Derwent London Plc (DLN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our Investor Day. Actually, it feels just so fantastic to have so many of you in the room to have actually a collection of people all talking to each other. That's a good idea, isn't it? So I hope you all got here safely. We've got a lot of presentations today, which you'll meet a lot of the team, but thank you very much all for attending. It's good to be back. I'm sure we all feel a bit zoomed out. So welcome also to 80 Charlotte Street, which is our first all-electric and Net Zero Carbon development. Now we completed the building in the middle of lockdown last year. Boston Consulting and Lee & Thompson already in occupation, another major tenant, Arup, are currently fitting out. So you'll get the opportunity to see other parts of the building later today. Now you're sitting in DL/78 which is a first for us and one of our new portfolio initiatives. It will open next week, so you're all getting a bit of a sneak view. It's a hybrid amenity space and it will be available to all our occupiers for an opportunity to hire meeting rooms, to have town halls, host away days and the like. Now subject to how this works, we're going to creating some additional facilities elsewhere in the portfolio. We've received wonderful feedback from our occupiers. So -- but actually, we'll talk more about DL/78 later. So anyway, market commentary. Now we updated the market in -- with our results and our latest acquisition back in August. Business activity has picked up as the year progressed, and we're seeing good demand for high-quality buildings. Now it's encouraged us to raise our current year average ERV guidance to plus 2% to minus 2%. The investment market, as David will explain later, continues to be strong. Occupation levels are picking up fast with some of our West End assets back to pre-COVID levels. We do have some laggards, principally among some of our eastern properties. However, the clear message from those who've returned to their offices is that they're pleased to be back. We strongly believe that good quality of space that embraces excellent design, adaptability, amenity, wellness and sustainability will perform better than older properties, especially those that are not easy to convert or improve. This supports our decision to commence next phase of developments and to retain more of our larger recent modern schemes on completion. The latter should not only improve our earnings but also enable us to establish and deepen long-standing relationships with our occupiers and to make meaningful investments to promote climate resilience and support local communities. We're excited by our recent acquisitions, which add longer-term opportunities to the portfolio, and our LTV will rise very -- a little bit to 20%. But if we see the right opportunities, we're prepared to let this go a little higher. 19-35 Baker Street, Network Building and Bush House represent a further 565,000 square feet of development. However, we do not intend to move away from our modest gearing policy and some of these activities are likely to be funded through recycling. Now investing in the portfolio. As well as the other major capital incentives, we're also investing in a number of portfolio initiatives both to improve the quality and to enhance occupier experience. This will be discussed in more detail later. One of the objective is to ensure Derwent London's business is Net Zero Carbon by 2030. This is a commitment we made last year. Part of the journey relates to how our buildings are operated and the U.K. government's Energy Performance Certificates, or EPCs, have become a proxy measure of portfolio compliance. This is a challenge for the industry as a whole as under 20% of London's stock is rated EPC B or better according to JLL. Derwent London's portfolio is essentially 2023 compliant with an EPC of E or better. Now looking forward to 2030, when the minimum requirement is expected to be an EPC of B, we're already 43% compliant. We're currently undertaking detailed studies, but our preliminary estimates are that it will cost an additional GBP 5 million to GBP 10 million per annum to upgrade the portfolio. Some of these costs will be met through tenant service charge or are already part of our planned portfolio maintenance performance, also indeed, refurbishments. We see the challenge of meeting 2030 compliance as an opportunity. So there may be some stranded assets that we can look to acquire. Now the agenda for the day -- is going to be a packed day, and I hope most of you can stay all day get on the tour. It provides an opportunity to go into more detail for you to meet most team. In fact, I think 25% of the team is here. The remainder of the morning is divided into 3 sessions. The first focus is on the London office market and some of your related initiatives and what we're launching as a response to what's going on. The second digs into our development activity and looks at our next 3 developments in more detail. And the third will concentrate on the investment market with a focus on our approach and the latest acquisitions. This will be followed by a Q&A session. After that, we will break for a buffet lunch upstairs and you'll have a chance to meet other members of the Derwent team. The aim is to start the property tour at 2:00, following which, we'll come back to 80 Charlotte Street for a drink. So now I'm going to pass it over to Emily Prideaux and her team with an update on the office market and an outline of our new initiatives. So over to you, Emily.

Thank you, Paul, and good morning, everyone. To echo what Paul said, it's lovely to see you all here in person and lovely to host you here at DL/78. This morning, you're going to hear mostly from a number of the team who will be hopefully able to give you a good sense of where the market is, our portfolio approach as well as importantly, what we've been up to, whilst the world has, in some ways, been on pause. We continue to move forward and remain ambitious to be the landlord of choice for London's best talent. To introduce the team, Philippa Davies, Head of Leasing, will be talking you through the market, discussing sentiment activity and movement since the last update you had at interims. Vasiliki Arvaniti will then touch on what we are hearing from our own customer base and how we are strategically addressing things across the portfolio. I'll then highlight from these helpful insights those key demand drivers and how we are responding to them. Tim Hyman, our Group Architect, will then share with you how we are thinking about design as we look ahead at our exciting pipeline. John Davies, Head of Sustainability will talk you through the 90.good progress we're making on our Net Zero Carbon agenda. And last but not least, Michael Simons, our Digital and Innovation Manager, will talk you through the exciting next steps we've made on the digital agenda. A lot to cover. So without further ado, I'll hand over to Philippa Davies.

Thanks, Emily, and good morning, everyone. Whilst we await the arrival of the Q3 market statistics, we were obviously encouraged by the improvement in the metrics from Q1 to Q2 this year. And positively, the July and August figures have continued on a positive trajectory, albeit clearly from record low levels through COVID. Sentiment seems similarly positive and market lease sale in the last few weeks. With the role of the office being front and center in the press, the flight to quality is a theme that continues. Occupiers continue to value amenity, good sustainability credentials and digital enablement as they continue to employ the office in their war for talent. I'll be coming on to the detail around the latest market statistics shortly. But as an overview, we can expect Q3 take-up figures to be higher than the previous quarter, total suppliers showing signs of leveling off and demand figures feel more transparent than they have been since the onset of the pandemic. Encouragingly, rents and rent-free periods have stabilized and the big agencies have revised upwards their rental projections. So looking at this year's data in further detail. Including the July and August figures, you'll see that Q3 take-up is well on track to outperform the previous 2 quarters. Positively under office have also seen a marked improvement and total supply and vacancy figures are leveling off. So focusing on take up in more detail. Take up year-to-date stands at 4.3 million square feet. And whilst these figures fall below the 5-year average, we should be encouraged that this year's figures will exceed last year's. Positively, the 2021 monthly average is 54% higher than the post-COVID 2021. Moving to under offers. As I mentioned, this metric shows a significant improvement moving from 2.8 million square feet at the end of Q2 to 3.7 million square feet at the end of August. Here are some of the bigger transactions that are currently under offer with a wide range of sectors represented. And so to supply and vacancy rates. Total supply currently stands at 26.7 million square feet compared to 26.1 million at the end of Q2. And whilst these figures are relatively high, the good news is that they appear to be stabilizing. Unsurprisingly, supply is dominated by the city market where we have no presence. Tenant controlled space comprises 31% of total supply at half year, down from 35% just 3 months earlier. As you can see from the chart, the last 6 months tells a positive story with tenant withdrawals outpacing additions, a trend we expect to continue with the logos shown here being some examples of the key withdrawals. And so to the development pipeline, 32% of 11.2 million square feet that's currently under construction is either pre-let or under offer, which leaves 7.6 million square feet of speculative space under construction. The green bars show the developments that are at this stage, only proposed and which have not been committed. If we were to question the commitment of these projections -- these projects, you will see that there is a significant supply gap over the coming years. The next slide looks at active demand. It has been easy to question the accuracy of this metric last year during the various lockdowns and the occupiers physically being unable to view their office space. But this figure has been much more reliable recently with viewing tours being back on the agenda, and indeed, we have seen this in our own portfolio. Active demand currently stands at 9.7 million square feet, which is 8% above the 10-year average. And finally, to rents. This graph shows the long-run annual rental growth in both the West End and the city. Having fallen through 2020 due to COVID uncertainty, the downward trajectory looks to be reversing and has laterally turned positive. This return to growth is expected to gather pace with agents forecasting rents to recover to pre-COVID levels in 2022. So to wrap up, market conditions and occupier sentiments are improving. We should be encouraged by the increasing take up and under offer figures. While supply figures are high, they do appear to be leveling off, and the tenant withdrawal story is positive. We are gaining greater visibility in the demand figures with the flight to quality continuing to define an increasingly 2-tier market. Thank you. And I'll now hand over to Vas.

Thank you, Philippa. Good morning, everyone. I head the asset management team, which is responsible for our occupier relationships and are generally the first port of call for our tenants. We continuously speak to our occupiers, and this contact provides some of our best sources of market intelligence. Overall, business sentiment continues to improve, which mirrors the market feedback you heard from Philippa earlier. This can be demonstrated by first, the July survey of our major occupiers reporting positive employment intentions with 80% saying they intend to either increase or maintain their headcount over the next 6 to 12 months. Secondly, our office rent collection, which has returned to near pre-COVID levels. Thirdly, the ongoing low vacancy rate of 2.4% in August, and finally, improving reoccupation levels across the portfolio. One of our key tasks in the last 12 months has been to manage our lease expiry profile as nearly 1/4 of our rental income was due to expire in 2021. If we allow for near-term development starts, this has now fallen from 24% to 5%. From the chart, you can see the asset management and leasing activity has dealt with half of the risk. For example, Wise had a break at Tea Building. They considered the number of options, but in the end, we extended their lease for 5 years and accommodated their expansion plans, all in line with ERV. Around the corner from here on Tottenham Court Road, UCL had a lease expiry in June '21. We have now regeared and expanded this space on a 10-year term with a break at year 5, in line with ERV. Interestingly, part of this deal, we also -- as part of this deal, we also replaced the gas boilers to all electric, improving the environmental performance of the building. And then at Holden House, Envy Post Production extended and expanded their leases to 26, in line with ERV. Derwent London likes to offer flexibility to occupiers in order to facilitate customer solutions. This means that in some cases, we are prepared to extend leases by just 12 or 24 months to allow businesses to consider their longer-term options. During COVID, we have seen some tenants favor a short-term wait-and-see approach to extensions, reflecting the uncertainty generated by the pandemic. We would expect this to reduce over time. Example of shorter lease transactions include Morningstar at Oliver's Yard and Keyhaven at Maples Place. And while these deals give our occupiers flexibility, they also give us optionality around when we decide to refurbish or upgrade the space. We continue to sign long-term leases as many of our tenants are using the current market conditions to either expand or consolidate their activities. One example of consolidation is the Arup Partners at Charlotte building who regeared the leases to 2027 and have taken additional space. Shoreditch House at our Tea Building provides flexible working space as part of their offer. Earlier this year, Soho works, regeared and doubled the existing space, pushing the term out to 2031. Now Paul mentioned earlier, our improving reoccupation levels. In April this year, we saw a sharp increase in space utilization with a lifting of lockdown. And actually, there has been further increase in September. However, there remains a wide range of occupancy levels across the portfolio. We are finding that the responses vary from industry to industry and are often personal to each occupier. The good news is these numbers continue to improve on a weekly basis. We previously reported on our July occupied survey covering our 50 largest tenants, the results of which support our approach. All respondents expect to see more hybrid and agile working, but they are unanimous in their desire to get their people back to the office. They have missed being able to work collaboratively, build a culture and social interaction, and they are increasingly concerned about securing new business, employee training and well-being. Many businesses are reporting a current skill shortage, but all are clear that having the right space in the right location is essential to attracting and retaining talent. Thank you, over to Emily.

So you've heard from Philippa and Vas what we're hearing from the wider market as well as some of our own occupiers. Firstly, I think it's important to note that the topics discussed and a lot of the headlines we've heard over the past 18 months demonstrate an acceleration of change that was already underway pre-pandemic. Of course, there's some new areas of focus, particularly wellness and to some degree, sustainability. But these, like many of the topics being considered more widely now have been very much on our agenda for some time. Fundamentally, what continues to drive real estate decisions, as you've heard, is talent. Business leaders, talent managers, HR teams continue to consider real estate and the office environment an increasingly vital component in the war for talent. The office and its role is complex and all the buzzwords you see here on the screen are relevant topics that we're constantly discussing and addressing with occupiers today. Businesses need their workspace to be a well-designed, high-quality, inspiring space which drives innovation and inspires collaboration and collective productivity. It needs to be representative of a business' culture and brand, and of course, must be a safe space with individuals well-being at the full. The office is so much more than just a place to work, and work is not just a thing we do, but a place we go. Talent will have more choice in how and where they work. More agility is inevitable in this world and for good reason. But despite some of the headlines, an agile workforce doesn't necessarily mean there's no need for offices, but in fact, means the role and purpose of the office is even more important. And of course, it will continue to change and evolve. The value of good quality office space to businesses will be understood more now than ever before. We continue to look ahead and be led by what we hear from occupiers and business leaders. We listen to what they need, we consider how we can help them deliver on their core business agendas and we respond. We've been busy on a number of initiatives across the portfolio, which you'll hear more detail on from the team. But first, I'm going to play you a short video which hopefully summarizes just some of the good things that we've been up to. [Presentation]

So you'll now hear more on all of those initiatives from the team. Over to Tim, who's going to give you a little more on how we're thinking about design as we look ahead to the exciting pipeline.

Thank you, Emily, and good morning. I'm Tim Hyman, the Group Architect for Derwent London. We are a design-led company. Our thinking is always innovative, and we constantly challenge and question. We are inquisitive and curious by nature. As we consider how we work and the places we design for work, the pandemic has proved to be an accelerator on a journey that we are already on towards sustainable, intelligent, human-centric and adaptable spaces. There are choices where work can be done. And the character, amenity and destination of the places that we create, make them places people choose to come to. It is our flight to quality. The future of a place to work is a place for collaboration where you can connect socially and digitally to the world. Digitally enabled intelligent buildings will be controlled locally and importantly, in real time. Controls will be intuitive to suit the users' requirements, thus optimizing energy use, reducing operational carbon for a sustainable future. Building Design will incorporate natural ventilation, passive systems, atria for stack ventilation, low energy air delivery. They will be orientated for solar shading and to benefit from natural light with openable windows throughout. They will be mindful of embedded and operational carbon. Adaptability is the key to give our users flexibility, and this is our brief. Our vision for informing our approach to the future of design builds on what we have learned and celebrated in the past and add to what is needed for the future. Tall floors for volume and light, smarter servicing, embracing passive systems, soft and adaptable course as light wells and for natural ventilation, low-carbon structures, which consider the providence, production, transportation and life cycle of materials, generosity of common parts and 21st century receptions, active, amenity rich, connecting and engaging with the city. We enjoy these values already, and as you've heard from Emily and Vas, they're close to our customers' hearts. We create generosity and character. We always celebrate volume and light. We design amazing amenity, and we design for well-being. We deliver the best canvases for our customers, and we create flexible and adaptable space that are long-life and loose fit. It is also a time for convenience as people return to work. So we have designed and created our furnished and flexible spaces and a new offer, the space that we're in today, DL/78 for our customers and community. Our design ethos and thinking will be applied to our pipeline as we continue to challenge and question to ensure our schemes are relevant and desirable. Of course, the places we create will continue to be distinctly Derwent, beautifully designed and with our ethos at their core, like the space that we're in, which I find joyful and uplifting and good for my well-being. That's all for me for now. Thank you. And I'd like to introduce John Davies, our Head of Sustainability.

Thanks, Tim, and good morning, everyone. I'm John Davies, and I head up our sustainability efforts here at Derwent London. If we can get that to work, that's the one. As Paul mentioned earlier on, we launched our ambitious Net Zero Carbon program last year. But you might be thinking on why and you might ask is, why are we doing this? Why is it important to us? And laid out here, we got some of our key drivers. First off, it's good for our business. It makes sense for us to do this. We will make our business more resilient, not only to the effects of climate change, but also to -- our ever-changing climate, but also to continue to operate effectively and also create value for our stakeholders. It's also critical to future-proofing our portfolio, and ensuring our assets are future proof, but also helping us in our long-term objective to deliver value. This helps not only to make our buildings more efficient, but also more cost effective to run. Obviously, meeting our stakeholders' expectations and making sure that we understand all of their needs, but also their responses and their understanding of the climate change agenda as well. And lastly but no means leastly, collaborating with our customers. Only by working together with our customers can we truly succeed in our mission to reduce and lower our carbon emissions. So looking at what we're doing internally with some of our business activities. Renewable energy plays a key part in any Net Zero Carbon journey. Currently, 100% of our electricity suppliers are on renewable backed tariffs and we're working hard with our energy suppliers and brokers to move our gas supplies on to renewable tariffs as well. Also having a deep understanding of how carbon fits with our financial modeling or forecasting is very important for us to ensure that we're accurately mapping not only the carbon within our portfolio, but also how that links to our relationship with our future investment requirements. Having high-quality and sustainably linked finance is also very important to us as it enables us to gain cost-effective routes to debt, but also allows us to demonstrate how that links to our Net Zero Carbon work and the impact that it creates. Looking at new developments. Reducing energy is, first and foremost, on any Net Zero Carbon journey. As a result, we are committed to using the new end-use operational energy assessment rating scheme or NABERS UK, which aims to provide a transparent round seal sticker for buildings in terms of their actual energy consumption, unlike an EPC. Just like operational energy, we are committed to reducing iron bodied carbon as well as much as possible by using lower carbon materials and more efficient construction techniques. And whilst we're working hard to reduce both of those, we are also realistic that there will be carbon that we cannot manage and/or subsequently eliminate. Therefore, we are utilizing offsetting to help us get through this, but also by only using verified projects and also, where possible, offsetting from within the U.K. Looking at our existing portfolio, similarly to our developments, energy reduction plays a pivotal role in decarbonizing our portfolio. And to guide us to that, we have set a series of challenging building specific energy reduction targets aimed at our managed portfolio. As mentioned earlier, collaboration with our customers is going to be key in reducing the energy consumption within our buildings, and we're having to go beyond the current landlord tenant status quo. In tandem to not only our 2030 ambition, UKPLC is also on a Net Zero Carbon pathway, albeit by 2050. And in doing so, I'm looking to bring forward stringent measures to move the current building stock to ever high levels of efficiency. The latest of these current proposals seeks to raise the minimum EPC rating from E to a B, a very bold ambition. Looking at our green leases. One of the key customer relationship platforms we have is obviously the lease arrangement and getting this right is critical in ensuring that we get the right kind of atmosphere and the ability to communicate our ambition effectively and also to gain buy-in, not least of all, as many of our customers are also on a similar path to ourselves to Net Zero Carbon. As a result, we're looking to strengthen our existing arrangements to enable a clearer articulation of our requirements, but also to try and set out a much clearer value benefit equation for our customers. Moving a step through this process, we're trying to also understand fit-outs and alterations as these will need to be better understood in terms of their carbon burden, but also to ensure that we're both aligning ourselves and our customers' ambitions neatly. As a result, our licenses to also need to promote a much better, lower carbon fit-out regime. We are also well positioned for the next round of the EPC legislation, as Paul mentioned. And in 2023, the so-called Continue to Let rules will start to kick in and our portfolio is essentially now fully compliant with those and also over 40% currently compliant with the potential 2030 changes we've just mentioned. Looking at our Scottish estate. So perhaps a slightly lesser well-known side to our business, but our Scottish Estate is a key tool in our Net Zero Carbon pathway. We're currently looking at utilizing this to not only help us provide renewable energy production, but also looking at it to further the carbon offsetting opportunities that we've already created on the estate. By developing our own energy sources, we will hopefully be demonstrating clear leadership. But perhaps most importantly, given the recent events in the past couple of weeks, a better resilience to the energy market forces that we've currently been witnessing. This will also play into the factor of additionality as we call it, and helping our customers move into a higher grade of renewable energy, thus helping them move along with their Net Zero Carbon journey as well. We believe this to be a significant business differentiator for us and show a clear route to not only those in our sector but also wider. That's enough from me. Thank you very much, and I'll now hand you over to Michael, who will take you through our digital strategy work.

Thanks, John. Good afternoon. I'm Michael Simons and I'm going to be taking you through our digital strategy. There is no denying the positive impact technology and innovation can have on a business. However, without a well-thought-out, coherent and meaningful strategy, the implementation of technology can cause more problems than it solves. Digital strategy cannot be bought off the shelf. In order to really drive meaningful innovation, the strategy must be organic, homegrown and involve all stakeholders of the business. Over the past 2 years, our business has come together to evaluate, to test, to reiterate and to rethink what the implementation of technology means for not only our workforce, but most importantly, for our customers. We have also made the investment in a dedicated in-house technology team to support our digital endeavors. Fundamentally, our digital strategy breaks down into 3 key areas: customer experience via our DL app, our intelligent building strategy and by building a technical infrastructure of systems that communicate with each other, which share a central source of data and information and allow for digital solutions that can give our people the best possible tools to do their jobs. The first element of our digital strategy that brings true value and meaningful change is intelligent buildings. Our intelligent building rollout plan is targeting 22 buildings from our managed portfolio by the end of 2023, which totals 55% of our overall portfolio. Whilst we are committed to all future developments being intelligent from the start, we are also taking the responsible and customer-orientated approach of retrofitting existing buildings with new technology, bringing them online and in line with modern spec buildings. We successfully upgraded the White Collar Factory in the first half of 2021 to an intelligent building and the next building up is the Featherstone Building. And here's a short video explaining the Featherstone Building. [Presentation]

Fundamentally, our intelligent building strategy focuses on 3 core areas across our business. Firstly, assisting in reducing our energy consumption in line with our Net Zero agenda. Secondly, in running our buildings efficiently in order to reduce our own costs and our customer service charge. And finally, enabling us to continue to offer best-in-class space for our customers with healthy, efficient and intelligent spaces designed with them in mind. Our buildings are a complex ecosystem of different systems run by a range of different manufacturers. By connecting this myriad of building machinery, systems and networks into a coherent digital infrastructure, we give our business a centralized view on how our buildings are operating and how our tenants are using them. And then finally, with an organized digital infrastructure on our core, it gives us the flexibility to adopt technologies and software that is right for us, that integrate seamlessly with our business, our people and our customers. Last week, we launched the Derwent London app. We took the decision to own the development of the DL app in-house with our own software developers and engineers. By doing this, not only do we reduce the long-term CapEx spend on ongoing development, but most importantly, it allows us to own the product road map. Much like with our buildings, we own the entire design and curation of this digital real estate that now sits directly in our customers' pockets, meaning we decide what our app can do and when, making the decision by critically analyzing what our customers want and how we can deliver it in the Derwent way. I'm going to pass you over shortly to Richard Baldwin. But before I do, I'm going to leave you with the promotional video for our app. [Presentation]

Good day, everybody. My name is Richard Baldwin, and I'm the Director of Development here at Derwent London. Development is a major part of our business, development business is circa 40% to 50%, the top black line on the graph of our portfolio, either under development or earmarked for future regeneration as illustrated by this slide, which also shows the ongoing relationship between core income, on-site, consented, under and future appraisal. Active development tends to be 10% to 15% of the portfolio, the gray line on the graph, which means the majority of our space remains income producing. Development activities enhance our property performance. Design is an important part of our DNA in creating the office of the future and our developments have been a major driver of our relative outperformance against our property benchmarks, which is illustrated on this slide by the comparison between Derwent London developments and the IPD Central London Index. The development team at Derwent London is made up of experts in development and project management, design and cost management. We work closely with our colleagues in asset management and investment looking at opportunities to enhance the value within the existing portfolio and on our acquisitions. We also work closely with our leasing and property management teams in creating the distinctive Derwent product to provide great space for our tenants to do great business in. I'm pleased to say our current major projects, Soho Place being delivered by Laing O'Rourke and the Featherstone building by Skanska are both going well. With the challenges of Brexit and COVID well managed, we are looking to complete both projects in the first half of 2022. All of the offices at Soho Place have been pre-let or forward sold to APOLLO, G-Research and a sell co and the first newbuild theater in the West End for over 30 years to NIMAX. Featherstone, which we expect to multi-let remain speculative at this stage, but we remain confident of the building's quality and Net Zero credentials ensure it is well placed for today's market. Our projects over the last 5 years, which include White Collar Factory, Brunel Building, 80 Charlotte Street, plus many more have all been great successes, and our future pipeline is equally exciting with our 19-35 Baker Street, Network Building and Bush House currently going through design and procurement stages, 565,000 square feet for delivery over the next 4 years. More details on these projects will follow. Procurement is a hot topic in the construction industry at the moment with concerns over the impact of Brexit and the supply of materials and labor and the impact of COVID on productivity and consequential inflation. Nobody should underestimate the ability of the construction industry to talk up procurement challenges leading to inflated construction cost expectations. But equally, nobody should underestimate the value of secured orders to construction companies from businesses who set about engaging with them in the right way. Our approach of establishing deep and long-lasting relationships with both Tier 1 main contractors and of equal importance, Tier 1 subcontractors has served us well in the past and will continue to serve us well in delivering the next group of developments. Derwent London is viewed within the construction industry as a client that establishes a fair price and a fair program for execution with clear delivery targets from the outset. We have an excellent payment record, including shortening our payment terms with suppliers following the onset of the pandemic. This reputation, established over 30 years, makes us a highly sought after customer even during periods of strong demand, coupled with supply challenges. All of the major QSs produced quarterly forecast of inflation. This is a graph of the latest Gardiner & Theobald forecast for Central London. And you can see that they are predicting a range of inflation of between 1.5% to 2% per annum increases over the next 3 years. But our appraisals take a more cautious view. All of our current projects on-site are on a fixed price basis and the allowances made by our contractors, given the stages of the projects they're at, are proving to be adequate. Following several years of flat construction costs as illustrated by this graph, we are anticipating a longer-term inflation rate of around 3% per annum. Appropriate allowances are made within our appraisals where we don't assume any rental inflation. As a rule of thumb, estimated construction cost represents circa 35% to 40% on the total development costs of our projects. Collaborative working with a tried and tested Tier 1 supply chain will enable us to navigate what is clearly going to be a challenging construction market over the next 3 years. The vertical supply chain offered by many of our contractors has proved to be very successful. In addition, we have a positive and enduring relationships with key Tier 1 subcontractors in such areas as planting, lifts and mechanical and electrical installations with whom we have monthly meetings to review project progress and market conditions within their particular markets. Our risk mitigation strategy for Brexit was largely focused around moving away from just-in-time delivery to ensuring early ordering and storage of key materials and components in off-site logistic hubs, which enabled us to avoid any major supply chain issues. The same strategy has served us well throughout the pandemic, and our contractors continue to deliver in accordance with our project programs. I'd now like to hand over to Benjy Lesser, our Development Manager on Baker Street; and Mike Taylor from Hopkins, the architect for the project. They were followed by Tim Hyman, our group architect; and Stuart Piercy of Piercy&Company on Network; and Jonathan Theobald, our Development Manager on Bush House. Thank you, and over to Benjy and Mike.

Thank you, Richard. So this is the major redevelopment scheme at 19-35 Baker Street, just about to start on-site next week after several years in design, planning and procurement. A JV with The Portman Estate during these early phases on the 30th of September, this Thursday, Derwent completes the option to demerge the JV to regear the long leasehold interest and to redevelop the site. This mixed-use development scheme is composed -- comprised of 217,000-square-foot of offices; 29,000-square-foot of retail, the majority of which has been presold to Portman; 45,000-square-foot of private resi; 41 high-end units; and 7,000-square-foot of on-site affordable residential. In total, just under 300,000 square feet, 100% area gain from the existing assets on-site with a start on-site next Monday and a target completion in Q2 2025. The site is located in the heart of The Portman Estate, key to connecting up pedestrian routes between the Marylebone Villages East and West and Ireland sites between Baker Street and Gloucester Place, now both 2-way and traffic-calm streets. For more detail about the architectural design, I'll now hand over to Principal at Hopkins Architect, Mike Taylor.

Thank you. Good morning. Thanks, Benjy. From the outset, this is a really exciting project for us because it was a chance to think at not only the detail that you've heard a lot about but also the urban scale and to really make a significant new public place. And when you see the site, which runs between Baker Street and the foreground in Gloucester Place in the -- at the top, we managed to make a route through the Georgian building on to Gloucester Place, and that freed up a great opportunity on that site, which was to carve out a new piece of public realm that went from front to back. You see at the top, the route out across the place, we've got transverse routes, and we built the office building in the foreground over that route. So a whole new public place. Beautifully finished in high-quality materials with 29,000 square feet of retail supporting that. You'll be able to go there, sit outside, have a drink, have something to eat, go shopping. Within that space, there's also residential on George Street. The green marks the entrance. That, too, connects to the central space. And then in yellow, the office development refurbished offices on Gloucester Place, the new office entrance in the foreground within a supporting cafe. So a very exciting, vibrant new place to be, a bit of a campus. At the forefront of which is the office building, which is in a restrained modern style, 7 stories above ground and 7 bays wide, beautifully detailed in stone. At the bottom, the middle 3 bays will take you through to the central courtyard space. And in a palazzo style, it has a base, which is grand tool shops and middle and the top, all clearly defined. And it's designed to be beautifully illuminated, and we've worked hard on the corners, which are a feature of Baker Street, which is now a 2-way road. And as you go through the office building into the central space, you'll see shops, lots of green res, spaces to sit out and a good place for events, too. The whole area, the whole development is very green. We've planted wherever we can. So lots of trees and planting in that courtyard space. All the rooms are green, highly sustainable with new eco-habitats. As you move around and see the side of the building, which is 5 bays wide, you look down and see the residences on George Street and the feature corners I described. The office entrance there is behind that corner together with a cafe, a generous West End reception with the [ cathodion ], and then the staircase, which takes you up to the top of the building. We've thought a lot about ventilation access and help in these COVID times as we designed it. That's staircase takes you right up to roof level. As you go up the building, the floor plates about 25,000 square feet, very clear, very open, about 60 x 45 meters with a core, which is split in 2 ways, are very transparent. As you come out of the lift, you look out to the core in both directions on to the floor plate with views out to generous windows. When you're on the floor plate, you can look back through the core. So very open, very sociable, very generous, very West End. And then the finishes are high-quality Danish fabric for the acoustic absorption, full-height windows, tall ceilings. And importantly, the windows open and give you a natural ventilation. We have a mixed mode servicing strategy. So very open and very generous. As you move up the building, the top floor is set back and give you some terrace space with added greenery. That's the eighth floor. And then on the 10th floor, there's a shared amenity space in pink there with a terrace outside, south-facing, and that's for anyone in the building, a space that will function a little bit like this one. And within that space, there will be a kitchen, a servery and the possibility of running events on the outside terrace there. So the whole building has been very carefully worked out in Derwent lines, as you've heard. So it's BREEAM Outstanding. It's WELL-enabled. It's an A-rating EPC. It's lead gold, it's neighbors, it's net-zero, all-electric, and we have worked very hard on all the systems, taking all the simple strategic architectural measures to make it work well. It will be very well supported by all of this technology, including all the Derwent Digital, which will be integrated from the start, that will give feedback and run the systems, make the building work very efficiently. And that one thing can enhance the enabler experience for tenants. So as I say, it's been a really exciting journey. We're very excited this project starting. We started off thinking at urban scale, which is amazing for a chance to work on a campus and make a public place. The brief call for exceptional buildings, but it also asked us to integrate this building the West End. And we've worked very hard at every single detail. This is a model of the handmade bricks on the facade of the residential and then stepping up to the stone on the office building. We have actually got Portland Stone. We're using Fancy Beach, whitbed stone, oak, polished black concrete, a little bit of some stainless steel, very carefully thought out palliative high-quality materials. And we have gone to the extent of building a full-scale mockup with the team, not just the external bay. You'll see some experimentation there, leaving nothing to chance. But on the inside, all the services, all the lighting. So in Derwent's tradition, I would say, as an architect, it's been a pleasure to work with their [indiscernible], and we are going to deliver an amazing building.

Thank you, Mike. We've had fun with that building. We're going to have fun with this one. This is the Network Building located just on the other side of the road, just to the northeast of this building. It will be our next new building in the Fitzrovia area and a gateway to the area itself. We're just moving into detailed design. So a very exciting time for us, following the resolution to grant planning, which we received in July. Demolition is due to start in July next year. Completion of the scheme will be in Q3 '25. Building is designed by our architect, Piercy & Co., and we'll be creating around 137,000 square feet of space with a CapEx of around GBP 110 million. The building will, of course, be intelligent, WELL-enabled, targeting BREEAM outstanding, more of that later. But of course, it will be architecturally striking as is our tradition. It is a corner building. It will feature an active [indiscernible] ground floor, 3-meter floor ceiling heights, openable windows throughout, roof terraces and gardens. But enough from me, I'll get carried away. I'd like to introduce Stuart Piercy who will tell you more about this building.

Thank you, Tim. So we'll just get a little bit into the DNA of the site. I think it's a fantastic triple-aspect site, has corners both from the Fitzrovia campus, leaving the campus and also entering the campus from Tottenham Court Road, 10,000-square-foot of terrace space. It's a ground plus 8-story building and a total net of about 137,000 square feet. I think we've heard about Soho Place and all the great stuff that's happening on the south of Tottenham Court Road. Not so much to look forward to on the north of Tottenham Court Road until now. Of course, as I've said, 2 fantastic corners. We all know that to get to net-zero carbon and to achieve these targets on the right, buildings are becoming much more solid. And the way we're dealing with that here is a beautiful sculpted piece of reconstituted stones. So on the building, you'll see there's a very soft sort of shape. That not only shapes the building but also allows us to make that piece of clouding off-site, which is much safer, much cleaner, much quicker. And the form of it means that we can actually flip it. So as the building -- as we go around the building, we actually flip the panel, which gives us much more variation in the facade of the building. And then when we get to the bottom of the building, we've been looking at buildings like Heal's or department stores. So that's much more expressive, much more beautiful where people are in touch with the building. And then internally, we go to a much more Nordic sort of pallet of materials, which are obviously very beautiful. So there's a gentle curve into the reception from Howland Street. We've widened the pavement there to make the entrances feel much more generous. And also, this is a double-height space, but it's very adaptable because, as we know, plans change and receptions now need to be very flexible and able to support complementary uses like this beautiful DL 78 space. So we're making this reception a sort of soft reception that can go down, it can get wider, and it can go taller. We're also using a pallet of beautiful sustainable materials, and we often talk about in the studio about space is not only looking good, but they must feel good as well. As I mentioned, we've -- we're very excited about the ground floor of the building. We've widened all the pavements around the whole 3 sides of the building. Materials become much more expressive. And I think there's a really nice civic gesture of a seat on the outside of the buildings, which is surrounded by new water gardens that are fed from the water that runs on to the pavement. And then internally, we have a dedicated 3,000-square-foot terrace on the eighth floor, and we've got 7,000-square-foot of terrace on the top of the building, on the roof garden, which sits -- that's shared amongst all of the occupants of the building, but it sits just below the viewing corridor from Primrose Hill. So that should mean that nobody will build in our view in the future. So we have a fantastic 360-degree view from up there. So really, in summing up, we think it could be a fantastic gateway building to the Fitzrovia campus. It transforms the public realm around the whole perimeter of the building. And our focus is really on creating a building which is human-centered, which is not just by using beautiful materials or bringing the outside inside; it's also supported by a very ambitious environmental agenda on route to a net-zero carbon building. Thank you.

Thank you very much, Stuart. Good afternoon. Well, Bush House has been on the Derwent London -- in the Derwent London portfolio for a number of years. But only recently, we took the opportunity to buy in the remaining headlease term and gain vacant possession of the building. This unlocking has created significant marriage value and provides us with a repositioning opportunity. We are now in an exciting position to bring forward a scheme that would dramatically enhance the building. To give some background, Bush House, South West Wing forms part of the complex of Bush House buildings that were constructed between 1925 and 1935. Originally commissioned by American industrialist, Irving T. Bush, no relation to George, it was at the time declared to be the most expensive building in the world. Occupied by HMRC for the last 20-plus years, the building lies at the bottom of Kingsway and a stones throw from Somerset House. Our largest neighbor is King's College London as well as the Indian and Australian High Commissions. In the immediate facility are some major hoteliers, the Savoy, the Waldorf, the ME Hotel, a brand-new Soho House as well as theaters: the Lyceum and the Theatre Royal Drury Lane. This area is dramatically improving, in particular, with the timely investment from Westminster for the Strand Aldwych public realm works. These works involve the rerouting of traffic around Aldwych in creation of a pedestrianized zone along this section of the strand. So as shown in this picture, our building lies right in the heart of this new public realm. This will transform the setting of Bush House and offer fantastic opportunities to activate the ground floor frontages of the building. With works having commenced earlier this year, this section of the strand has now been pedestrianized, except for the courtyard that forms a large part of our site. And the landscaping is expected to complete around this time next year. This is roughly when we'll be looking to commence the main works to Bush House. We have worked hard with architects Stiff & Trevillion on repositioning the building, and the end product will be classic Derwent, working with the existing, extending where possible, producing good floor plates with plenty of natural light, openable windows, amenity space, terraces and courtyard landscaping, lots of cycle and shower facilities, of course, and a generous reception space with direct access to a cafe. In total, we expect this work will create an additional 30-plus-thousand square feet of net high-quality office space, a 33% uplift in area. Bringing the building back to its former glory, this will be a sustainable and net-zero retrofit project, replacing all plant throughout being all electric, replacing the single-glazed windows with high efficiency and openable double-glazed windows and a side extension that enables the relocation of the building core to create a much improved floor plate. We are targeting BREEAM Excellent and EPC B. This image from the courtyard shows 3 key new additions. The roof level will include terrace and potential function space. The side extension will appear seamless to the existing building and offer terracing at seventh and ninth floors as well as a colonnade at ground floor level, and the courtyard will be transformed from a car park into landscape public realm. As part of our sustainability agenda, we're looking to reuse the Portland stone way facade for the extension, and we're even looking at the potential for reusing the steels from our Network Building project to construct the extensions here. Through moving the core of the building, we are creating a much improved floor plate. As shown on this slide, the blue dotted line indicating the extension. The ground floor will offer lots of activation points, the main reception on to the strand with restaurant and cafe uses either side and secondary entrances within the courtyard to provide multi-tenant flexibility. The upper floors can also be divided in 2. We'll be placing soft spots in the floors to offer connection between levels, and there'll be good natural light from the 3 facade of the building. The views from the top of the building will have fantastic visitors over Somerset House and Derwent tenants. We expect to see rents here in the mid-70s per square foot on average, rising to GBP 80 on top, which is somewhat a significant improvement on the 25p per square foot that we were previously receiving. We aim to submit a planning application in the next few weeks. And if successful, the current program would see the scheme complete in H1 2025. Thank you. I shall now pass it over to David.

Thank you, Jonathan, and good afternoon, everyone. So we've heard all about our schemes. Now we're just going to touch on how we actually buy these opportunities. We're going to talk about the London investment market and take you through our recent activity, giving you some color behind our thinking and our approach. I'm joined by my colleagues, Giles Sheehan, Head of Investment; and Lucy Taylor, Investment Manager. So the London office market has gathered pace this year with investors looking towards recovery. Our leasing colleagues have discussed the flight to quality. This is being seen in the capital markets as well. Here, the focus is on well-let assets to strong covenants or sites where this product can be created. For the right asset, competitive bidding is being witnessed across both West End and city markets. Stuck in between has struggled to find its market, yet we're still not seeing any vendor distress. CBRE estimate there is currently GBP 41 billion of global capital circling London offices, under pressure to invest following last year's pause in activity. With the majority of funds underway to London, we're expecting prime yields to tighten. We continue with our disciplined approach to seek out value and new opportunities. Our reputation and track record opens doors, which, together with our detailed knowledge of our market, gives us a unique advantage. Our strengths have been fundamental to us implementing our investment strategy this year. We've been able to secure substantial pipeline opportunities off market by leveraging long-standing relationships. Touching on our evolving strategy. Given the focus on Tier 1 stock and looking at our recent performance, we believe we will see enhanced returns from these assets over the coming years. For this reason, we can see us holding on to our Tier 1 assets for longer to capture this performance and, as with our recent disposals, accelerating the recycling of Tier 2 buildings. Going forward, we continue to target short-term income-producing assets right for redevelopment. However, we will also consider sites and empty buildings where we can create best-in-class Derwent product. The key message, we remain extremely ambitious for further activity with substantial firepower to take advantage as and when we see the opportunities that meet our criteria. I'm now going to pass over to Giles to talk a little more about the market and activity.

Thank you, David, and hello, everyone. With business confidence returning, there is much to be positive about the outlook for investors. Market momentum has picked up from a slow start this year, with even usual quieter months of the summer bucking the trend. Focus very much remains on secure income and quality assets. CBRE state that investment turnover now stands at GBP 5.3 billion. With over GBP 2.3 billion under offer and a typically busy final quarter approaching, they believe the market will comfortably exceed the GBP 9 billion traded last year. Larger lot sizes are finding a market, another sign of confidence. And over the coming weeks, we expect to see further significant lot sizes transact. As the flight to quality continues, we're also seeing competitive bidding for well-located development sites across London. This activity is in response to improving investor sentiment and confidence and occupiers' focus on best-in-class sustainable space in their war for talent. Given the limited available stock of finished products, we're also seeing a build-to-hold approach by investors to create Tier 1 office space through development. There is a lack of demand, however, for secondary assets and older stock, usually referred to as core+ by investment agents. These sales have proven a little more challenging. Typically older, providing medium-term income with limited future growth potential and no real signs of vendor stress, there is often a disconnect between the sellers' aspirations and the market. There is much talk of environmentally stranded assets. These are older buildings with low F&G ratings, where considerable CapEx is required some to improve energy efficiency. We remain alert to the opportunities that may arise here. However, we yet to see it materialize. We suspect we'll see more signs of these assets emerging beyond 2023 when legislation prohibits letting of commercial space with low F&G ratings. It is understandable why London remains at the top of investors' priorities list for gateway global cities in which to invest. Aside for longer leases, liquidity and stability, London's positive yield gap remains attractive with the majority of European cities currently at 3% or low. With interest rates remaining at historic-low levels, this continues to underpin property values, and with it, the ways of capital chasing higher returns. As an example, German funds who have been historically unwilling to invest below 4% have now been acquiring at levels 50 basis points keener. This can be seen with Deka's acquisition of 8 St. James's Square for GBP 223 million, reflecting circa 3.5% and GBP 3,400 per square foot. In addition, we have seen new records set this year with H&M retail family, Ramsbury, purchasing 5 St. James's Square for around GBP 75 million, reflecting 2.7% and over GBP 4,600 per square foot, a new capital value benchmark for Central London offices. This slide shows a breakdown of CBRE's estimated GBP 41 billion of global equity chasing London offices, with the largest share from the Far East, representing roughly 50%. Given the challenges around international travel, it is unsurprising this aspiration has remained unfulfilled with Asian buyers only accounting for less than 20% of investment so far this year. As restrictions begin to ease, we expect to see greater engagement from overseas capital with significant pent-up demand. However, we remain alert to potential headwinds that may affect this. As always, a competitive landscape requires a different approach to sourcing new opportunities. An essential part of our culture is forging and developing relationships. Our relationship with Lazari has been developed over many years as neighbors, but also with our acquisition of a headlease from them on 1 of our freeholds 88-94 Tottenham Road back in 2018. To briefly recap on our recent acquisition with them, the total investment, including the 50% Baker Street JV, is GBP 290 million. The transaction comprises 5 properties totaling over -- just under 250,000 square feet for our share across 2 freehold properties in London's Knowledge Quarter, along with the creation of a 50-50 joint venture on Baker Street. I'll now pass you over to Lucy to hear more about the importance of the relationships.

Thanks, Giles. It's rare to have the opportunity to acquire a portfolio of West End assets such as these. The portfolio of assets bolters our exposure to vibrant West End villages where we're already undertaking significant regeneration. The importance of our existing long-term connections will be key to us delivering exciting products in the medium and longer term. The desired portfolio of circa GBP 3 billion is mostly located in the West End, much of which is close to our Baker Street and Fitzrovia holdings. Baker Street will be their first joint venture as it happened to our development expertise, attracted by a brand of best-in-class office space, along with our track record of securing planning in Westminster. The UCLH relationship is similarly long term where we've been both a tenant and neighbor here in Fitzrovia for many years. 250 Euston Road is entirely let to the hospital. As the slide shows, this forms part of their London campus, which totals around 2.5 million square feet. 171 Tottenham Court Road is a corner building surrounded by holdings, either owned by UCL or UCLH who have a vision to create a world-leading cancer research hub on the Fitzrovia campus. The Portman Estate is another important relationship for the group, which extends back to the London Merchant Securities joint venture created in the 1970s. Today, that joint venture has come to an end, but the relationship is stronger than ever, and the recent headlease regear on our 19-35 Baker Street scheme is testament to that. The Portman is now actively regenerating their 110-acre estate, and as a result, a very supportive involvement in the new joint venture offset our current scheme. Turning to other recent acquisitions, Bush House and Holford Works. Both were generated from within the portfolio where we brought in headleases to gain control and allow us to bring forward schemes. This is an example of keeping close to our leaseholders to be able to create situations should the opportunity arise. Together, these 2 assets have the potential to add circa 220,000 square feet to our pipeline. At Bush House, HMRC's relocation out of Central London accelerated the opportunity. As Jonathan presented earlier, the building is one of the last remaining rings of the complex, which has been untouched for decades and is now ripe for regeneration into Tier 1 space. The block is surrounded by significant occupiers, King's College and LSE, where we already have relationships, which may open up interesting dialogues as we progress the scheme. It's worth highlighting the manage value created with a low all-in site cost of just GBP 500 per square foot. The acquisition of the 65-year headlease at Holford Works has given the group control and optionality with the benefit of high-yielding income. The existing single-story warehouse building, sitting on a 1-acre field site, offers future development potential. In the short term, this 40,000-square-foot estate located within walking distance of King's Cross, provides interesting asset management opportunities as the passing rent reflects a low GBP 40 per square foot. Our commitment to creating and owning a portfolio of best-in-class buildings has led to the acceleration of recycling of Tier 2 buildings. Our disposals this year focused on exiting situations where we felt we could get better returns elsewhere. Johnson Building was a first-generation refurbishment and has come a long way since it's acquired back in 2000 for GBP 25 million. With over 40% of the space becoming vacant early this year and taking advantage of an off-market approach, we successfully recycled GBP 170 million back into our CapEx pipeline. Angel Square is a collection of 3 buildings linked by courtyard. This presented limitations in creating a high-quality single-office building. Here, we received a number of strong bids showing the depth of investment demand for immediate opportunities and exposure to the London value-add market. The property fell largely vacant this summer, requiring refurbishment. And the sale has provided further additional capital to be recycled into new opportunities and into our exciting Tier 1 projects. I will now hand back to Paul to close.

Thank you very much, Lucy. Of course, I thank also our guest speakers, Mike and Stuart. They're having some really fantastic projects. The only thing to say to you is on time, on budget, please, at our usual quality. No pressure. We're in a great place. And as you can see, we've got a great team. The last 18 months has deepened our long-standing relationships with a further flight to quality. We have the balance sheet to support our ambitious development pipeline and add to the portfolio. And whilst I'm sort of talking about the development pipeline, Network Building, you'll recall, many of you, that we've got 2 planning permissions there. We're always greedy. We've got 1 for an office building, and we've got 1 for life science building. We've done a lot of research on it, and -- but given the outperformance, the office market could have strong demand for the area. We also work with Boston Consulting who would like to expand within the area. We're making a commitment to build the office building. But we've learned a lot on the life science. The new acquisitions will give us many opportunities going forward. In ideal world, we made the building slightly bigger. But as we said earlier, you've got a view in corridor. So one would normally make going a little bit towards. So we're going to commit to the office building. We're very excited about what it will perform, but you will see some life science development from us.

So having heard from us, and I think our timing is spot-on. I think we got about 10 minutes left. So I'm going to ask you all for some questions. I'd like some decent questions, please. And so we're not having a roving mic for, obviously, COVID reasons. I think we've got 10 minutes to go. He will be very pleased with me that our timing is spot-on. So who would like to ask that question? Please, would you just put your hand up? And also, for those that don't know everyone, just add your name. So please stand up and to talk up because there's no mic.

Paul May from Barclays. [indiscernible] both in investment side and also on the leasing side. Just wondering what your views are on your secondary market that [indiscernible]

Well, I think you're going to see a bit of a diversion. Maybe David can add to his point on the leasing. So I think you're going to see a further prioritization of the market. And we might see a little bit more Tier 2. I think where the demand is for office buildings and lettings is pretty much Tier 1, but there is a way to money. I think David just talked about GBP 41 billion looking to investment. So I think you'll see some more. I think, obviously, with interest rates remaining so low and with demand being so high, I don't see any distress yet. And maybe David can add to that. We do have some stalls, what are you going to do? Well, maybe just stand up. David, do you want to just talk about...

Okay. Yes, I think, as you said, I think we've done well on ourselves of Tier 2 stock. I think something that we talk about a lot. And I think the issue for us is, I suppose, looking at Tier 2 stock that we can't turn into Tier 1. Because, obviously, when you think about our doughnuts and the balanced portfolio, obviously, a lot of the excitement is in the future and under appraisals. So that's really where the sales of Johnson and Angel Square have been. And as Paul said, there might be sort of 1 or 2 more, but there aren't a lot that fit into that. And I reiterate what I said, which is, I think for Tier 1, for best-in-class, in a sense, I've never really known a time like it in terms of the amount of demand that's out there for it. So yes, so that's on the investment side.

Emily, just on the leasing side?

Yes. Just on the lease side, I mean, you've heard many times this morning, there is definitely an emergence of this 2-tier market. I think it is going to be increasingly linked to the net-zero agenda. There will be assets which will be not only impossible to move into the levels that will need to be met in terms of the net-zero agenda and it's there similarly in the occupational market that we're likely to see more divergence in rents.

Anyone else got a question? Mr. Leckie, all right stand up. We want to see you.

So [indiscernible] reducing the work in progress after keeping the new stuff [indiscernible] in Tier 2 market. You're selling your [indiscernible], but I mean, we're in a low-growth market, right? Yields are going to be firm, maybe come down a bit. Rents are going to be a bit better for the prime stuff. We need to drive shareholder returns. If you're selling out a few older stuff that you [indiscernible] the prime, you're going to have a lot of cash. You don't have the CapEx [indiscernible] a couple of years. How is the -- how are you tying the balance sheet, to answer both questions, I guess?

Well, I mean, we're committing to further 565,000...

[indiscernible]

We're going on -- we're spending GBP 200 million over the next few years. We're ambitious to buy more. You're right about that growth. And if you look at things previously, one would expect sort of a profit on cost of sort of 20% normally. And I think now, realistically, it's going to be more closer to 15%. Yield on cost probably moved down from the 7s to the late 5s, but that's not bad compared to what you get in the bank would be, what you're going to get as a valuation. I think the Tier 1 properties and our developments will continue to outperform. If you look at our guidance on our rent, plus 2 to minus 2. Our recent lettings of the Tier 1 start the stuff that we're delivering the green coats and all those sort of things are above 2%. So I'm ambitious for some growth. And one would sometimes criticize us for being unambitious on our guidance. So all I can tell you is that London remains a fantastic global city. It's tough to buy. We've got a great portfolio that we can improve going on. Yes, we've got 2 or 3 years of development going on as -- going forward, but we've had a fantastic run over recent years, pre-letting. I mean so I feel very positive about it. Damian, do you want to add something to that?

Yes. There's lots going on. I mean sitting inside the company, it feels as busy as it ever has. We've still got 3 big developments on-site. We're just about to start another one. You're going to see Network in a few minutes, which is, again, not far off starting off. Bush is also starting. There's about 20 smaller refurbishments going on. So our level of CapEx isn't expected to fall at all over the next few years. I don't quite understand this feeling that slowdown is coming. We've actually got more going on than we've ever had. So I think it's going to be...

Don't you want your [indiscernible]?

Yes. But value doesn't just happen when you complete a scheme. Now you build value through the scheme. And we've also -- remember, we've got rents -- rent-free is still burning off on even buildings like Brunel for some time. So I think -- don't focus just on development completions. Look at activity because that's what creates value.

The point I'd like to see the LTV [indiscernible] because we're so confident in the low supply after demand products currently [indiscernible]...

Well, I'm ambitious to growing the LTV. If you look at the point Damian's making, we've got prides to come still in our 80 Charlotte Street, our Soho Places, our Brunel site and the point that there are still profits to be gained on that.

Just on the LTV point, I think we've mentioned it before, we are ambitious to grow the LTV. We obviously need to find the things to buy. The Lazari transaction itself will push the LTV up to about 20. If we complete our existing developments, that takes us up to the mid-20s. Now clearly, it's a dynamic portfolio. There'll always be some recycling going on. But hopefully, there'll be some acquisitions, too. But there is, I think, the expectation that with our current program, the LTV will rise to mid-20s or perhaps in the...

Yes. We're ambitious to grow it. I mean if you look back at the history, though, being modestly financed is always left as a good spread because there's a -- if there is ever a downturn, we're free to get on with it. I think we were the only REIT not to read through this kind of rights issue. I think still take some credit in that. I think for the business, if we get the LTV up to mid- to late 20s, that's fine, but we're going to find the right assets where we can buy additive value. And that's why we're excited by the Lazari acquisitions. I think the new developments with Baker Street is going to be great. We're very excited there. So you'll obviously see more and more. Don't worry about it. All right?

Can I just add? I think the point I was just going to add as well, to Damian's point, is on other acquisitions as well. And we talked about that we're not seeing vendor distress, which is absolutely right. But at this point about relationships and track record and et cetera, and I think it's potentially a sort of interesting moment in time where track record and ability to deliver for people are -- is quite important. So although that -- there's no distress there, it's that side of it that I think could be interesting over the coming months and years.

Anyone else? We've got 5 minutes left, unless someone else there. Carl, you've got a question for me, apart from what the beer is at local pub?

[indiscernible]

Yes. No. Okay. Okay. We've got a follow-up [indiscernible].

Fuel shortage. Does any of your tenants -- have any of your tenants spoken about requiring [indiscernible] just coming from that reason or [indiscernible] basis? Anything on that [indiscernible]?

I suppose the first point to make is that a lot of our occupiers are looking to hire, which in itself is a good thing rather than a bad thing. You know the agents are out there. This [indiscernible] is incredible, really. So we expected to see some shortages in the sort of construction industry post-Brexit, and that's been handled quite well. So I think this will -- over time, I think people still want to come into London. We saw some recentralization before the pandemic, before Brexit. We expect that to continue. I'd say that, as Richard said, both projects, the Portland Stone and Soho Place, are on track and having a sort of vertical supply chain, just got that in control. So no majors. I think restaurants are struggling a bit. I think that's a real issue. I think you'll see some restaurants are not trading full days, and I think that, that is the issue, that sort of stuff. We're not getting problems with security or cleaning. Nigel, have you seen anything else particularly? No?

A lot of what we're seeing are letting them [indiscernible]

And you got growth -- you got other growth industries. And I think you'll see that with FinTech, EdTech, technology. So it's good. All right. Osmaan, stand up.

[indiscernible]

John, have we got details of where we see the end market? Well, we obviously were effectively 100% if you take off the Baker Street things are starting next week. Where do you think the market is on F&G? Do we have that stack?

Generally, in London, the average rate [indiscernible] across the whole market, about 10% to 12% F&G rating. So it's fairly a small part [indiscernible] opportunity.

I think the issue for, obviously, people don't necessarily have the ability or the financing to govern some buildings, may be difficult to actually convert whether listed in things, but yes, I suspect 10%, 12% F&G, but we've got to get them more up. One last question, oh, yes.

[indiscernible] Green Street. Earlier on, you talked about [indiscernible] having potential for employment gain. I do think employment gain is going to turn into [indiscernible].

Well, firstly, I think office demand and how people occupy -- and maybe Vas is going to help answer this question as well. If we look at densities, we design our buildings to 1 to 8 square meters. And on average, there will be an occupier in 1 to 12 square meters. And we are -- I've seen, I think it's sort of a few places our strengths about how spaces are designed adaptively, they are being occupied to 1 to 12 square meters. So actually, you think there's quite a lot of gap there. But within a more amenity space, more breakout space. So I think it will go back to those sort of numbers. Vas, can you add to that?

I would only add to that, that [indiscernible] talking about [indiscernible] but using it differently. And we see that [indiscernible] in our portfolio. So that's just different use of space rather than changing [indiscernible].

Well, obviously, hybrid working is here to stay. We now [ standardized ] our working policies last week, which has basically come in 7 days a week. That's only a joke, but I'd like to get away with it. But effectively, we're saying to our staff the office is open 5 days a week, but you can work actually, but we're going to have an all-hands, say, Monday. And we're finding sort of people wanting to be back, but you can apply for some agile working offices and businesses designed for peak occupancy. They have to design their offices for those days when everyone is in. And in fact, Boston Consulting upstairs were probably leaders of this because when we first spoke to them, I mean, we were -- we talked about what their business model was. And their business model was out of the office 4 days a week, and everyone in the office 1 day a week. And so Fridays was their all-hands day, but the other 4 days, they're out of the office at client meetings, traveling the world [indiscernible]. And so actually, it's a pretty dynamic thing. And I think you'll find that -- actually, I think it's pretty neutral. I think you'll find that people at office occupy offices differently, which is why we need to keep designing offices with amenity but with adaptive people. People can change and their office as it is. So how did we queue for time? Do I need to wrap up?

There's time for more questions, if anyone wants...

Carl again. Yes.

You mentioned about the [indiscernible]. Do you have a set of [indiscernible] unless there is [indiscernible]?

That's a nice tricky question. I think I might pass it over to our head of leasing. I think, first of all, absorption figures are very difficult to get hold off. Reality is the agents don't really issue them very well. You get under office new space without actually feeling about what's been left out. So without wanting to drop you in it, can you...

Yes, I think you're right. I mean it is a very difficult metric to read. I think this sort of almost fluctuates, but I think there's a positive message [indiscernible] shift to increase what we saw in the last quarter. And I think the [indiscernible] in terms of [indiscernible] bigger, but we don't really [indiscernible].

I think it's also quite sector-specific. But I think it goes back to what we see was happening. It's a flight to quality. So people are moving to better offices. You look at cost overhead, people, I think, are much more expensive than office rents. Rents are -- represent about 10% of people as overhead. So people are pushed into flight to quality. It goes back to the message we're making about net-zero carbon. If we talk to our occupiers, they want to be net-zero carbon building, particularly also building that's in net-zero carbon in use. So I think that is what you're going to be hearing about a lot going forward. But it's a good question, but I don't think the agents really ever give you the true figure. And obviously, some buildings get converted to other use, residential, et cetera. So thank you very much again, everyone, for attending today. Thank you for a great turnout, and we'll be mingling. Look out for yourselves. Thank you.