“Services have to be a priority. Thirty years ago, you provided car parking. Now you provide cycling facilities within the building. The generation’s needs are changing, and these things have to be taken into consideration.”
Insightive.tv: What are the key national and international forces affecting your portfolio at the moment?
Paul: One of the primary forces has, of course, been Brexit. We are almost completely focused on central London. Recruiting and maintaining tenants is up there as one of our main challenges. Brexit has had an effect on the share prices of the whole sector. However, we are coming off of a record letting year — and we had a strong second half.
It has actually been a bit of a confusing picture. Although some firms have been quite nervous about Brexit, and the stock market has fared poorly — the core business has been pretty good. Our focus is on the middle market — focusing on media and creative and tech companies. We cater to a lot of UK based companies, but also to European and American firms. We have been keeping a strong and close view on the health of our tenants, but we have retained a very high occupancy rate, with only 3-4% vacancy. We are confident about our position and have no holdings in the financial markets. Only 2% of our portfolio is held by financial tenants.
Looking to the future, Brexit will certainly add uncertainty. I think the main thing is making sure that passports are issued to people who are already here — but it looks like that will happen. I think there has been a bit of the old British attitude — let’s roll up our sleeves and get on with it.
There are also potential positives. From an investment point of view, the weakness of the Pound is attractive to international investors. Particularly in East Asia, the UK is seen as good value.
Insightive.tv: Do you see other international forces affecting your business in London?
Paul: One long-standing positive factor is that we have quite a few American tenants. They still view London as a World City. They appreciate the language, time of day, and see us as a bit of a refuge.
Overall, the current situation is one of uncertainty. Ultimately, however, I still haven’t seen any big decisions on ongoing projects falling through because of international forces. Both Apple and Wells Fargo have recently made large expansion commitments. There is activity. Companies are attracted by London’s talent base and quality of life.
Insightive.tv: Have you taken any specific measures to manage your portfolio moving forward — looking at longer-term ramifications.
Paul: Most analysts suggest that valuations are going to go down a little. The truth of the matter is that secondary assets are going to suffer. But areas in strong locations — such as central London — should retain their valuations. There is strong demand, and overseas interest does not seem to be letting up. We are in a fortunate position. Our middle market assets, are strengthened by their locations, and are perfectly placed to handle this type of uncertainty.
We are building our income, and are protective of our tenants. A few years ago, we might have been more inclined to refurbish buildings and speculatively re-let vacancies. But, income, and a push on assets are going to be very important over the next few years. We have decided to maintain our big pipeline projects such as the Brunel Building and 80 Charlotte Street that will be delivered in 2019. But I think the focus, over the next few years, is going to be a bit of TLC with our tenants, which we undertake anyway. The long term goal is the same as it always has been — create interesting and desirable space for tenants. .
Insightive.tv: Turning to your portfolio — do you deliver services within your buildings?
Paul: We do, however, our goal is to create more of a service environment within buildings than actually provide the services ourselves. We provide the usual services — heating, air conditioning, security. We are also moving more towards further service provisions such as cafes, and “Wellbeing” services — gyms, tracks, cycling facilities. Sustainability is coming further and further up that list as well.
Most of our assets are multi-let. So, we have been easily able to contract out portions of a number of building to other companies, primarily one called The Office Group, that provide additional service to our other tenants. We often rent out 5-10% of a building in this way. One main aspect of this is that it allows for the provision of flexible office space on a short-term, project basis. Our tenants can essentially contract with The Office Group. We chose partnerships simply because it is an easier way of delivering a better service. Those kinds of service packages are intensive — like running a hotel. In general, it is something that we are looking at as a companion to the traditional office, rather than a replacement.
Insightive.tv: Do you see greater demand from tenants for services, and have changes affected your valuations or yields?
Paul: I think services make buildings let quicker. We generally let to a service operator, take a rent from them and a top up. So, again, we aren’t completely side by side. But I think it makes the space more interesting. It makes the valuations stronger and pulls up both the rent and yield.
Services have to be a priority. Thirty years ago, you provided car parking. Now you provide cycling facilities within the building. The generation’s needs are changing, and these things have to be taken into consideration. Our focus is to get the core facilities right. We provide cafes within our demises. In breakout areas — The Angel Building for example — it’s like a hotel. All of these additions make buildings desirable — commanding better rents and better values. But, I don’t think single companies are going to able to effectively provide all of these services. Our model of working alongside service providers is a successful and necessary one.
Work is turning more into home, and home is turning more into work. The office is turning into something more fluid than it used to be, and Millennials want something rather different. Our goal has been to provide flexible spaces. We have changed the way tenants can occupy buildings, and we have changed the leasing profile. We try and allow tenants to see their office as their own space.
The old twenty-five-year leases are gone. But our average lease is seven or eight years. We can accommodate something as short as a three or five-year leases. But for very short-term based workspace arrangements, we collaborate with our partners. I think people want choice, but they also want to have their own space — they want to be able to brand it as their own and conduct business as they see fit. Our success comes from providing both choice and stability.
Paul Williams has been on the Derwent Board of Directors for almost two decades, originally joining the company in 1987. He is also the current Director of The Paddington Partnership. At Derwent, Paul is responsible for asset management and the supervision of refurbishment and development projects. We spoke with Paul to understand how political changes have impacted the immediate property market, along with long-term developments in real estate. Paul’s expertise gave us insight into how Derwent is adapting to short and long-term changes to retain their successful market position.
Derwent London is the largest London focused real estate investment trust, with a 6.2 million sq/ft portfolio valued at ￡5.2 billion. Founded in 1984, Derwent currently groups their expansive property assets into fifteen unique “villages” — catering to different sectors and business cultures. For the previous six consecutive years, Derwent has topped the property sector in Management Today’s peer reviewed ‘Britain’s Most Admired Companies’ — taking the overall third place last year.
Part of THE FUTURE OF COMMERCIAL PROPERTY series
Trends, Challenges, and Opportunities An Inside View