Great Portland Estates Plc (GPE) Earnings Call Transcript & Summary

Okay, good morning, everybody, and a very warm welcome to our annual results presentation. It's great to have you along with us for the next hour or so. Well, this drizzly day is not exactly what we were hoping for a summer's day, but I really do hope that we can bring some sunshine to your morning. And I hope you'll leave us with a spring-y step as we've given you some things to think about. And what we're going to do is take you through the presentation. It's not very long, circa half an hour. And after that, we've got the full GPE Executive Committee to help answer any questions that you may have on the call as well. [Operator Instructions] So we can look forward to that in half an hour or so, but in the meantime, let's get the stories of our results and our outlook and some comment on the market from our presentation. Hello, everyone, and thank you for joining us for our annual results presentation. As we all know, the past year has been extraordinary and challenging in so many ways and we have felt the impact across our operations, but GPE will emerge from the pandemic in very robust health with one of the strongest balance sheets in the sector, a portfolio full of opportunity and a team who have risen to the recent challenges brilliantly and who are driving change and innovation across our business. So over the next 30 minutes or so, Nick and I will give you the main messages from our results, the conditions of our markets, a broader business update and our outlook from here, but first of all, the headlines. Valuations were down 8.7% over the year, mostly in the first half, as developments recovered strongly in the second half, up 6.7%. A similar story for rents, with ERV stable over the second 6 months after a decline of the first 6, leading to total property returns of minus 5.9% and NTA down 10.3%, again with better performances in the second half. And we are paying a final dividend of 7.9p, to give 12.6p, in line with last year. So as we emerge from the pandemic into an improving operating environment, we do so with great strength, with deep opportunity and positioned for change. 4 points: There's no question that COVID has accelerated a number of key trends that shape our operating environment. Occupiers are demanding more. They're after more flexibility in the way they work, with hybrid working patterns here to stay. In turn, their buildings need to be more flexible, allowing for greater health and well-being, with higher sustainability credentials. And they need to be totally tech enabled. And we are delivering more through our flex spaces, through our amenity provision and building design, through our decarbonization fund and the use of award-winning tech across the portfolio. And these changes will define the best spaces. They'll ensure that our buildings act as magnets drawing people back; as great places to collaborate, to learn and to create. And it's clear to us that prime space with the best occupier offer will, as a result, outperform the rest. And so despite the challenging conditions, our experience of the past year bears this out. Quality space is leasing and leasing well. We signed deals worth GBP 12.9 million over the year, 2.4% ahead of ERV. And whilst our year-end void rate was up at 13.2% following development completions, 3/4 of it is new prime space. And the underlying rate was half that at 6.6%. Plus, in the 6 weeks since the year-end, we've signed a further GBP 8 million of rent, ahead of ERV by a sizable 13.9%. And the void rate is down to 12.2%. So with a further GBP 5.5 million under offer today at a 1.2% premium to March ERVs and a further GBP 40 million in negotiation, demand for our great spaces feels robust and leasing momentum is accelerating. Third, our financial position remains as strong as ever. Our rent collection has improved each quarter since the first lockdown, with offices now up to 91%. We've extended our ESG-linked RCF and put in place a new GBP 150 million U.S. private placement, giving us liquidity of more than GBP 440 million. And with an LTV of only 18.4%, we have significant capacity for us to draw on as we set out to capture the deep opportunity across our portfolio, for example, in our investment portfolio, where we are meeting occupiers' needs, creating fit-for-purpose, well-designed, tech-enabled space and delivering flexibility through our flex product, up 22% since March 2020; in our development portfolio, where after delivering 2 exemplar prime schemes this year, we are gearing up for our largest-ever program, with our 2 on-site and 4 near-term projects alone requiring circa GBP 860 million of CapEx to complete; and in the investment market, where we'll find opportunity. We're currently reviewing circa GBP 1.7 billion of interesting assets, up from GBP 0.5 billion this time last year. Add up all this opportunity and you have a business with material growth potential, organic income growth of more than 100%. And that's before we make any acquisitions. Thus, we are well placed to capitalize on this opportunity with both balance sheet strength; and a first-rate, motivated, engaged team. And as we think about life after COVID, we maintain our view that great cities like London will bounce back as the workers and the tourists return and that our capital will remain a key world city with an exciting long-term growth story. Over now to Nick to look at the results in more detail.

Thank you, Toby. Good morning, everyone. I'll take you through the details of our financial results and provide a full update on our rental income and collection performance, along with our significant organic rent roll growth opportunity. I'll also cover our extensive capacity for investments as well as a reminder of our exceptionally strong financial position and its alignment with our sustainability ambitions. So let's start with the headline numbers. The group's property portfolio stands at GBP 2.5 billion following a valuation decline of 8.7%, which resulted in EPRA NTA of 779p. And LTV remains low at 18.4%. EPRA earnings are down 29.6%, taking EPRA EPS to 15.8p. And with our strong financial position, we are paying a total dividend of 12.6p. Overall, our total accounting return was negative 8.8%. Now let's look at the 10% fall in EPRA NTA principally driven by the first half-weighted property valuation decline and by retail values falling 27.3% given ERV declines of 16.7% and 32 basis points of yield expansion. Our offices proved more resilient, with ERVs up 0.5% and values down 1.7%. Our committed developments held up best, down 1.6%, whilst our pipeline assets fell by 14.3%, principally driven by retail exposure and short income duration, although there's plenty of latent development potential in these assets. Returning to the walk. EPRA earnings added 16p, whilst dividends reduced NTA by 13p. And with other items of 2p, NTA per share stands at 779p. Moving to EPRA earnings, which you'll recall were GBP 57 million last year. This year's rental income was GBP 10.1 million lower, driven by securing vacant possession at Finsbury Square and the prior year sale of Britton Street. Given rent collection challenges, we make -- we made an expected credit loss provision of GBP 9.6 million, of which GBP 7.7 million relates to wholly owned assets and which also contributed to JV earnings falling GBP 2.2 million. Group earnings fell a further GBP 1.6 million due to higher property costs, including increased empty rates, although this was offset by higher JV fees given our leasing successes at Hanover Square. Admin costs fell by GBP 3.8 million given lower performance-related pay. And with other movements of GBP 0.7 million, overall earnings were GBP 40.1 million. As you'll see on the right, this resulted in EPRA EPS of 15.8p. And we are paying a final dividend of 7.9p, taking total dividends to 12.6p, bang in line with the prior year. Now more detail on rents [ and, firstly ], collection update. The chart top left shows that, of the GBP 89.4 million billed in the year, 87% has been collected either directly from occupiers or through rent deposit drawdowns. Of the balance, the majority is accounted for by the GBP 9.6 million expected credit loss, 80% of which relates to retail, hospitality and leisure occupiers, with GBP 4.1 million written off given concessions and insolvencies and the remaining GBP 5.5 million of provision following an assessment of each and every outstanding balance. You can see on the right that our 7-day collection rate has been improving each quarter. And we have so far collected 85% of the March rent, including deposits, with our office collection rate back up in the 90s. Turning to rent roll, which was GBP 100.8 million a year ago and has subsequently benefited from GBP 12.5 million of new lettings and rent reviews. However, GBP 11.3 million of breaks and expiries, which we predominantly sought to access portfolio upgrade opportunities, along with surrenders and retail delinquencies, meant year-end rent roll was GBP 95.2 million, down 5.5%. Together, these contributed to our underlying vacancy rate ticking up to 6.6%. Given this backdrop, whilst rent collection rates should keep improving, we also expect that some occupiers will be impacted from reduced government support as lockdown eases; and that our void costs may increase, depending on leasing velocity and our recent developments. So taken together, we expect EPRA EPS to decline over the next 12 months. However, looking further ahead, our organic rent roll growth opportunity is bigger than ever, with a potential 104% uplift. Our year-end rent roll, shown in blue, will rise as we lease up our void and refurb space, which would together add GBP 13.6 million, almost 1/3 of which will be delivered as flex space. And we have another GBP 7.5 million available through reversion capture, shown in green. Beyond our existing lettings to the likes of KKR and Four Comms and our recently completed Hanover Square and Hickman developments, there's a further GBP 8.6 million of rent roll available, of which 21% has been let since year-end, with a further 34% under offer or in negotiation. And shown in dark red, there's GBP 21 million of rent potential at Newman Street and our recently committed Finsbury Square scheme, which are together 19% pre-let, with another 43% under offer or in negotiation. Beyond this, our 4 near-term schemes, with starts from next year, could add an extra GBP 49 million of rent, of which around GBP 20 million is already in negotiation. So overall, this gives a total potential uplift of just under GBP 100 million. Our financial strength means we are well positioned to deliver on these organic growth ambitions. Even after recent valuation falls and the return of more than GBP 600 million of surplus equity in recent years, our LTV is only 18.4%, still one of the very lowest in the U.K. REIT sector. And as shown on the right, with potential CapEx of more than GBP 900 million across our developments and refurbishments, more than 90% of which is into office space, prospective LTV would remain at comfortable levels, peaking at only 40%. And that's before factoring in development surpluses and prospective sales. And given the CapEx phasing, we have extensive capacity for new accretive acquisitions. And you can see our deal flow is good, with GBP 1.7 billion of acquisitions currently under review, the highest for some time. These are predominantly off market and play into our key themes of value-add repositioning and growing our flex offering as well as assets stranded by the growing sustainability needs of occupiers and regulators. Far right, you can see, of the 7 properties which we had under detailed review and subsequently sold in the last 6 months, 2 of them or 46% by value traded near our view of fair value, again the highest for some time. We will, of course, remain disciplined. And this applies equally to our existing portfolio, where we currently have around GBP 400 million of sales under review. Our extensive capacity for investment is complemented by our significant liquidity. We have more than GBP 440 million of cash and undrawn facilities. And whilst our average interest rate has nudged up following our 14-year-plus U.S. private placement shown top right, the average rate would fall to 2% on full drawdown of our ESG-linked RCF, which has a 90 basis point headline margin. Shown bottom left, 98% of our debt is on a flexible unsecured basis, and our weighted maturity has materially increased to over 8 years. We've also extended GBP 400 million of our RCF to 2026. And in their inaugural year, we have outperformed the ESG targets in the facility, resulting in a margin reduction which we will contribute to charities focused on environmental initiatives. And we are currently developing our wider sustainable finance framework as we continually evaluate options to further diversify our funding sources. So overall, our financial position is as strong as ever. And now back to Toby for a few comments on the market.

Thank you, Nick. Let's turn and have a look at conditions in our markets, and we think there are some encouraging signs of a recovery underway. In our leasing markets, we expect to see an economic bounce back as the year progresses, with London forecast to grow at an average of almost 5% per annum over the next 3 years. As you can see on the chart, this optimism is already feeding into confidence around job growth, which in turn is translating into a sharp recovery in leasing activity, shown bottom left, with active demand, the blue bars, up 36% since September. Most of this demand is looking for prime HQ space and/or flex and fitted space, and we are majoring on both, so expect more flex leasing from us and more pre-lets of our developments. Much has been written about the recent increase in supply, shown on the chart at the bottom. Yes, it's sharply up since the pandemic started, but almost all of it is occupier controlled; or secondhand space often tired, no longer fit for purpose and unlikely to be of much interest to the occupier of tomorrow. By contrast, new supply has hardly moved since 2016, as you can see. What's more, for the next 3 years, we expect deliveries across London to run at roughly half that of the long-run average Grade A take-up, 2.5 million feet per annum versus 5 million feet of requirements. So our new build deliveries will have limited competition. And significant pre-lets are a strong possibility, [ witnessed the ] GBP 40 million of annual rent we have under negotiation. A quick word on retail. The past 15 months have probably been the most difficult on record, but there is some early evidence of a recovery underway here too. Inquiry levels are up since stores reopened, admittedly from a very low level. And footfall is clearly building well, as you can see on the table, with Oxford, Regent and Bond Streets recovering to 56% of pre-COVID levels and some 440% higher than this time last year. Heddon Street's restaurants are doing better still. From here, we expect branded destinations like Bond Street to perform more strongly than average high streets, particularly once office workers and the tourist trade returns. Turning to the investment market. And not surprisingly, both turnover and supply were down over the past 6 months by 23% and 29%, respectively, with virtually no distressed or forced sellers and many potential sellers happy to wait for pricing to recover once the pandemic is behind us. And they may be right to do so. The quantity of equity capital looking to invest in London is up, now at GBP 41 billion and within a whisker of its all-time high and a 6.5x multiple to available stock. So whilst we have good deal flow, our sizable development program means we have no need to buy. And as you heard from Nick earlier, we will maintain our disciplined approach, always looking at relative returns on offer. So given the recovery we are forecasting, our market outlook is more positive than at the interims, with both the rent and yield drivers improving, as you can see on our traffic lights. And we expect prime to outperform the rest. The only remaining red is vacancy rates, but even this is less relevant for prime space, whereas measures of confidence have all improved. Where next? For rents, our full year '21 outturn was at the better end of November estimates, as you can see on the table at the bottom left. For FY '22, we have a more positive range for offices of down 2.5% to up 5% for the best space. Retail rental growth is still expected to be negative but less so at an overall range of [ down 2.5% to up 2.5% ]. We're also more positive for yields, with only retail on average likely to see further expansion in the near term. Beyond that, the heavy weight of money and improving sentiment towards London is likely to prove supportive for yields for a while, particularly for the highest-quality real estate. Turning to our operations, I want to touch on a few areas of focus for us today. First, we're working hard to support our occupiers' changing needs. We've kept all our buildings COVID secure and opened throughout the pandemic. They're all now tech enabled, using, for example, our sesame app to enable contactless entry and air quality monitoring and digital twins to improve their efficiency. We're making them more sustainable through our road map to net zero carbon as well as enhancing their amenity and service level through our strengthened Occupier Services team. And we're improving all aspects of flexibility through our growing flex offer. Today, this product covers 267,000 square feet, up 22% since March 2020 and totaling 13% of our office portfolio. In March, we launched our Flex+ managed product at Dufour's Place in Soho. Just a few weeks later and we are more than 70% let or under offer at average rents of GBP 185 per square foot, some 6.9% ahead of ERV. And we have a further 6 spaces launched and in the market, with another 135,000 square feet being appraised for conversion. All up, this would take our flexible products to 20% of our office portfolio, all of it dialing into a real sweet spot of occupier demand. And as you can see on the chart, our focus on occupiers' needs is paying off. One of the best measures of that success, our Net Promoter Score has risen from 18 in 2017 to 42 today. And it's miles ahead of the offices peer group, shown here in orange. Our third area of focus is leasing voids and delivering pre-lets. As you can see from the bar chart, half of our March '21 void was recently completed development space, meaning it's mainly office, is quality prime space; and we expect it to let well. 19% is under offer today, with a further 26% in negotiation. On the right: We have major pre-let potential across our committed and near-term developments totaling GBP 92.5 million of ERV. And again you can see that it's almost all office, 100% prime. And today, 5% is under offer, with a further 31% already in negotiation to lease, so as I said earlier, some strong leasing momentum. Fourth, we'll be delivering further asset sales over the next year. We're reviewing circa GBP 400 million of potential disposals where we see an opportunity to crystallize surpluses; or where limited repositioning opportunities mean we'll be unable to meet customers' changing needs, leading ultimately to insufficient IRRs. So everything we're doing from an operational standpoint today is about matching our product to customers' needs, and we have a clear vision as to what that looks like. And perhaps some of the best evidence of that vision can be found in our 2 recently completed developments, both of which are leasing well. At Hanover Square, 75% is let, under offer or sold. And following last week's deal, 100% of the office space in the largest building, #18, is now leased. We've also seen a recent pickup in discussions with retailers for the remaining space on Bond Street. 27% is let, under offer or in negotiation. At The Hickman, GPE's most technologically advanced and sustainable building yet, 54% of the space is let or under offer at rents ahead of our expectations, profit on cost 16.7%, with more to come. We also have strong leasing interest at our 2 on-site developments. You'll recall we've already pre-let 51% of the offices at 1 Newman Street, and we have healthy interest in the remainder. Plus we are under offer on almost 17% of the retail space. Given that circa 40% of the scheme's value is retail, with the brutal conditions of the past few years, it's no surprise to see the profit on cost has declined and is negative currently, but I expect this to recover as footfall returns and leasing accelerates, enhanced by the opening of Crossrail directly opposite next year. We started 50 Finsbury Square in January; and works are going well to deliver this 128,000-square-foot major refurbishment, our first net zero carbon scheme. We've just kicked off our pre-leasing campaign. We already have 4 strong lines of inquiry and have received terms to lease the whole building, so we're feeling confident here too. Looking beyond our committed schemes, we have 4 near-term potential starts, shown here, with the first, 2 Aldermanbury Square, due to start in January next year, and each with strong growth potential. Taken together, they could deliver more than 900,000 square feet of prime flexible space, an increase of some 116% over the existing areas, with exemplary sustainability credentials and all near major transport infrastructure. Total CapEx to build out, some GBP 800 million; and on current estimates, a sizable rental increase of circa 214% to aim at. So with a further 4 schemes in the medium term, we have a 10-scheme total program covering 1.5 million square feet and potentially redeveloping some 40% of our portfolio into exemplary prime product, delivering for occupiers and giving us a strong platform for growth. So let's sum up our activities and consider where next for GPE. Last year, we said we expected to be a net buyer. We weren't. We held our discipline, but we were a net investor into our portfolio through CapEx, shown by the blue bar on the left. For this year, we have good deal flow, and acquisitions are looking possible. We're likely to be a seller too, taking advantage of current pricing. You'll see lots of activity across our development program as we prepare for a significant step-up in CapEx. Plus we will be working hard to convert encouraging pre-letting interest into new customer relationships as well as leasing voids across the investment portfolio, growing our flex offering and all the while focusing on creating prime space, delivering on our sustainability ambitions and on satisfying customers' changing needs. So to conclude with our outlook. And as you've heard, our message to you today is that we have created a great opportunity for GPE and one that we intend to exploit to the full. We can expect a market recovery, with economic indicators increasingly supportive, encouraging occupier demand and an increasing weight of money looking to invest. We have many portfolio opportunities too: 40% in development, 92% near Crossrail and with accretive CapEx to invest of almost GBP 900 million. With our focused acquisition strategy, we have good deal flow. And we expect to be able to add to the portfolio, and we have the balance sheet to take advantage of such opportunities. And our great spaces are leasing well, with healthy demand for our flex product. We have clear strategic priorities built around a single market focus with deep knowledge, a long track record of capital management discipline and an enduring belief in London's exciting future as a global capital city. Plus we are evolving our strategy, staying in tune with occupiers' changing needs, all the while delivering them sustainable spaces and sector-leading customer service. Finally, we have the magic ingredients of a strong culture and a great team. We have a clear purpose and unifying values supporting our customers and our communities. We have highly engaged people, evidenced by our exceptional engagement scores, and we have an experienced senior team. So to sum up: GPE is in great shape, enabling us to grab the opportunity we've laid out for you today. And we remain confident in our outlook. Thank you for listening.

So thank you, everybody. I hope that was informative and maybe even answered some of the questions you were preparing to ask. Let's see. As I said at the beginning, we have the full GPE executive team here for you and to help answer any questions you have. And you can see, I hope, all of us on the screen. So what we'll do now is field some of your questions. We've already got a few coming in. [operator Instructions] We've already had a couple, so let me start, first of all, with that from Tim Leckie. Thank you, Tim. Tim asks 3 questions. The city looks like a tough market. And how does that affect our decision to [ push out ] with Aldermanbury Square? Lot question -- lots of press reports, rather, around building materials and labor shortages and cost inflation. Andy, perhaps you could take that one in a second. And the valuation yield on completion, I'll come back to that at the end. And Marc, if you would just like to think about the city versus the West End, but before you go to that, just, Tim, an overview from me. If you look at the best buildings and Grade A vacancy, what you see is, whether you're in the West End or the city, actually the rates are remarkably low. And if you -- depending on who you listen to, you will find that most [ commentators ] are low single-digit vacancy in both West End and the city; and West End circa 2.3%, city only 3.5%. So whilst it may be [ on the face of in a market ] with more supply, actually most of that supply is not what we would call Grade A. And certainly the pipeline is not Grade A. And as we talked about earlier on, with GBP 40 million of deals in negotiation currently, you can get the sense straightaway, seeing where our pipeline is coming out, that we've already got some pretty healthy interest in some of our product. Marc, do you want to touch briefly on the city as you see it?

Yes, sure. Thanks, Toby. Tim, I mean, I think, if you look at sentiment generally, it is definitely positive. Inspections are going up. And actually the timing between first, second and third inspections are getting quicker. And to Toby's point, the lack of Grade A availability is really resonating with a number of the occupiers. And actually if you look on a sector-by-sector basis, there is definitely consistent strength and depth of demand; and a lot of demand that had been shelved at the start of the pandemic that now has been realized, as I talked about the activity, but if you look at -- specifically at the city, you obviously have names like T. Rowe Price who have come out, are looking for more space than they started 12 months ago. And you've got Alliance and Bernstein (sic) [ AllianceBernstein ] and Mondrian who've gone to 60 London Wall; [ CAPA international ] looking of 200,000 square feet, when they started at 130,000 square feet. If you look at the legal sector, there's a raft of names out there particularly focused on city and looking at the best of the space that is available and is coming through. And then also, in the tech market as well, those which have younger staff than you would expect would not necessarily want to be coming into the office. Certainly those organizations such as Google, Netflix, Amazon, Snapchat, they're all out. They're either acquiring or have acquired and looking for more space. And I think it does go to that point about lack of Grade A.

Thank you, Marc. And of course, this strong differentiation between occupiers looking for buildings that are going to answer their well-being needs and sustainability needs. And they are in the Grade A spaces and simply not being interested in Grade B and poor-quality space, which means that plays nicely into our supply, into our own pipeline but also will give us opportunities to acquire poorer buildings over time that we can then improve and turn into Grade A. So a really interesting opportunity for us in the future. Turning to your second part of the question: building materials, labor shortages and inflation. Andy, any thoughts?

Yes. [ Richard ], if you could go to Slide 72, please. Certainly construction pricing is volatile at the moment. We saw costs drop 2% roughly last year. We think they'll be flat this year and thereafter probably revert to a 2.5% to 3% rate. What we're seeing right at the moment is there are input pricing pressures, particularly for materials and labor, but they're being absorbed, particularly by main contractors and subcontractors absorbing those as they try to rebuild their order books. So what are we doing to reduce the risk? Well, we're bringing in both main and subcontractors much earlier on into the design process, bringing them in as actually members of our team. So paying a fee for them to have specific outputs as to what we want them to produce for us. And what they can do is they can help us on buildability, logistics, design, procurement, pricing but, I think, crucially now also the sustainability credentials of the building, particularly thinking about the embodied carbon and helping us on that. We always use a Tier 1 supply chain, and we're very rigorous in how we analyze that. And we're also doing a lot to make sure that our jobs are attractive in the market. So we always make sure we've got detailed and coordinated design. We've got favorable payment terms. We've got terms and conditions that are robust but appropriately fair, open discussions on risk. And I think the final one is that we always allow prudent contingency allowance in our numbers as well. So that's a high-level view of where we are on construction pricing.

Great. Thanks, Andy, really helpful. And to your last point, Tim, valuation yield: Well, if you take a -- let's just say keep it simple, broadly current yields at between 3.5% and 4% across London for a Grade A investment product and you assume that typically we're looking for a 15% to 20% margin on development, then you get your answer. Somewhere approaching 4.75% to 5% would be your exit yield on completion. And as you know, we have tended to sell most of our finished products. We weren't always, but -- and that has been our practice over the last few years, which means you crystallize those gains as well. Stevie -- thank you, Tim. Stevie. Let's -- where would you like to go next?

We've got -- Chris Fremantle would like to ask a question. So I'll allow you to talk.

Can you hear me okay?

We can.

Great. So I just wanted to ask 2 questions. I think you've talked about -- you've given an expected CapEx chart for the future years, which I think is quite helpful. Can you just talk about how contingent that is on leasing on your near-term schemes and/or planning, what the key sort of things we should be looking out for to confirm whether that CapEx is actually going to come through on time or whether it's going to be delayed? So that's the first question. And then secondly, I just wanted you to give, put a little bit more meat on the bone on retail valuations. I mean it's an astonishing move down in retail valuations in 1 year. I mean, do you think that valuation decline is sustainable, or have valuers over-adjusted? Any commentary you can make on that, I think, would be very helpful, please.

Thanks, Chris. Both good questions. Nick, maybe you'd come to the valuation, the retail valuation, question in a moment. And in terms of expected CapEx, [ Rich ], could you just go to, I think it's, Slide 19, the 4 near-term projects, please? So Chris, there is clearly always contingency around timing. And if you look at these 4 projects, it's not just about planning. There are many other components that we try and bring together when we make our decisions. And if you look at Aldermanbury Square as an example: The application is in. We would hope to have that out by the summer, late summer. And we would also -- we also have to [ regain our ] head leases and we need to gain vacant possession. And then we need to get the contract with the contractor signed up, and we have to form a view about the leasing market. We've talked about the leasing market already. I think we're pretty optimistic about that given the inbound we're already receiving for that building given its quality. The other components, we'll have to wait and see, but that's what we do. This is our stock-in-trade. It's working through these risks and managing them as best as we possibly can. Will there be delay to some of them? Unquestionably. Will we bring some of them forward in time? Quite possibly. Will they end up being exactly as we've shown on the charts here, on the pictures here? Almost certainly not. That's the essence of development. It's they're iterative and you go through numerous improvements over time. And sometimes, things don't work in favor and there's a bit of delay, but we're working pretty hard to make it happen. And for the first time in a long while, there is a sense that the near-term program is actually very near. And I think that's really, really interesting, with GBP 860 million of capital investable in the not-too-distant future. For the first time, you can, I think, begin to feel that in our own outlook, which is really encouraging. Nick, do you want to comment on the retail valuation?

Yes. Chris, thank you for the million-dollar question with regards to retail. I guess what I would say is, if you look at the valuation decline this year and then you overlay what we've had in previous years, we've now seen in general terms retail values down by just over 30%, ERVs down by 23%. What we saw specifically in this year was, first half of the year, the valuers were much more focused on moving the rents down. You'll see in the full year they were down by 17%, of which 13% came in the first half. What we saw in the second half was a slowing rate of both valuation and ERV decline but the valuers moving out yields to reflect uncertainty. And clearly a lot of that uncertainty is linked to the fact that clearly no -- there have been very little footfall until recent months and equally very few deals being transacted in the retail leasing market. So moved down a long way from where they were. There's clearly some quite big variances on an asset-by-asset level as well. And perhaps the most obvious example, most visible example that I can give you with regards to where rents have moved is you'll remember down at the east end of Oxford Street, 4 or 5 years ago, we were doing deals at GBP 700 Zone A. And you'll see in the presentation that the value is -- for our space at Oxford -- at what was Oxford House is now GBP 450, GBP 475 territory. So that's come down a very long way. I think the encouraging thing is that the level of inquiry has started to move up, certainly from where it was 3 or 4 months ago. Getting deals over the line is difficult. What we have guided to is further rental falls at a lower rate than we saw this year, so our range for the next 12 months is down 5% to down 10%. And we're also suggesting there may be some further yield expansion. So I think, long story short, Chris, I can't answer the question directly. We're not out of the woods yet, but I would say that for the best space, and in particular I'm talking about what we're delivering at the east end of Oxford Street and what we're delivering at Hanover Square, on Bond Street, the signs are much more encouraging than they were 3 months ago. The return of tourists, the return of office workers and the opening of Crossrail will [indiscernible]. And we do think there is a future for retail on the best streets in London, but it may well be there's a little bit further to fall. But as we've seen in many times over, the market may go down too far and therefore may come back up. Is it going to come back to the levels that we saw 4 or 5 years ago? Highly unlikely. Could it get back to levels above where we are today? That's [ perfectly possible ], but we may have to go down before we come back to that.

And you've seen our forecasts on rents there. I mean I will just add that I do think we have flagged this morning that we're beginning to feel a bit more optimistic about retail. And we're getting some inbound that simply wasn't there 6 months ago, which is encouraging. Thank you, Chris. Steve, where would you like to go next?

We've got another hand raised, from Paul May. So Paul, I'll just activate your speaker.

Actually, can you hear me?

Yes.

Yes, great. A couple of sort of specific questions and a more general one; obviously things looking very positive, which we could see. A couple of specifics to start with: On the near-term schemes, are you prepared to say what you think the profit on costs would be on those schemes or provide the sort of current value of those near-term schemes and also the current rental income on those? Sorry. I'm -- you might have said it, but apologies if I missed that. [ Let's do ] one by one...

[indiscernible] -- let's just deal on that one quickly. We're not going to go into specific details, not least because we -- they're still in the process of being refined, as you would imagine, but I would refer back to what I said at the beginning, which is that typically we're looking for a margin of 15% to 20%. And the other point to make -- thank you, [ Rich ]. The other point to make in the middle here is that you can see that there is a very significant increase in rent on offer here through the schemes we're proposing, the majority of which comes from Aldermanbury and City Place House on the Southbank because those are the 2 single largest size increases, net space increases. So you'll imagine we're repricing for a higher rent per foot and on more area.

Okay. And thanks for the range of rent expectations. As you say, it's sort of looking more positive moving forwards. Just wondered. I think you mentioned that the 5% is on better space, and probably the decline on some of the lower-quality space. Are you able to give a indication as to the percentages of your portfolio that sit within those or to give an idea of the average rent expectation? Or is it just very much it will sit somewhere in that range? Is that the way to -- the best way to think about it?

Well, we're always applying knowledgeable guesses, I think, is [indiscernible] Paul, because clearly there's a lot of -- there are a lot of moving parts to this. And that's why we give you a range. And the range is there to cover 2 things: firstly, uncertainty; and secondly, variations in quality. I mean I think it is quite possible that, for the very best spaces, if we manage to get competition during the year on offices, we might do better than that. Equally, if we have another lockdown, the 21st date doesn't come to pass next month and things look a little stickier, then clearly things go the wrong way. So it -- the range is really there to address, as much as anything, uncertainty, but I think this bifurcation point that many people have made and we've been making for a while is as relevant today as ever. And it's absolutely the case. The depth of demand we're feeling most strongly is for the best-quality spaces and those with the most flexibility. And we're dialing into both of those, as you know, both of those deep pools of demand -- or deepening pools of demand, very well, I think.

Yes. I think it makes a lot of sense. I think we agree with you on that polarization, and suddenly you are in a better position than some others maybe to capitalize on that. The final one, which I'm just struggling with and sort of scratching my head a bit. If you go back to November 2019, so pre pandemic, I appreciate it was sort of pre -- in the midst of the sort of Brexit discussions and everything that was happening then, but generally speaking, your indicators were either amber or red, other than vacancy rates which was green. Since then, we've had obviously quite a material GDP decline, admittedly a GDP recovery, but we're still at this point in time and expect it to be below the levels of 2019 by the end of 2021 despite that -- despite the recovery that we're getting. And yet we've moved to a very positive outlook moving forwards. I just -- I suppose I struggle to see how things are better today than they were in November 2019, pre the pandemic, and just wondering what your thoughts were on that.

Yes. It's a very interesting question because, of course, what we're not doing is saying we're starting from the same place. So in 2019, we were looking -- if you'll remember, we were sitting at near-record share price, et cetera, et cetera; and considering from that position how the outlook felt. Today, we're sitting from a position of a long way off a record share price, clearly reduced NAV. And we've touched on some of the -- Nick's talked about retail valuations having come off as far as they have. And it's from this position that we're looking forward with our traffic lights. And so the differential in starting place is very relevant for the traffic lights. And as we look out at the sentiment of the market and we feel in the negotiations and discussions we're having with prospective customers, there is no question that the environment has changed. Now it's not without risk, granted, but it's a very different starting place and a very different set of discussions that we're having with a community of occupiers and people who really want to get back into a sense of normality. And they've got, many of them, swelled -- swollen balance sheets; clearly, retailers not so much, but many businesses with lots of desires to get back onto the acquisition trail, to get back into growth all over again, looking at their office space as a really important part of that mix. And hence, our outlook has changed with it. And I think that you may well see it strengthen from here even further.

And then just sort of bringing all that together. Do you feel that the market has more question marks, but GPOR's portfolio and GPOR's position can take a greater share of a smaller sort of market demand or tenant demand? Or do you feel we're in a sense that tenant demand actually overall increases from here? I appreciate you've got the polarization. And as I say, that's why it's sort of questioning whether it's GPOR's position is better than the market overall or you just feel the market overall is better at this point in time.

Well, I will say we have to dial into the bits of the market where we think there is most opportunity. And our choice at the minute is to dial into Grade A, highly sustainably efficient buildings, with all of the well-being components that we know the occupier of tomorrow is looking for, dial into that. And that tends to be new build or major refurbishment. And dial into the, I think, growing demand for flexibility, and we're doing that through our flex spaces. How that compares to the rest of the market will be for you to work out, but essentially we've identified areas of real interest, occupier interest. We're playing all the -- all of those trends as hard as we possibly can, making our buildings as tech enabled as possible, focusing on micro location, getting next to infrastructure and transport because we think that's going to be as important as ever and hitting all of the needs of tomorrow's customer right now. And if we do that well, we should do better than the market, but let's see. That's a big longer-term question.

Sorry. Do I have time for one quick last one? Sorry. I just suddenly thought of it when you mentioned flex space, if that's okay. The lettings that you've done in flex, obviously the rent is significantly higher than previous passing. That's sort of the nature of flex. And a number of that space or parts of that space became flex since the March valuation date, I think, is -- in terms of the March '20 valuation date. So just wondering what impact the lettings in flex space have had on the -- versus ERV rent uplift. Or is that excluded from [ the "plus 2 and a bit" ], I think, percent or the percentages that you've highlighted?

No, they're in there. So if you take Q4's as the most recent, we've beaten the ERV there by 6.9%. And that's in the mix. They're all in the numbers.

Okay, so we'll -- I'll go to a written question now from [ Marcus ]. Toby and team, you flagged a good deal of deal flow. Can you give some color on recent bidding situations? And have you been surprised by the underwriting implied by bidders?

Okay, great question. Thanks, [ Marcus ]. Robin, would you like to have a go at that one?

Yes. [ Marcus ], I think, I mean, just turning to Slide 11 is probably a helpful start. And that actually gives a granular look at our bidding process really in the bottom right, where you see 46% of deals that we looked at [ and then give you ] the details, we got [ quite close on ], and that's within 10%. And actually they're pretty much on 10%. The point to note just from our experience is that number [ as high of 46% is actually in ] from 2 deals, so the total of 7. So just take that into context. So the color on bidding is probably most well shown there. The other interesting granular point on our bidding has been that most of the deals we've been bidding on are opportunities where we see real potential in our flex and [ managed space ]. So buying into that theme of the market. So these buildings are typically smaller. There's more of them around, and they're actually generally quite well sought after, so harder to compete and quite a deep market for those smaller [ let-type ] product buildings for us. Are we surprised by the underwriting? I think no because there's a lot of confidence out there. And everyone has got their own measure of confidence, and clearly there are some who are really willing to [ push the boat out ]. And as we've seen and talked about, Toby has mentioned, we're seeing a record amount of capital in the market looking for investments [ in London ]. GBP 41 billion is a record [ ever ]. So there's a real desire to get money placed in the market. We're obviously -- we don't have a need to buy. We're going to remain disciplined and focused on the right risk-adjusted returns, but I think the -- there are competencies there allowing some buyers to really push hard on the underwriting. So harder than we would like to but understandable given the level of confidence that's coming back into the market, for all the reasons which, I'll say, well known, be it post-Brexit London, post-COVID London and a general sentiment that is [ well priced ] on a global basis.

Thank you, Robin. That's really helpful. And of course, the point you make about no need to buy is the one that I think really stands out at the minute with our investment internally through our development book. And -- but you and your team are doing a fabulous job unearthing things at the minute. And we've seen the number go up, as I say, from GBP 0.5 billion to GBP 1.7 billion. That doesn't mean we'll necessarily do any of them, but it does mean that we've got an increasingly interesting pool that we're looking at. And that discipline that we're well known for will absolutely still persist, so it needs to be accretive to the business overall. Thanks very much, [ Marcus ]. I hope that helps. Stevie?

Next one is a live call from Oliver Carruthers.

Can you hear me okay now?

Got you.

Perfect. So following up on [ Marcus's ] question on that rise in deals you're seeing trade at fair value, on your definition on that Page 11. I know it was just 2 deals, but could you maybe comment a little bit on what has changed over the last 6 months? Are these values coming down? Or are you underwriting higher rents relative to -- for these value-add projects relative to where we were 6 months ago? So any additional color there would be very helpful. Second question, on the pre-letting deals that you're in negotiation for, can you share if these corporates are either upsizing or downsizing their space relative to what they're coming out of? And if there are any other design changes relative to what they're coming out of, that would be very helpful too. And then thirdly, can you share any insights into how your tenants are approaching return to office in the coming weeks and months?

Okay, a really good spread there. Robin, maybe you should approach the first one, on the 2 in our fair value list. The pre-lets, are they up or down? Andy, maybe you'll touch on that one, please. And actually sort of let's go to Marc on that one. And sorry. Your third one, Oliver, was...

Really just any insights you can share on return to work over the coming weeks and months. What are your tenants saying? What are their expectations? How important is June 21, et cetera?

Yes, okay. Steven, maybe you'd like to have a go at that one. Robin, over to you.

Thanks, Oliver, yes. So I hope that sort of answered that question earlier, but just to clarify a bit more on it: The deals that we're getting close are typically the buildings which offer themselves to flexible or managed solutions. As we've seen, the ERV beat, you can get -- on that kind of occupier solution, get an underwriting an extra push. And that's why we're finding ourselves getting closer. And also probably another part of it is a lot of the stock we're looking at is off market. And when it's off market or perhaps a very select few bidders, the chase and the race to get ahead and be -- a very competitive situation comes out. And perhaps vendors have been looking for some certainty in the pool of people they talk to, trying to sell in a market which has a little -- been a little bit jittery over the last few months. Clearly it's moved on from that today, but from [ November's round to sort of March ], it was a difficult selling market. And so we had a closer look at deals and have got much closer to that. Hopefully, that answers...

So it's a combination of slightly more positive from your side in terms of the rental underwriting and slight softening over the trailing 6 months in terms of valuations.

Yes. I think it's a little bit of both, [ both of that sort of tempered ]. I wouldn't get carried away with either theme, other than we are able to target smaller buildings [ which suit themselves to flex ], which -- and that flex managed base get to premium rent. So it's a different pool of assets we've been looking at really over the last 6 months because the development, repositioning of both opportunities [ are actually being ] the ones who are very well chased and have been achieving record.

Marc?

Yes, sure. So really, from our point of view, the occupiers that we are talking to right across the board have -- in the main are all upsizing. And I think that just goes back to what I said at the start of the Q&A, that financial, legal and professional, the ones that are acquiring, seem to be taking more space and looking for better space. But if you go across the board: 50 Finsbury, we have tech. At City Place House, we have legal. Newman Street, we have professional; Hanover, financial; and The Hickman, also professional. And these are either live negotiations or RFPs that we are responding to. So we're pretty optimistic of our ability to try and close these out.

And is that head count related, their upsizing? Or is there something else driving it in terms of...

Well, I think it's a combination. You've got head count and also the new ways of working as they will be, but the de-densification, we think, is going to take place. So people having more space and more ability to collaborate. We look at the way the work from home and hybrid working is going to evolve. And certainly, the old style of coming in just for meetings and sitting at your desk will evolve into something more relevant, which is again going back to why buildings will become more sustainable with more vibrant amenity and wellness for staff. So we think that collaboration is definitely going to be a new purpose for the office and team building and so forth. So I think it is a combination of additional requirements and head count.

Thanks, Marc. Steven? So what are we learning from our own occupier surveys that we're doing about returning to work?

So as part of the support we are giving our occupiers, we're holding occupier [ surgeries ] and understanding what they're thinking so we can help them get back to work. Office occupancy at the moment is around 30% of the portfolio. I think the feedback -- and we're expecting to see that increase and step up in June, obviously subject to all restrictions being lifted. In terms of specific -- So it's not easy to generalize, but some general comments: I think occupiers are very [ comfortable ] and have no issue with the office space and safety of the office space we're delivering. There is some anxiety still, I think, around commuting. Some occupiers are saying to us, "Look, we're going to ramp up more slowly," but probably by the summer, we expect to be pretty much fully occupied again. Others are telling us, "Look, we were looking to come back 2022. We've actually accelerated that now." I think that's particularly true of the smaller corporates. I think the larger corporates we've got in the portfolio are more hesitant. And I mean we've also got a couple of examples in the portfolio where space was actually given up sort of December time. They're now talking to us about, "Well, can we have it back?" So lease has been surrendered. They're now on the phone saying to us, "We'd like to take that space back, please." I'd also say we're also seeing in -- particularly in the finance side of things, people starting to hire again. And they're wanting to come back, have the office space available ready for that hiring. So I think -- in summary, I think people are starting to realize the benefits of getting back to the office, the collaboration, creativity and all of that. So hopefully, that -- just one other thing I'd also just add. From our partnerships, we're also seeing within down at Runway East, down at New City Court's, London Bridge and in Piccadilly, certainly the inquiry levels within that service office business and also within our own flex business has certainly picked up since the Easter.

Yes. Thanks, Steven, really, really helpful and good color. And there's no question that there -- it feels different. It feels different. And I'm sure, Oliver, you've felt this as well. If you've been in the office, it feels different to how it did. There are more people around. Transport is busier. And it feels like people are certainly keen to get back to, as said earlier, some sense of normality. Thanks -- Stevie, with you.

Okay, one more live question from Max Nimmo.

Can you hear me okay?

Yes, got you.

Great. I think most of my questions have been answered already but just maybe one. I appreciate what you guys are saying about the polarization in the market. And that does seem to be what we're seeing happening, but just maybe as a theoretical kind of exercise, how high would you have to see secondhand office vacancy getting before you'd start to get a bit more worried about the prime office market? Or is this just a discussion that occupiers are not really willing to have? They will not look at that secondhand space no matter how cheap it is.

Max, I think you've answered your own question there. I mean clearly some will consider it, but the majority of businesses have worked it out. They worked it out ages ago, that your space is one of your most important factors of production. It has to deliver for your people. Do you want to be a -- if you want your brand to stand up to scrutiny, if you want to be able to hire the best people -- and increasingly that's going to be around sustainability credentials. Sitting in, time expired, inefficient, probably more expensive than it should be where the air conditioning is chewing energy and doesn't work, it's not going to be fit for purpose anymore. And so I suspect the vast majority of that Grade B space -- and that's before, by the way, we get to the EPC regulation changes coming at us in '23 and '30. The vast majority of that space is not fit for purpose, and they simply wouldn't countenance moving to it. And when we look at the cost of space relative to the cost of people -- and actually, [ Rich ], you put the slide up earlier on in the appendix. We know that the rental bill is somewhere between 5% and 10% of the staff cost for a typical London business. So it makes absolute sense to fit for purpose your buildings around people's needs and not save on that last piece of rent. It just doesn't make sense. And I think most businesses have woken up to that.

Toby, can I just add something as well in terms of the secondhand supply? 76% of everything that's on the market, which is 6.3 million square feet, is less than 10,000 square feet. And 50% of it is less than 5 years, so even the opportunity for occupiers to acquire the space is very limited. It's just quantum that is being flooded onto the market. And as Steven said, there are occupiers that are starting to reoccupy the space, and the amount of space that's coming to the market is definitely slowing as well.

Thanks, Marc. So Stevie, we've got a few on the Q&A. Should we come to some of those quickly?

Yes, sure. Do you want to go straight to those? Because that's the last live question.

Yes. Okay, thank you. So Os, I think we've addressed the challenging planning environment. Andy, maybe you'd like to talk about New City Court in a moment. Mike Prew, thanks for your question around rental guidance and whether prime offices -- [ are 10-year terms certain we're looking out there ]? And whether the yield shift is applicable to our assets that some of the agency community is talking about. The answer is to, the latter point, absolutely. As we go from converting buildings, which is our stock-in-trade, converting buildings from poor to great, you would expect to see yield shift coming in our favor. And as Robin talked about earlier, the depth of demand for great assets at the minute is not shrinking, so I would expect that we will be able to access some of that yield shift over time. Andy, do you want to touch on New City Court briefly?

Yes. Thanks. So New City Court, we've gone in with a second application. And what we're trying to do here is address [ Southwark's ] concerns over height, albeit they're not shared by the GLA or CABE, but also that the scheme that was originally submitted was actually sort of conceived and designed before we published our net zero carbon road map. And so what you see here top left in -- on that slide is a far more sustainable building and one that we're confident will be a net-zero-carbon building. So we think those -- the height reduction that we've done and the net zero carbon is the right thing to do, which is why we put in the new application.

Thanks, Andy. Stevie, are we -- do we have any more that we need to address?

Not live, no. That's it.

Okay, very good. Everybody, I think we are -- therefore, we've covered all the bases. I hope that's been really helpful for you. Thank you as ever for joining us, and we really appreciate you giving us the time. We're always available for all questions. And as the lockdown becomes ancient history, we'd love to show you around some of the things that we've been up to whilst we've been locked away because clearly we've been very busy. So if you have interest in coming and seeing some of our buildings, we'd be really happy to show you around. And as ever, we're here to answer any more questions that you have, but overall I hope you get the sense that we're looking forward and we're looking forward with a real sense of optimism. Yes, there are uncertainties still out there, but our product is -- we're hitting all of the occupier needs. We've got a fantastic pipeline of opportunity around the corner. And we feel we've got a supportive market and a balance sheet that can help us grow. So with that, thank you, everybody, for joining us. And have a very good day. Cheerio.