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

Well, good morning, everybody, and a very warm welcome to Great Portland's interim results presentation. It's great to see you. Thank you for giving us your time on this Friday morning. So the run order will be a short presentation, giving you all of the detail around our healthy results that we have published this morning. And we'll follow that up with an opportunity for you to ask us questions, as ever. And to help answer those questions, we will have a good cross-section of the senior team. So I'll be joined by Nick, Steve, Andy, Marc, Robin, Janine. And I'd also like to welcome Dan Nicholson, who joined us as an Executive Director in October, and he also will be joining to help answer any questions we have later. So I hope you enjoy the presentation. There's lots of detail in there. The full deck will be on our website. So you can see there the material and there are lots of appendices, as ever, with a great deal of details to help understand the story. So without further ado, let's get started and turn our attention, please, to the presentation. At our finals in May, you'll remember I talked about the extraordinary challenges we've all faced as a result of the pandemic. Clearly, some of those challenges still exist. But as you'll hear from us over the next 30 or so minutes, there are now strong signs of recovery gathering momentum in the London economy and in its property markets. And we, at GPE, are feeling confident about our prospects as we 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 focused on driving positive change and innovation across our business. So over the next few slides, 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. You'll also notice that we have evolved our brand, shortening our name to GPE and giving ourselves a fresh new look. Our core values and our purpose remain as applicable today as ever and so are unchanged. But we think our refreshed brand will allow us to connect with our customers, our partners and our communities even more powerfully than we already do. So let's kick off with the headlines, and these are robust results. Our property valuation was up 2% over the 6 months, with a strong performance from our developments, up 29.7%. Encouragingly, ERVs were also up by 1.6%, driving a total property return of 3.7%, outperforming the MSCI Central London Index and delivering EPRA NTA per share growth of 2.2%. So a strong turnaround from this time last year and a business that is operating well and doing so from a position of both strength and opportunity. Four points. First, we're addressing all of today's key occupier themes, giving our customers spaces of the highest quality, focusing on prime where demand is at its deepest. We're offering flexibility through our flex spaces and great service with a relentless focus on a customer-first approach. We're weaving strong amenity provision through all our designs, including the adoption of market-leading technology. We're hardwiring sustainability considerations across our activities as a strategic imperative and supporting occupiers and our communities with the launch today of our social impact strategy. Taken together, in this hybrid working world, we need to create magnetic buildings, enticing our customers into our spaces and then retaining them. Our single-minded focus on these themes will ensure that they are. Second, and our approach, is driving our strong leasing. We've already secured GBP 27 million in new rent since March. And as you can see in the chart, in the first 6 months, we've leased pretty much the same as the total for the previous 2 years put together. And we're handsomely beating ERVs in the process by 9.8% in half 1 and a strong 11.1% for our retail lettings. And with our underlying vacancy rate lower at 5.1%, or 14% including recently completed developments, with more to do. But it's good space, 85% is prime, and we have GBP 2.4 million under offer at a 7% premium to ERV, with a further GBP 16 million in negotiation. So healthy leasing momentum with robust demand for prime and flex space and, as I'll cover later, improving interest from retailers as well. Third, our financial position remains as strong as ever. Our rent collection has improved each quarter since the start of the pandemic, and we're getting back to more normal conditions. And following profitable sales at a premium to book value, gearing is low at 16.7% and liquidity is high at nearly GBP 500 million, giving us significant capacity for further investment as we set out to capture the deep opportunity across our portfolio. For example, in our investment portfolio through growing our flex product, up 12% since this time last year to 15% of our office portfolio today. In our development portfolio, where 75% of our 1.4 million square foot program is either on site or could be in the near term, investing more than GBP 870 million in the process, with our earliest start in January 2022. And in the investment market, where we'll find further raw material to add to our deep portfolio opportunity. So add all this up, and we're excited by our material growth potential. Organic income upside of more than 90% before we make any acquisitions, plus we're well placed to capitalize on the opportunity with both balance sheet strength and a fully engaged great team. And as we think about life after COVID, we maintain our view that London, through its ever-present process of evolution, will solidify its position as a relevant and dominant 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 our detailed financial results as well as our extensive capacity for investment, both organically into prime office developments and externally through acquisitions. I'll also share the headlines from our new social impact strategy, which aligns with our broader sustainability ambitions. So starting with the numbers. The group's property portfolio stands at GBP 2.5 billion, up 2% on a like-for-like basis, which resulted in EPRA NTA rising 2.2% to 796p and LTV reducing to 16.7%. As expected and guided, EPRA earnings fell to GBP 18.7 million, taking EPRA EPS to 7.4p. And with our strong financial position, we are paying an interim dividend of 4.7p. Overall, our total accounting return was positive 3.2%. Now let's look at the NTA increase, which was driven by the property valuation uplift adding 16p, with office values up 2.8% given ERV growth of 2.3%. The significant retail declines experienced in recent periods seem to have eased with values down only 0.8% in the 6 months. On a like-for-like basis, our committed development at 50 Finsbury Square was the star performer, up 30% following the office pre-let. With our long-dated properties, including our landmark Hanover Square scheme also posting a healthy uplift of nearly 7%. Returning to the walk, a profitable sale of 160 Old Street added 1p, with EPRA earnings delivering another 7p, whilst dividends reduced NTA by 8p. And with other items of 1p, NTA stands at 796p. Now moving to income and an update on rent collection. The chart top left shows that of the GBP 41.6 million build in the period, 88% has now been collected. Of the balance, the majority is accounted for by the GBP 3.3 million expected credit loss, 83% of which relates to retail, hospitality and leisure occupiers. You can see on the right that our 7-day collection rate has been improving each quarter, and we have so far collected more than 90% of the September rent with an office collection rate of 95%. As shown bottom left, we have been successfully managing down rent roll on monthly payment terms to more normalized levels of 6% to date. I'm also pleased to say that we've had no delinquencies since we reported in May and still have GBP 20 million of rent deposits available, if required. Pulling this all together and turning to EPRA earnings, which you'll recall were GBP 20.6 million in the prior period. Rental income was GBP 1.7 million lower, in part due to short-term income forgone from developing Finsbury Square. Whilst JV earnings were strongly up by GBP 5.3 million, supported by the GBP 3.9 million surrender premium received at Regent Street from Superdry, whose space we immediately relet to Uniqlo. JV fees increased by GBP 3.5 million, including fees received on the Old Street sale, although associated costs we incurred were up GBP 2.1 million. When combined with increased vacancy costs of GBP 1.6 million, this contributes to property costs rising GBP 5.1 million. Admin costs increased by GBP 3.3 million, given higher provisions for performance-related pay. And with other movements of GBP 0.6 million, overall earnings were GBP 18.7 million. As you'll see bottom left, this resulted in EPRA EPS of 7.4p and cash EPS of 5.1p. And we are paying an interim dividend of 4.7p, bang in line with the prior year. In the near term, we expect second half earnings to be lower than H1 following the Old Street sale and expected lower surrender premia receipts. However, looking further ahead, we continue to have a significant organic rent roll growth opportunity with a potential 91% uplift. Starting from our current rent roll of GBP 101.1 million, up 6% since May, leasing our void and refurb space will add GBP 13 million of rents, nearly 60% of which will be delivered as flex space. And we have another GBP 6.6 million available through reversion capture, shown in green. Beyond the existing GBP 16.2 million of lettings at our 3 recently completed developments, there's a further GBP 13.5 million still available, of which more than half is currently under offer or in negotiation. And shown in dark blue, through the Inmarsat pre-let, we have already secured GBP 8.5 million of the GBP 9 million total rent potential of Finsbury Square. Beyond this, our 4 near-term schemes, with starts from early next year, could add an extra GBP 50 million of rent. So overall, this gives a total potential uplift of more than GBP 92 million. Our financial strength means we are exceptionally well positioned to deliver on these growth ambitions. Following the Old Street sale, our consistently low LTV has fallen to 16.7%, again, one of the very lowest in the U.K. REIT sector. And as shown bottom left, our weighted average debt maturity is strong at nearly 8 years. 98% of our debt is on a flexible unsecured basis. Our available liquidity has increased to GBP 486 million which, if fully utilized, would reduce our weighted average interest rate to only 2%. And looking ahead, with total potential CapEx of GBP 924 million, more than 90% into office space and GBP 830 million into our 4 near-term schemes as broken out in the pie chart, prospective LTV will remain at comfortable levels, peaking at below 40%. And remember, that's before factoring in development surpluses and prospective sales. And given the CapEx phasing, we have extensive capacity for acquisitions. As ever, we are actively seeking out accretive opportunities, but our approach remains focused and disciplined, meaning that we have made no acquisitions in the period. Since our full year results of the 8 properties which we had under detailed review and subsequently sold or ones under offer, 3 of them traded in their -- our view, of fair value. All 3 were potentially suitable for our flex offering and had a combined value of just over GBP 215 million, a similar position to the one we reported in May. That being said, you'll also see the majority of deals are still transacting at pricing levels well ahead of our view. However, on the right, you can see our deal flow remains good, with more than GBP 900 million of acquisitions currently under review. These are predominantly off market. And as the pie chart shows, they play into our key themes of value-add/repositioning, growing our Flex offering and development. We have yet to see assets stranded by the growing sustainability needs of occupiers and regulators come to the investment market, but they will emerge. And our track record for unlocking potential, accessing stock off market and working in JV means we are extremely well positioned. Sticking with sustainability, we are pleased to launch today our social impact strategy, which builds on both our statements of intent and our existing community strategy and aligns with our DNA ambitions. We're focused on creating a lasting positive social impact in our communities, and our strategy is built around 4 key pillars focused on health and inclusion, championing diverse skills and accessible employment, supporting the growth of local business and social enterprise whilst connecting people with urban nature. As ever with GPE, there's lots of detail that sits behind the strategy, including clear commitments and targets to ensure accountability, and I encourage you to take a look at the document on our website. Finally, following our successful ESG-linked RCF issue in early 2020, we published our wider sustainable finance framework over the summer, providing us with even more options to further diversify our funding sources as we invest for the future. So overall, plenty going on with our commitments to financial strength, flexibility and sustainability unquestionable. And now back to Toby for a few comments on the market.

Thank you, Nick. So let's turn then and look at conditions in our markets. And it's clear to us that recovery is building momentum. We can expect healthy GVA growth in London, running ahead of the U.K. average and driving decent office employment growth, as you can see on the chart top right. So looking at the chart bottom left, it's no surprise that active demand from occupiers is rising, up 55% since September '20, as is space under offer, the blue bars, up 94%, with the vast majority in Grade A space and pre-lettings. Looked at in aggregate on the right-hand chart, after the lows of 2020, total take-up has recovered to within touching distance of the 10-year average, shown by the dotted line. On the other side of the equation, the supply of prime new space will remain tight for some time to come. The chart on the right shows that we think speculative completions, or the hatched areas will average only 3.6 million feet per annum between 2022 and '25, versus an average take up of prime space of 8.9 million feet per annum, so generally supportive conditions for quality offices. There's also momentum building in retail markets, too. And just as a reminder, retail is 21% of our books, down from a recent peak of 28% in 2019. Whilst it's still challenging, absent further lockdowns, we think we could be at or past the market trough, principally because we're seeing both inquiry levels from retailers and footfall improving, as you can see on the chart bottom left, with the West End, shown by the black line, on a faster pace of recovery since June than the U.K. High Street, shown by the pink line. And don't forget Crossrail will provide a further boost when it opens during the first half of '22. Turning to the investment market, activity is recovering here, too, with GBP 1.2 billion traded since our results in May, up on last year, but we're still way behind pre-COVID levels. As you can see on the right-hand chart, with supply relatively flat and equity capital searching for opportunities steady at circa GBP 40 billion, there's still GBP 6 looking for every GBP 1 of opportunity shown by the pink line. Add in the fact there's no distress and we think pricing will remain strong, making accretive acquisitions an ongoing challenge. That said, our deal flow is good, as you heard from Nick earlier. And so we see no reason to soften our investment hurdles, meaning we'll maintain our discipline. And we can because we have had and continue to have plenty of opportunity to invest internally. So with the recovery well underway, we are seeing more green traffic lights for rents, with only the slightly elevated vacancy rates to the red. But even here, Grade A vacancy is low, and so we expect office rents to rise with prime to outperform. For rents across our portfolio, in May, shown bottom left, we forecast a range of down 2.5% to up 2.5%. Six months in, and we are towards the top of the range at plus 1.6%, with offices performing well so far, up 2.3%. As a result, we're upgrading our forecasts for the year overall, and you can see we're now expecting an upturn of plus 2% to plus 5%. We're also marginally more positive for yields than in May, with retail yields now expected to flatten following 3 years of weakness. Overall, we think the consistently heavy weight of money and improving sentiment should be supportive for a while, particularly for the best assets. And next, I want to give you a brief operational update and some more color on our strong leasing and flex growth where, in both areas, we are benefiting from a flight to quality. Starting with retail, where conditions remain tough but are clearly improving, by way of context, our retail ERVs have fallen 21% since their peak in 2018. But in the first half, we let GBP 8.7 million, up almost 6x versus last year, beating ERVs by a substantial 11.1% margin, all of it in W1, including the West End's largest retail letting so far this year. So early signs of a recovery. I've already mentioned the strength of our office leasing in the first half, GBP 18.3 million, up almost 4x versus H1 '20 with a really healthy ERV beat of 9.3%. I talked earlier about the vast majority of office demand being for prime spaces, and that's exactly the sweet spot we've dialed into in 95% of our lettings. 20% were in our flex spaces, another sweet spot where it's increasingly clear that more and more occupiers of sub-10,000-foot units are looking for exactly what our flex product is offering. So we're growing flex. It now totals 286,000 feet, up 12% since September '20 and representing 15% of our office book. We've successfully rolled out our first Flex+ full-service offer at Dufour's Place. We're fully let at an average of GBP 191 a foot, 10.5% ahead of ERV and on an average lease length of 2.5 years. And we have another 6 spaces in the market totaling 35,000 square feet. And in a matter of weeks since launch, we're already 65% let or under offer and breaking new rent records along the way. Looking at the aggregated performance of our flex product over the past year, shown in the table, you can see that whether it's our flex or Flex+ offer, we're generating net rents and relative cash flows way ahead of traditional Cat A alternatives and for not a great deal of extra risk. So where next for flex? With the support of strongly positive feedback from our customers and a deep pool of demand for us to attract, we're appraising a further 217,000 square feet within the portfolio. And if we convert it all, our flex offer will total 27% of our office book. Meanwhile, we've strengthened our customer teams and are working hard to further improve our operating efficiencies. So there's more to come from us in this exciting dynamic and economically rewarding part of the office market. We've also been crystallizing value through asset sales with the disposal of 160 Old Street, another great example of working an asset through to maturity and turning our hard work into a cash surplus to be recycled into better opportunities elsewhere. Looking at the graph, you can see we bought the land for GBP 30.6 million, generated GBP 19 million through the design and planning process, invested a further GBP 83 million to create imaginative prime offices, which we largely pre-let to Turner Broadcasting. We sold for GBP 181.5 million of a yield marginally over 4%. All up, a surplus of GBP 68 million or 59%. And most relevantly, getting out of a 2.2% prospective IRR. As ever, we're regularly reviewing our assets' expected performance. And today, we have circa GBP 300 million of further potential sales under review. Now some of these proceeds will find their way into our significant development program, where we have a strong platform for growth. Having finished one scheme, 1 Newman Street during the period, we now have 1 committed scheme, 50 Finsbury Square; 4 near-term starts from January next year, totaling more than 900,000 square feet; and a further 4 medium-term schemes, bringing the total to 9, covering 1.4 million feet or 32% of the portfolio. Turning first to 50 Finsbury Square, and you'll recall, we pre-let all of the offices to Inmarsat during the half on a 20-year lease, some 11% ahead of ERV. And with completion forecast for Q4 '22, we fully expect to be net 0 carbon and are currently projecting a surplus of some 39% and a healthy development yield of 6.4%. Turning to our 4 near-term schemes and some significant progress since May. They're all prime with exemplary sustainability credentials, offering up strong growth potential. Since the finals in May, we've obtained planning for 2 Aldermanbury Square, top left. We've submitted new applications at both New City Court, top right, and Minerva House, bottom left. And we've gained a resolution to grant consent at French Railways House in Piccadilly. All up, 916,000 feet, generating a 118% net area gain, a rental increase of circa 219% through investing GBP 830 million and all will be net 0 carbon. So let's sum up on our activities and consider where next for GPE. Last year, we were a net investor, including CapEx, to the tune of GBP 66 million. So far this year, our sales receipts are greater than CapEx to the tune of GBP 53 million. For the remainder of the year, we have significant investment to make across the portfolio. In our development book, we have our committed scheme to finish and further prep work across our near-term projects, with a likely start at 2 Aldermanbury Square in January. Across portfolio management, we have plenty of leasing to be delivering and growth to generate across our flex offering. And we'll continue to hunt in the investment markets for new raw material as well as execute sales so as to recycle capital for more return elsewhere. Plus running through all our activities will be our focus on sustainability as a strategic imperative, on the creation of prime quality space and on our relentless drive to satisfy our customers' changing needs. So to conclude with our outlook. And as you've heard, our message to you today is that GPE is full of opportunity. Challenges? Yes, of course, but ones that we can more than meet. Because, first, 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 dominant global capital city. Thus, we are evolving our strategy, adjusting to customers' changing needs, delivering them sustainable spaces and sector-leading customer service. And because, second, we expect the recovery to gather momentum, with support of economic indicators and encouraging demand for prime London real estate from both occupiers and investors. Because third, we have numerous portfolio opportunities in our development book, in our flex spaces, both of which are successfully appealing to today's deepest sources of customer demand. And don't forget, 92% of the book is near Crossrail. It's opening next year. We'll add new opportunities through our focused acquisition strategy, enabled through our strong balance sheet. And because fourth, we have the magic ingredients of a powerful, collaborative culture and a great team, with a clear purpose and unifying values, supporting our communities and our people, delivering exceptional engagement scores and with an experienced senior team. So to sum up, GPE is in great shape, ready to grasp the opportunities we've laid out for you today, and we remain confident in our outlook. Thank you very much for listening. Thank you, indeed. So what we're going to do now is give you the chance to ask us any questions that you wish. And to help us do that, we have our trusted [ component ] , Mr. Stephen Burrows, who's on standby, he's monitoring the chat and will also field questions directly. And we can then see how we go. Whilst you're thinking of questions, just worth reiterating a couple of the principal messages that we really wanted to get across to you this morning. One, recovery is clearly building momentum. And as I say, there are challenges out there still, but we feel that there's definitely been a corner turned. Demand is up strongly, under offers are up strongly and supply remains tight. We're long-term believers in London. We think it's still as powerful as ever. But clearly, it's changing. And clearly, the best assets are going to be those which outperform. We're hitting all of our key occupier themes, as you heard. Flex is going to grow. GBP 900-odd million of internal investment for us to make through our development program and refurbishments. Lots of income upside and, fundamentally, a confident outlook. So who would like to start? Steve, do we have any in the chat?

Not yet, but if you'd like to either raise your hands, I'll come to you directly, and you can ask your questions live. Or please, could you put your question in the Q&A function and then we will answer it. So I've got one question in from Rob Jones. Thank you, Rob. He says, flex. If the 217,000 square feet was converted to flex, it would be 27% of the office portfolio. Do you have an upper limit that you'd feel comfortable at?

Thanks, Rob. Good question. Steven, maybe you've come to thinking about some of the challenges of conversion in a moment. But just as an overarching comment on flex and the ambition we have here, Rob, we're pretty clear in our minds that the smaller end of the market is moving in the direction of flex without question. So we think it makes complete sense that our customers want us to do the heavy lifting for them rather than them having to do it themselves. So it's quite possible that we'll see the majority of the market for sub-10,000-foot units moving in this direction. The extent to which you layer on service for them is a moot point. But we think that if you're not in this game, you're going to need to be. And we clearly have been for a number of years and doing it very successfully. Steven, in relation to some of the specifics around the portfolio, do you want to think about that for a moment?

Yes, I mean the first thing I'd say is, just a reminder, what our flex product is actually. Flex is fitted ready-to-go space. And then we have our Flex+ product, which is where we're layering on additional services. So if you think something akin to a serviced office, but the difference here is you've got your own front door, your own privacy, your opportunity to brand. And as you can see from the map that Richard just put on the screen, sort of centrally located across London. But just talking about the challenges and opportunities within the portfolio. First thing, I mean, the portfolio is incredibly well suited to this flex model. As Toby said, we believe the default will be sub-10,000 square feet for this product. 80% would -- just about 80% of our spaces in our portfolio are sub-10,000 square feet. So it's sort of ready to go. But one of the sort of challenges and sort of, I wouldn't say a frustration, but it's getting hold of it, getting access to that product and getting access to that space, because we have leases in place already with our existing occupiers. But where we are getting space back and where we get the opportunity, we have the ambition to convert that space to our flex product. And that's what our customers are really telling us they want. The other thing I'd just make a quick point. We are seeing larger inquiries as well. We talked about the sub-10,000, but we're starting to see more requirements larger than 10,000 for this very same product. So the market is certainly, and our customer is demanding more from us and moving in that direction.

And just to add to that, Rob, the -- you can see here, as Rich has got on the slide, clearly, the economics are supportive. There are, as I mentioned in the text there, there are operating efficiencies that we still have to refine and further efficiencies to grab. We're strengthening the team to help us deliver on those ambitions. But this is a part of the market that is a really interesting opportunity for us and for limited extra risk. So we think it's well worth it. Okay. Steve, back with you.

Yes. The next question is from Marcus. He says, how your valuers are approaching the more volatile income streams within your flex product, i.e., the variable service income?

Nick, would you like to have a go at that one?

Sure. Marcus, I mean I think there are 3 things that I would say is, one, the valuers are trying to split out, as you've identified the 2 different kind of income streams, and understandably placing different yields on as what you -- I guess, you described as the real estate income stream and the service income stream. In terms of the volatility point, I think one of the things I would highlight is that if you look at the Flex+ deals that we've done, they've been an average lease term of 2.5 years of the flex, which is fitted out a little bit higher than that. So actually, the lease duration is not materially lower. However, one of the things that we would experience on floor plates of that size and typically we've been doing deals in the 3,000 to 10,000 square foot floor plates, I guess the first thing I'd say is they clearly have to make different assumptions around void and re-leasing of the space when it comes back, but also CapEx, and there's clearly a higher assume CapEx on our flex space than on our traditional space. So hopefully, I did give you a little bit of color. We clearly set out in the book, both the differential in terms of the rents we're getting but also the relative cash flow. And certainly, something we'd love to -- we can talk through that in more detail offline. But I think there is -- there is clear protocols that were emerging within the valuation market around flex. But equally, it's still relatively early stage. But I think our understanding is that the consistent approach is being taken across the market about seeking to value these assets.

The only other thing I would add to that, as to what Nick has said, is the higher income we're generating per foot is very helpful in offsetting any perceived shorter income negativity around that. And secondly, we're finding our customers are, I wouldn't say not batting an eyelid at the extra rent that we're asking for, for the extra fit-up we're putting in there, but they are certainly not -- they're not as price-sensitive around the rent per foot. As you might imagine, not least because we're taking so much of the agro away from them firstly. And secondly, as we've shown many times, and I think there's a slide in the back of the book, rent as a component of overhead in London businesses remains fractional. It's 7% to 8%. So it's much more important to put your people in the best quality space as you can, having removed from them all of the agro of their real estate, it makes complete sense for people to move in this direction, which is why we're seeing it grow so quickly. Stevie.

Okay. Next question is from Chris Fremantle. I appreciate you talked a lot about vacancy rates in grade A space. But overall, London vacancy is still rising based on Q3 figures. Do you get the sense that broader vacancy is peaking?

I'm not -- thank you. Thanks, Chris. I'm not sure we see the same data points across the whole market. And maybe, Marc, you want to come in on this in a second. I think we think that prime vacancies are actually falling at the minute. And we've certainly seen areas of the market where they have been moving even in the West End. Thanks, Rich. They are clearly -- they're clearly coming down. As you know, 75-odd percent of our book is West End. Marc, anything you wanted to add?

Yes. Thanks, Toby. Thanks, Chris. I mean what I would say is that vacancy -- overall vacancy has come down by about 1% from 9% to 8%. And in terms of that Grade A vacancy, that is also on a downward trajectory. And I think the reason for that is this continued flight to quality that occupiers are looking for the best space and most sustainable space and all the goodies that you want out of a best-in-class building. And the interesting thing, actually, Chris, is that in terms of the under offers through Q3, which we think are about 3.5 million square feet, 88% of that is Grade A or development stock pipeline. And if you look forward to the next 3 years, as Toby showed in his slide, looking at every single scheme as we do on a 6-monthly basis, we think that there's about 3.6 million square feet coming through on an average annual basis compared to a take-up of 8.9 million square feet of grade A space over the last 5 years. So we think that shortage will continue.

Thank you, Chris. Stevie.

Okay. So we've got a hand raise from Oliver Carruthers. So I'm going to go to Oliver to allow him to ask his question.

Excellent. I was just wondering if you could share your criteria on the space in your portfolio like Dufour's that you're looking to now transition into flex product. Are these in buildings that will eventually be transitioned into your traditional development pipeline? Or is the plan that these will become flex assets in perpetuity?

Yes. Great question, Oliver. And maybe there's an opportunity here to bring Andy in, in a second to think about development, and I'll explain why. So the way we're looking at the business today is essentially in 2 dominant pieces. On the one hand, we have our repositioning game plan, which is essentially taking raw material and making it fundamentally more attractive. That sometimes involves ground-up development. And it sometimes involves high intervention refurbishment. But it's essentially capital-intensive repositioning of assets. And Hanover Square is a great example of that. And the other end is an operating business where -- we've always had an operating business, it's just getting more intensive, with customer service absolutely at its forefront and flex is part of that. And within that operating business, we have the smaller end market, and we've described that this morning as sub-10,000 units, where we think flex is going to be, if not already, is the default that our occupiers and customers are looking for. And so by definition, therefore, Oliver, we're really defining within that operating platform smaller spaces. But there are other things in there. And Rich, perhaps you can go to my -- I think it's Slide 4, where I talk about the key themes that occupiers are looking for. The next one, please. Thank you. Top left. So as we think about flex, it's, by definition, it's smaller, but it also needs to have amenity provision. So we need to be able to show our customers that this is a building that is more than just office space for them. And Dufour's Place, if you haven't seen it, is our first example of a Flex+ offer. We'd happily show you it because it's a great example of how we think the customer of tomorrow needs to be serviced and kept happy. As I say, and as Steven has referenced actually, we may well find in bigger spaces that the service we're offering begins to drift that way as well. And Andy, if you think about our developments on that side of the business as we go forward, lots of opportunity for us to deliver amenity and so on. Maybe just like to comment on that.

Sure. Well, I think you've seen the increasing trend of moving towards that at 50 Finsbury Square, and it was a key attractor for Inmarsat, was actually all of the amenity that we put into the space there. So we had the very attractive and enlivened reception area, the town hall space at the base of the atrium, the exciting roof terrace and pavilion at the top of the building. And we're increasingly seeing in 2 Aldermanbury Square, which we're hoping to make a start in the early part of next year, it's again a similar thing, we've got terraces on all of the office floors, we've got a really amazing roof terrace with views over Central London, attractive reception. And it's about thinking about the flexibility and future use of that building. So as we go through our design process, we increasingly think about the whole offer from a customer experience perspective.

Thanks, Oliver.

Sticking with development. I've got a question on supply chain. How are you dealing with supply issues and delays? How much of the committed projects are already delayed? And what's the carry costs of those delays? So a broad question on the impacts of the supply chain.

All good ones, too. Andy.

Well, the good news is we are not delayed with 50 Finsbury. We are probably now well into the 90% in terms of cost fixed. We work very closely with our supply chain, involved them very early on in the design process and procurement process. And what we have found is, clearly, this year, it has been around materials, it has been difficult. You've got the sort of the backlog from COVID shutdowns. As production starts to ramp up again, the well-known transportation issues we found. Getting some of the wood for the bleacher seating at the base of 50 was challenging, but working with our supply chain, we found a way through that, so that hasn't caused us any delay. And what we're seeing now is that certainly, the sort of the spike in material pricing is leveling off. I think the next area we need to watch is labor. But what is quite interesting at the moment is with the main contractors is the amount of workload that they have secured. So for the next couple of years, their order books are probably less full than they have been at previous times in the cycle. So they are keen to absorb some of this cost rising to actually make sure they've got their order books full. So it's something we watch. We're obviously concerned about it. But at the moment, we're comfortable with where we are on it.

Dan, can I just perhaps ask you a similar question. I mean you've spent a lot of your recent career in large central under development like Andy. Any observations from you on that question and how perhaps we can think about it going forward?

Yes. I mean I think provision of service and appealing to what customers want out of buildings, which is offered by obviously the flex provision and the developments as well, is absolutely key to what we have to include. I think occupiers these days are getting even more discerning about that. I think as people return from fairly sort of troubled times over the last 18 months, they expect even more from their buildings. So we have to have that all as a benchmark for everything we do, both in the new buildings that we provide, but also in the flex space, in the smaller, more managed space that we provide for occupiers. So it's a combined effort across the business.

Yes, absolutely agree. And I think the other thing that a point you made to me last week was that we don't necessarily think about supply chain issues. We don't necessarily need to fit everything out and put in new buildings, the cafe in all of the spaces. And we may well choose that there's an economic advantage to not doing cafe across all of the space to speed up delivery times and to reduce some of that risk.

Yes, I think it's always discounting when you fit out a building to a cafe specification you just developed. And the place looks wonderful and then an occupier comes in and refits it for their own space and a lot of the air conditioning gets moved, a lot of the stuff that's gone under the ceilings. If you have ceilings in those particular buildings gets wasted because once this moves, a lot of it has to be thrown away. So being more creative, fitting out part of the building, perhaps in different specifications on different floors to appeal to different types of occupiers but only doing that in, let's say, 1/3 of it. And then the rest of the category A equipment being installed off-site in the building saves a huge amount of wasted cost. And actually it's much more flexible and shortens the time scale for the occupier when they come in, in order that they can fit the space out. So it actually works for both owner and for occupier.

So ways that we can address the question, absolutely, as we look forward, also making sure that we stick with the very best in the supply chain. Who have the deepest reach is also very valuable. Thank you. Stevie.

Okay. So next question is from Simon Robson Brown who asks, I understand that GPE's green financing has corporate responsibility targets that need to be met. Can you review progress on these targets and whether the cost of the financing has changed as a result of the target testing.

Okay. Thank you. Janine, would you like to touch, first of all, on general progress around our sustainability, particularly maybe just touch on our 2030 ambitions. And then Nick, any comments around the sustainable finance framework perhaps?

Sure. Thank you, Toby. So we -- so we're making good progress against our net 0 carbon road map. If we start with our development portfolio, we've been able to say that our first net 0 carbon building will be 50 Finsbury Square. And that's sort of bringing forward what were our sort of net 0 carbon ambitions for our development portfolio by some margin. And largely think that's been due to our ESG-linked RCF and also the impact of our decarbonization fund, which has really driven performance through the development team. If you then sort of look at our existing portfolio, we've made good progress on our carbon footprint, but I'd just sort of say that you do have to look at carbon footprint figures with some caution. We need a long-term trend. And our carbon footprint will go up and down, depending on business activities. Of course, energy intensity did go down, and so we did hit our KPI for energy intensity embodied carbon and biodiversity, which are the 3 ESG-linked targets within our RCF facility.

And so Simon, just to follow up. The -- I mean we got -- there are 2 elements of our financing being green and sustainable. One is the RCF. We hit the measures first time around. As you know, the margin swing around that is not huge, it's 2.5 basis points. But crucially, the benefit of that margin swing, we contribute to community causes. So it's being deployed for the benefit of our broader communities. The second thing that you will have seen is that we issued over the summer a sustainable finance framework, which sits alongside our ESG-linked RCF, which means that were we to go to either the U.S. private placement market, the sterling bond market, from both market, we're already prepped to be able to issue on a green basis. We haven't done that as yet because as you'll see in the results, we've got more than GBP 480 million of firepower. And I think we'll be using a good proportion of that to fund sustainable developments. So just picking up on a question that I see on the chat from Tom, where are we prepared to take leverage? We've operated over the last 10 years on a 10 to 35 range. Each time we've been outside that, we'd be raised equity for being above 35. Or if we've been below 10, we've returned. We've shown an analysis that would see LTV rising to 39%. That's not until 2027. And I think a lot could change between then and now. But I would be comfortable, I think the Board will be comfortable, to see leverage moving up from where it is as we invest into our own portfolio and through acquisitions. And I think given the opportunity that we have to invest within our own portfolio, funding that development with 1% coupon ESG-linked financing is hopefully a very sensible thing to be doing. Crucially, I would also say, if we were to find opportunities outside of the group that potentially would take leverage above our comfort levels, we wouldn't rule out coming back to the equity markets. We've clearly given back more than $600 million over the recent years where we felt we had more. And I think that's been demonstrable. We did have more than we needed. The balance sheet is in good shape now. But as ever, if there are opportunities that we think will add value for our shareholders and to our business and would take leverage to levels above our comfort levels, we would consider coming back to the equity markets. I don't see that happening in very short order, but you never know. Let's see what we -- what emerges in the investment market for us over the course of the next 12 to 24 months.

Thank you, Nick. Stevie.

Sticking with the investment market, Matt Saperia asks, appreciate you have plenty of organic growth opportunities, but interesting to see on Slide 13 that 75% of the $1.2 billion traded since May was overpriced or mispriced. Any thoughts on where -- what others are mispricing? And are there any trends in terms of the type of asset that is being mispriced?

Okay. Robin, perhaps you'd like to have a go at that. And just by way of context, we've talked at length over the last few years, and frankly since our last major acquisitions campaign, about the relative merits of internal versus external investment. And it's always been central to our strategy to have lots of internal opportunity. And as we've referenced this morning, we do GBP 900 million, broadly in the context of a group with assets of GBP 2.5 billion is a big lever. It's a big mover of our future returns. But having said all of that, the opportunity in the market is always there for us and finding them is going to be challenging. But we will find things. Robin, any reflections on that?

Matthew, I think the -- looking at the slide we've got here with the fair value, I mean, we should qualify that is only a very small sample size. There's 8 deals that we looked at in microanalysis and bid on over the last 6 months. But what I think you'll see is if you look at the correlation between what we're looking at today, which is about 1/3 flex, 1/3 development and 1/3 third value-add, and as Nick said, the near fair value assets will flex. So what you can read across is the perhaps overprice and misprice that fall out outside our flex search into the value-add and development buckets. I think the -- what we're coming across in the market is obviously a big way to capital focusing on London. But the component, I think, which perhaps some investors are missing or looking at differently is for us is they don't have the clarity of data on CapEx, the challenges of development, how difficult planning is. And so we've got a true, live data. And I think we're probably tighter on our underwriting on those more challenging opportunities. And perhaps a very overpriced piece is really being driven from the build-to-core strategy that we're seeing some overseas investors start doing. Where they can't require investment of class assets, they're willing to build and they've got a different return metrics to us. So I think we're coming across different groups of capital entering our space. And I think that the area outside flex is where we're most challenged. And flex, as you can see, is the opportunity where I think we're coming closer into [indiscernible]. I hope it answers your question.

Matt, is that good with that?

I'm sure he is, he's on the chat.

Okay. Good. Stevie.

Okay. Next question. So how do you see the polarization playing out between Grade A being flex and green and non-grade A buildings in terms of rental growth and yield movements in the medium term. i.e., the former up and the latter down?

Yes. Well, I think it's -- that's a good question. Where does that -- do we know who that question came from, Steve?

No, unfortunately not.

It's a very good question, but it's also touching on a central theme actually of what we're talking about in the way that we're positioning GPE. And that central theme has been running for a while. This idea of a bifurcation between the best quality spaces and those that are in some way disadvantaged, be that the sustainability ain't good enough, the layout isn't good enough. Maybe even the transport connectivity isn't good enough. And these have been themes that we've been playing now for a long time. And I don't think that theme is anywhere near [ dumb ], I think it's got a long way to go. And that's why all of the things that we are investing in and that we're choosing to having improved, either trade on or avoid buying in the first place, are those where we don't think the long-term prospects play sufficiently into those themes. And if you look at our -- thank you, Rich, if you look at our active portfolio, management portfolio or development pipeline, every single one of those assets bar none, will hit all of those key themes. And flexibility and service, et cetera, are being certainly turned up in these themes. Sustainability, we turned up a while ago, but that's getting ever more important, as Janine talked about earlier on. And I think you -- it's difficult to enumerate the difference between those that hit the themes and those that don't, but there is going to be a difference. And the growth trajectory between those 2 parts will be significant on a compound basis over many years. So it's absolutely essential to be delivering the best quality space that hit the themes and avoiding those that don't. One of the beauties of being a focused real estate business is that we only do one market, this one. It happens to be, we think, still long term one of the best markets on the planet. And we will focus on the best bits of it. So there's really great long-term opportunity for us to continue along those theme lines. Thank you. Stevie, back with you.

That was actually Marc Mozzi, so he's sent me a little message. Last question, and I suspect that we have going at the moment is, are your development starts, and I'm presuming this is within the near term, still within the earlier start dates and no delays there either is the question.

Andy, that feels like one for you.

Thank you. Short answer is yes, they are. Some are still subject to planning. So we are dealing with various planning authorities, particularly, say, at Minerva where the application has just gone in. The other thing I would also just like to add following up on an earlier question is around sort of occupier appeal and net 0 carbon progress is sustainability. And thinking about 2 Aldermanbury Square, on there we've worked really hard on the net 0 carbon work, and we are aiming to potentially hit or even exceed our 2030 target on that because we feel it's moving fast. So we could be there 5 years early. And I think that is a key thing in terms of what [indiscernible] going forward.

The only thing I would add -- thanks, Andy. The only thing I'd add to that is that French Railways. We do have a resolution to grant, but we do need landlord consent for us under a head lease arrangement that we have there, so -- and that's the subject of an ongoing discussion. But we're very excited by particularly the ones at the top there where we're closest to being able to get going. And Aldermanbury, one of our largest ever commitments, one of our best ever buildings without question, with a potential start in a matter of weeks. Okay. Thank you. Stevie.

So further question is whether we have assets that are going to be left behind, typically raw material or new development. Are they still going to be an opportunity because of the cost it takes to renovate? So I think this is a question around stranded assets in the market and within our own portfolio generally.

Yes. Maybe, Robin, you might want to reflect on that in a moment. But just as an overview, this is what we do. The essence of this business is about getting hold of in some way assets that need love and attention and giving it the love and attention, be that sorting out a sustainability question, repositioning it in some fashion for a customer's demands. And that is the essence of what we do. So we really do want to end up owning opportunities such as that. And as we've described this morning have lots in our existing portfolio that give us potential to improve, that's why we own them. And indeed, I'd go so far as to say we are going to be willing to own assets which do not hit the sustainability criteria under the EPC regulations because we can improve them. And that journey, that opportunity to improve them and make them ultimately fit for purpose is what we are in business to deliver. Robin, anything from you on that?

I think it was one of our key focus points is where can we find opportunities in the market to help or work with owners or buildings that need to be moved forward into a modern day sustainability requirements. It's -- I think the realization of most owners isn't there yet, but they're beginning to surface. And we really believe that that's a future pipeline for us and where we can invest externally out of our business is going to be with existing owners. There might be joint ventures which feel -- everyone knows that GPE has a long track record of success with where we step in and work with an overseas, typically overseas or perhaps less resource owner of assets, help them with their strategy to get to the EPC and other sustainability requirements. I mean as a macro point, we think perhaps up to 80% of the London market is going to fall short of the EPC regulations. Clearly, a lot of that is in good ownership and will get fixed. But that still leaves a lot of area for us to explore and it will become a growing theme. It's a theme internally, but we've yet to see the rest of the market really notice it and realize it. It has as valuation consequences, so I think existing owners need to realize and will that the need to spend money on a building. And once that's set in, then we'll be able to work with them or buy from them to make that conversion. So it's a really exciting space for us, and it's firmly on the radar, and you should hear a lot more from us on that over the next few years.

Thanks, Robin. Stevie, probably time for one or two more.

We've got one further from Simon Robson Brown who asks, could you touch on your yield disclosure? Your yields look quite low. All else being equal, where can these initial yields move to if things go according to business plan?

Okay. So we have a yield walk in the back, Simon. What I suggest is that why don't we deal with that one, Stevie, maybe you could deal with that off-line with Simon to take them through how that yield works. But essentially, our yields are where they should be relative to market. And after all, it's CBRE who value the assets for our shareholders. So we're in their hands when it comes to the capitalization rates they put on the assets. The only other thing I would say in relation to yield is clearly there has been a degree of yield contraction in London, especially at the prime end, and we forecast that a little while ago, and we think there is still room for further moves in prime yields especially given -- thank you, Rich, especially given the improving outlook for rents. So we think you'll see some of that feeding into prime assets from here.

Okay. I think we've probably got one last question -- time for one last question, and this is from Alex Ross, who asks, with construction costs projected to further increase over the next 3 to 4 years, would you expect that to necessitate Grade A rental growth on a similar projection you need to partially offset with some yield compression for development viability?

Not just yield compression, Alex, but your point is valid, but also net area gains. So one of the ways of making development work, as we all know, is by finding that area that you can build that wasn't there before. And if you look at the 4 near-term projects. Perhaps we can just put those up on the screen, please, Rich. The 4 near-term projects that we're due to deliver, the one with the photographs at the back end of my development section, you will see that the area gain is somewhere around about 119% for those 4 projects. So that's clearly -- thank you. That's clearly 118%. That's clearly a big uptick in the amount of space to develop. And that is a key component of making an acceptable return through what is quite a risky process, let's be clear. Andy, anything you wanted to add to that?

I think you've also got short void periods and better chance to pre-letting when you're delivering the best as well. So that also helps improve your returns.

Yes. Very good. Okay, everybody. I think we've reached the hour. I'm sure you've got lots of other things you need to do today. And if I could just sign off please with thanks again for joining us. I hope that was helpful. Lots of good detail in there. The main messages, I think, are really very clear. We're hitting all of our customer themes. We're leasing really well, and we expect that theme and trend to continue. The portfolio is full of opportunity, as you've heard this morning, not just in development and not just internally, we've got things in the market that are interesting for us to look at. Bucket loads of financial strength for us to be able to access these opportunities. A fabulous team, you met some of them today. But clearly, behind the people you've seen today is an organization that's operating to its full potential and lots of opportunity for growth there. And we believe in London. We certainly haven't written off London. We think the stories around offices as being ex of human need were not right. We were very clear around that. And we believe the office has a key part to play in corporate life going forward. So we have a confident outlook and we're looking forward to the next few years with optimism. Thank you very much for listening and see you soon.