GPE, the listed London developer and investor, lifted its prime rental office growth projections for the year ahead from 3% to 6% this year on the back of full year results that show record leasing activity and a major expansion of its flexible offices platform.
The group said strong strategic positioning of its buildings meant they were benefiting from the flight to quality in the capital office market, and that had led to £55.5 million of leasing, a new record that was 3.3% ahead of estimated rental values.
It is also expanding its flex offer to sit at 414,000 square feet and around 21% of the office portfolio. It said it is now targeting 1 million square feet of flex space, with two
recent acquisitions totalling £53 million for the platform and more coming down the tracks.
The group has been hit by the wider fall in values in commercial real estate, particularly from the second half of 2022 onwards.
The portfolio valuation of £2.4 billion is down 6.6%, broken back to minus 7.3% for offices and minus 4.5% for retail. That meant it posted an International Financial Reporting Standards loss after tax of £163.9 million (2022: profit of £167.2 million). The total dividend has been maintained at 12.6 pence.
Rental values were up by 2.1%, driving a capital return outperformance of 4.8 basis points versus the MSCI Central London figures for real estate investors. It is providing portfolio rental value growth guidance of 0% to 5% for the new financial year, with prime offices lifting 3% to 6%. European Public Real Estate Association earnings of £24.0 million were down 12.4% on 2022.
Speaking to CoStar News, Toby Courtauld, chief executive officer, said: "The big story for us is around the strength of the occupational market and customer demand and how that is bifurcating between the best spaces and playing into our strengths creating the best space in quality locations. That is why we have delivered record leasing in the last 12 months and beaten ERVs. The demand for space at the best end of the spectrum has been pretty good. It has been good in our HQ spaces and we have done a stack of leasing in our flex spaces and in every case in offices we are beating ERVs really handsomely, in some cases up to 11%."
For that reason GPE has been buying again. "There have been five deals, with four of them set to end up in flex. We are seeing more interesting opportunities as a result of financing challenges in part and having gearing at 19.8% at March is a good position to be in."
In terms of continued negative sentiment around offices in global cities Courtauld added: "I would say there has been a lot of chat about cities and their place in the world and how they are faring but sitting in the corner of the West End we are in we reckon there is a circa 80% shortage of space to meet demand right now and as such we need to be building 80% more over the next five years. For the quality buildings we own the shortage is very real."
Chief financing and operating officer Nick Sanderson said that investors and tenants were clearly paying a premium for better more sustainable space. "The sale of 50 Finsbury included a commitment to the buyer that it would be net zero carbon and there would have been a penalty if it was not. That will become more common. It is super important to our HQ occupiers but equally to our flex occupiers. Often they are very keen to hear about what we are doing more generally as a business."
Courtauld added: "There is no way Clifford Chance would have come to the building we leased them were it not for fact that it has fantastic sustainable spaces."
The duo said GPE would be committing huge capital expenditure in its development pipeline as well as continuing to buy new opportunities, particularly helping to reposition so-called stranded assets.
Courtauld said: "Lots of owners know they have a problem but need a professional like GPE that has a balance sheet to help them. Particularly with overseas families and institutional investors that will be very real. There will be opportunities for us to buy into refinancing opportunities too. They may well choose to sell ahead of refinancing if there is a capital requirement opportunity in that building."
Courtauld added: "The development programme is big, rents are rising, gearing is super low and we have £450 million-plus of liquidity today. With yields we think the bifurcation is very apparent and we think prime yields are stable and think that secondary will drift out a bit more. But we not a million miles away from on average being in the trough and the supply side is looking every bit as a tight and challenging as ever."
GPE flagged significant capex programme of £0.8 billion with 1.4 million square feet delivering into what it called a Grade A supply drought. The loan to value is at 19.8% with £457 million of liquidity.