.5% for the six-month period overall, with West End offices up 2.3%, City offices down 2.0% and Central London retail down 1.7%. Over the same period, rental values in our like-for-like portfolio increased by 2.0% for Central London retail, but decreased by 9.5% for City offices and 7.7% for West End offices.

London Portfolio by capital value £4.90bn (%)

Capital value

As expected, pre-development sites continued to show greater volatility in valuation movements than investment properties, but overall the valuation change on our pre-development sites at Park House, W1, Selborne House, SW1, Wellington House, SW1, Arundel Great Court, WC2, and 20 Fenchurch Street, EC3, was positive over the six-month period at 6.5%.

On the basis of ungeared total property returns, our London Portfolio outperformed the IPD Quarterly Universe by 3.3%, with London offices ahead by 4.1% over the six months and our London retail underperforming by 2.9%.

Voids across our London Portfolio decreased from 7.2% in March 2009 to 5.1% in September 2009, with the decrease primarily attributable to properties being prepared for development. It continues to be the case that the high quality of our tenant base in London has ensured that units in administration are at an extremely low level at 0.3% (31 March 2009: 1.1%).

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Rental income

Gross rental income of the London Portfolio declined by £12.0m as set out in the table below.

Table 1: Gross rental income – London Portfolio

30 September
30 September
Like-for-like investment properties 127.4 130.5 (3.1)
Proposed development properties 3.4 5.3 (1.9)
Completed developments 23.7 19.7 4.0
Purchases since 1 April 2008 4.4 1.0 3.4
Sales since 1 April 2008 6.5 20.7 (14.2)
Ongoing developments 0.3 0.5 (0.2)
Gross rental income(1) 165.7 177.7 (12.0)
  1. Includes properties treated as finance leases. The income of these properties for the six months to 30 September 2009 was £1.9m (30 September 2008: £2.9m)

The decline in gross rental income compared to the same period last year is mainly attributable to our sales programme, which resulted in a decline in rental income of £14.2m. In addition, our gross rental income on like-for-like properties reduced by £3.1m mainly due to voids following lease expiries at Eastbourne Terrace, W2, and Portland House, SW1. These reductions were partially offset by acquisitions, and by a £4.0m increase in rental income as a result of completed developments, in particular New Street Square, EC4, and Queen Anne’s Gate, SW1.

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During the Half Year, we successfully completed our planned programme of asset sales. Sales totalled £296.3m and, on average, were at 2.1% below the 31 March 2009 valuation (before disposal costs) and showed an average income yield of 8.1%.

All of the properties were acquired by overseas investors, with the largest transaction being Portman House in Oxford Street, W1, which was sold for £155.0m. Portman House provides approximately 4,200 sq m of retail and just under 9,500 sq m of offices, with the offices being let on leases with between three and seven years to expiry and with passing rents in the range of £533 to £861 per sq m (£49 to £80 per sq ft). Other asset disposals were 22 Kingsway, WC2, 98 Theobald’s Road, WC1, 40/50 Eastbourne Terrace, W2 and Sardinia House, WC2.

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In line with the long-term planning of our development programme, we have had very little completed space coming onto the market during the period. During the Half Year, development completions totalled just 4,470 sq m and related entirely to our development at 30 Eastbourne Terrace in Paddington, which was completed in May 2009. Successful leasing activity during the period included:

  • Dashwood House, EC2
    This 14,820 sq m office refurbishment was completed in October 2008. We have made good progress on leasing and the building is now 52% let or in solicitors hands (31 March 2009: 9%)
  • 30 Eastbourne Terrace, W2
    This 4,470 sq m office refurbishment was completed in May 2009, and we have agreed terms to let 27% of the space in two separate transactions.
  • New Street Square, EC4
    In the Half Year we completed 2,780 sq m of new lettings, which takes the retail element of this scheme near to full occupancy and leaves just 2,170 sq m of offices still to let.

As we have relatively little development floorspace available to let, it is an investment property which generated our largest letting over the period. In August 2009, together with The Cadillac Fairview Corporation Limited, co-owners of Thomas More Square, E1, we completed a letting of 17,820 sq m of office and supporting space to News International for a term of a minimum of five years and at a rent of £4.2m per annum. This is the largest letting of second-hand space secured in the London office market since 2003.

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Development and planning

Our next major development completion is One New Change, EC4, which lies adjacent to St Paul’s Cathedral in the City. Here we pre-let approximately one third of the offices in September 2007 and have now let or agreed terms on 52% of the retail space. Confirmed tenants include H&M, Hobbs, Links of London, Marks & Spencer, Reiss, Topshop and Wasabi. In July of this year we made a decision to push forward quickly with retail lettings while taking a more measured approach on office lettings. We believe the exceptional quality and unique location of this development will attract strong interest from office occupiers as we near completion and as the momentum of the London offices market rebuilds.

Looking to the future, we expect positive rental growth to emerge first in the West End office market, and we plan to be one of the first to start large-scale development in this market. We have obtained construction tender prices for three West End developments, where we are likely to commence construction in 2010:

  • Park House, Oxford Street, W1
    This site covers an entire city block of almost half a hectare on a prime Oxford Street location near Marble Arch. It will provide exceptional retail, office and residential space.
  • Selborne House, Victoria Street, SW1
    The current Selborne House is an outdated 1960s office building. This will be replaced by a high-quality building that will create premium office accommodation, together with street-level shops and restaurants.
  • Wellington House, Buckingham Gate, SW1
    The new Wellington House will be a residential development providing 59 flats, and is intended to complement the traditional London red-brick mansion blocks of Victoria.

Our expected completion date for these developments is late 2012 or early 2013.

We have continued to identify opportunities to create value through our planning expertise, and one example of this is City Forum, N1. Here, Islington Council has granted planning consent for a residential-led scheme of 100,000 sq m, which will establish a mixed-use development on a 1.9 hectare site in Islington.

We have also obtained planning consent on appeal for our mixed office, hotel and residential development of 61,890 sq mat Arundel Great Court, Aldwych, WC2. We have secured income from the existing buildings on the site until late 2012 so that this is a potential medium-term development opportunity.

At Ebbsfleet Valley in Kent, we have very little residential development currently under way. All 104 completed units have now been sold and, on the small phase of 58 units currently under construction, we have already exchanged contracts for sale on 67% of the units. Further phases of flats and houses to be delivered in the short term at Springhead Park will likewise be sized to meet levels of demand.

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Looking ahead

As a leading global financial centre, London continues to be a magnet for international businesses, and this is reflected in the number of major office lettings concluded in recent months. We do not expect further material increases in vacancy rates in the short term and, with limited new developments being started, vacancy levels will begin to reduce as the economy recovers. Against this backdrop, a high proportion of the new capital we invest in London is likely to be allocated to development projects; these can be commenced now for delivery, in some three years’ time, into improved occupier markets with the prospect of rising rents.

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