Derwent: excellent London real estate for only fifty pence

With plenty of room to grow, this real estate investment trust offers investors a unique chance to purchase a portfolio of London real estate at a low cost

With 61 principal properties spread across what it refers to as 13 "villages" in central London, Derwent London (LSE: DLN) is the biggest office-focused London real estate investment trust (REIT). These include Fitzrovia's 8894 Tottenham Court Road and Oxford Street, which has 6,100 square feet of office and retail space. Additionally, the group owns a large pipeline of properties, such as 50 Baker Street W1, which will be completed in the second half of 2029 by combining three properties that have been acquired over the previous few years into a single office and retail building.

Put together, Derwent's existing portfolio and its pipeline are worth around 3,322p per share based on EPRA net tangible assets, an industry-standard performance measure. However, the price of the stock is only 1,600p. Analysts at Berenberg claim that this discount is greater than the January/February 2009 valuation trough. According to records dating back to 1984, a yield of roughly 5.1% is also the highest ever recorded.

The demand for commercial real estate in London is very high.

To put it simply, Derwent's valuation is unexpected. The market for top-notch office space in London is extremely competitive. Recent leasing activity by the company makes this evident. Derwent signed 11.3 million new leases in 2025, which were 9.9 percent higher than the previously projected rental values. Additionally, it managed to push through increases of 6.4% in the remainder of its portfolio. Management projected a 4%7% increase in rentals in 2026.

Start your trial. The company has outperformed the market average in terms of growth. Savills reports that due to financial firms relocating from the City, where there is a structural shortage of office space, rents for prime office space in the West End increased by an average of 6.1 percent to 166.61 per square foot last year. With the exception of those under offer, the vacancy rate at the prime towers is as low as 0.9 percent and just 0.2 percent. Rents in the sq\. Mile were once low by West End standards, but the competition for space is driving them up. Proskauer Rose, a law firm, moved to the 46th floor of 8 Bishopsgate EC2 on a 13-year lease, paying 145 per square foot as opposed to the sq\. Mile's average premium rent (Grade A) of 74.34 (and closer to 40 for Grade B).

These numbers show how diverse the central London real estate market is. The portfolio of Derwent is situated in the middle. With ongoing projects included, its West End assets have an average rental value per square foot of 72.77. After renovations, some of these large projects could fetch rents close to £110 per square foot. Over the next five years, management has projected that rents in the current portfolio will increase by roughly thirty percent per square foot due to lease expirations and rental reviews.

REITs can trade at a significant discount to net asset value (NAV) for three primary reasons. The first is debt; excessive amounts at high interest rates are fatal. Demandor lack thereofcomes in second. Instead of being an asset to the company, the properties become a liability if no one wants to rent them. Thirdly, there are future liabilities.

The demand for upscale prime properties that are energy-efficient and have all the amenities employees have grown accustomed to in their offices is one specific issue the UK market is currently dealing with. The potential benefit is frequently outweighed by the cost of bringing assets up to specification, particularly in areas like central London, which has some of the highest planning fees and construction costs in the world.

Derwent's unfair discount.

By offloading smaller, older assets, Derwent is resolving the upgrading issue. In 2026, it has already agreed to sell 144 million assets, and an additional 130 million are on offer. As a result, the group will have more money to reinvest in high-profile projects like its 50 Baker Street development.

When the new valuation is finished, a profit on cost of at least 25% is anticipated. Derwent planned to spend 142 million on regeneration this year, up from 182 million in 2025. Significant improvements are anticipated to produce a yield of 6.5%.

Derwent's debt management is aided by asset recycling. With maturities set until 2034, its loan-to-value ratio currently stands at about 30% of management's target. It recently used "existing liquidity resources" (probably cash and revolving credit facilities) to redeem a 175 million March 2026 secured bond at a rate of 6.5%. A 350 million 1.9 percent bond is scheduled to mature in November 2031. Last year, the company's income covered the entire interest on its £1.5 billion debt three times over.

Therefore, none of the significant problems that would typically support a lower Reit valuation appear to be hanging over the company. Additionally, earnings per share cover the dividend at a rate of 1.2 times, which is predicted to increase to 1.5 times by 2023. Earnings per share are anticipated to increase by 25% to 30% by 2030 as new and upgraded assets begin to boost Derwent's bottom line. Berenberg predicts that EPRA's net tangible assets will increase to 4,119p per share.

How the London real estate market will change over the coming years is the one thing that is unknown. The UK economy's future is, to put it mildly, uncertain. For the NovemberJanuary 2026 period, London's unemployment rate shot up to 7.9%, the highest in the UK and higher than its peak during the pandemic. Nevertheless, the current valuation of Derwent's shares already includes a sizable margin of safety. Furthermore, it's evident that Derwent's portfolio of upscale spaces is still in demand even though demand for office and retail space in central London faces an uncertain future. The firm is even benefiting from the uncertainty since other parties are delaying or pushing back new projects.

Derwent's shares offer investors a unique chance to purchase a portfolio of London real estate for about 50p in the 1 with a 5.1 percent yield and plenty of future growth.

Share price chart for Derwent London Reit.