Questor share tip: Derwent London benefits from office property boom

Lower for longer

The property sector as a whole was given a boost last week when Mark Carney, Governor of the Bank of England, hinted that UK interest rates will stay lower for longer.

Property investment is a yield play. Borrowing cheaply and delivering stable rental income will generate profits and see the value of the property portfolio increase. Derwent is currently doing all of the above.

Rental values increased by 4.2pc during the first half and the portfolio yields 5.02pc. The net debt of £974m at the end of June has an average maturity of 7.2 years and a weighted average interest rate of 3.98pc.

Developing returns

John Burns, chief executive, said: “Derwent London is set to have another good year in 2014 after an excellent first half. Our confidence in our market, the quality of our brand and our strong financial position is reflected in the group’s most substantial development programme to date.” The company has 626,000 sq ft of space under construction of which almost a third is pre-let.

The largest project, The White Collar Factory, with 293,000 sq ft of new offices, is located at London’s Silicon Roundabout – where a cluster of technology start-ups are based – and is expected to be completed in the third quarter of 2016.

Be wary of the cycle

Shares in Derwent London have enjoyed a strong year so far, up almost 14pc, and easily beating the wider FTSE 250 that has fallen 1pc during the same period. The performance follows a stellar five-year period during which the shares have more than tripled in value from lows of about £8 in early 2009. The shares now trade on a forecast price earnings ratio of 48 times, falling to 41 times next year, and offer a prospective dividend yield of 1.5pc.

Derwent is in a strong position, but Questor would argue that property moves in cycles and would be wary about getting in at the top of this one. Hold.

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