Derwent London (LSE: DLN) is the largest office-focused London property real estate investment trust (REIT) with 61 principal properties distributed across what the company calls 13 central London “villages”. These include 88-94 Tottenham Court Road in Fitzrovia and 50 Oxford Street, which comprises 6,100 square feet of office and retail space. The group also owns an extensive property pipeline, including 50 Baker Street W1, which consolidates three properties acquired over the past few years into a single office and retail building, scheduled for completion in the second half of 2029.
Put together, Derwent’s existing portfolio and its pipeline are worth around 3,322p per share based on EPRA net tangible assets, an industry-standard performance measure. But the stock is trading at just 1,600p. According to analysts at Berenberg, this discount is deeper than the valuation trough in January/ February 2009. A yield of about 5.1% is also the highest ever recorded, based on records going back to 1984.
Commercial London property is highly sought after
Derwent’s valuation is, in a word, surprising. Best-in-class London office property is highly sought after and the market is incredibly tight. This is clear from the company’s recent leasing activity. In 2025, Derwent signed £11.3 million of new leases at 9.9% above previously estimated rental values. It also pushed through rises of 6.4% across the rest of its portfolio. In 2026, management predicted rental growth of 4%-7%.
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The company’s growth is better than the market average. According to Savills, rents for prime office space in the West End rose on average 6.1% to £166.61 per square foot last year, helped by financial firms moving from the City, where there’s a structural undersupply of office space. At the prime towers, the vacancy rate is as low as 0.9% and just 0.2%, excluding those under offer. The fight for space is pushing up rents, which by West End standards were once low in the Square Mile. At 8 Bishopsgate EC2, law firm Proskauer Rose expanded onto the 46th floor on a 13-year lease, paying £145 per sq ft compared with the average of £74.34 for premium rents (Grade A) in the Square Mile (and closer to £40 for Grade B).
These figures illustrate the diversity of the central London property market. Derwent’s portfolio sits somewhere in the middle. Its West End assets have an average rental value per sq ft of £72.77, including projects in the pipeline. Some of these major projects, after renovation, could command rents near £110 per sq ft. Over the next five years, management has estimated that leases expiring and rental reviews will drive up rents in the existing portfolio by about 30% per sq ft.
There are really three main reasons why REITs can trade at a deep discount to net asset value (NAV). The first is debt; too much at high rates is terminal. The second is demand or lack of it. If no one wants to rent the properties, they become a liability for the business rather than an asset. And the third is future liabilities.
One particular challenge the UK market is facing right now is the demand for high-end prime properties that are energy-efficient and have all the amenities staff have come to expect in their offices. The cost of bringing assets up to specification, especially in places such as central London, which has some of the highest planning fees and construction costs in the world, can often outweigh the potential benefit.
Derwent’s unjustified discount
Derwent is addressing the upgrading issue by offloading smaller, older assets. It has agreed £144 million of asset sales so far in 2026, with a further £130 million under offer. This is freeing up cash for the group to reinvest in flagship prime developments, such as its 50 Baker Street development.
When completed, the new valuation is expected to show a 25%-plus profit on cost. In 2025, Derwent spent £182 million on regeneration and £142 million is planned this year. Major upgrades are expected to generate a 6.5% yield.
Asset recycling is helping Derwent keep debt under control. Its loan-to-value ratio stands at around 30% – management’s target – with maturities fixed until 2034. It recently redeemed a £175 million March 2026 secured bond at 6.5% with “existing liquidity resources” (likely to comprise cash and revolving credit facilities). The next maturity is a £350 million 1.9% bond due in November 2031. Total interest on the company’s £1.5 billion debt was covered 3.1 times by income last year.
So there don’t seem to be any of the major issues that would usually justify a lower Reit valuation hanging over the company. The dividend is also covered 1.2 times by earnings per share, a figure that’s expected to rise to 1.5 times by 2023. As new and upgraded assets start contributing to Derwent’s bottom line, earnings per share are expected to rise by 25% to 30% by 2030. EPRA net tangible assets is also expected to rise to 4,119p per share, according to Berenberg.
The one unknown is how the London property market will evolve over the next few years. The outlook for the UK economy is uncertain, to say the least. Unemployment in London has surged to 7.9% for the November-January 2026 period, the highest in the UK and above its pandemic peak. However, Derwent’s shares already have a substantial margin of safety baked into the current valuation. What’s more, it’s clear that while demand for office and retail space across central London faces an uncertain future, Derwent’s portfolio of high-end spaces remains in demand. The uncertainty is even working in the firm’s favour as other parties push back or delay new projects.
Today, Derwent’s shares present a rare opportunity for investors to buy a portfolio of London property for around 50p in the £1 with a 5.1% yield and lots of growth ahead.
(Image credit: London Stock Exchange)
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
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