Derwent London adds to West End portfolio – Derwent London has announced three off-market West End transactions.
West End Properties
The largest property being acquired is 250 Euston Road NW1 which totals 165,900 sq ft and sits on a 1.6 acre site. This freehold office building is let in its entirety to University College London Hospital (‘UCLH’) on a lease expiring in 2039. The passing rent is £4.7m or just £28 per sq ft, which is subject to 2.5% fixed annual increases compounded every five years. The next uplift is due in April 2024 when there is also a tenant break with breaks every 5 years thereafter. Derwent London says that, in the longer term, there is also an opportunity to create a larger scheme on this potential Life Science site. The total consideration is £189.9m inclusive of costs, and the initial yield is 2.5% reflecting the low passing rent.
The second property acquisition is 171-174 Tottenham Court Road W1 which lies opposite the company’s Network Building at 95-100 Tottenham Court Road. The purchase is a freehold office and retail building totalling 16,200 sq ft and is multi-let, producing an income of £0.6m. This property, together with adjoining UCLH and UCL interests, forms an important strategic holding in a larger block with longer term development potential. The total consideration is £24.7m inclusive of costs providing a net initial yield of 2.6%.
Baker Street Joint Venture
In addition, the company has signed a detailed memorandum of understanding with Lazari Investments to establish a new 50:50 joint venture which is expected to acquire three properties already owned by them in Baker Street W1 totalling 122,200 sq ft. Derwent London’s initial consideration for the joint venture will be £64.4m inclusive of costs and our share of passing rent will initially be £2.6m. The joint venture adds an exciting development opportunity opposite our 19-35 Baker Street project due to start later in 2021.
The new joint venture is expected to acquire three leasehold properties: 38-52, 54-60 and 66 Baker Street W1 totalling 122,200 sq ft with a passing rent of £5.2m. The leasehold interests range from 38 to 46 years. The total consideration equates to a net initial yield of 4.0%.
Together with a fourth property owned by the freeholder, The Portman Estate, these buildings form a 1.0 acre island site capable of significant redevelopment. Preliminary studies show this could be up to c.240,000 sq ft. Subject to receiving planning on the larger scheme and a regear of the headlease, Derwent London will pay the vendor an additional £7.25m of deferred consideration. There is the potential to obtain vacant possession at the end of 2024 which gives the joint venture an opportunity to commence on site just before completion of the 19-35 Baker Street project opposite, another freehold owned by The Portman Estate.
Based on the initial rental income, the company expects that the combined transactions will have a c.£4m p.a. positive impact on EPRA earnings, assuming a cost of debt of c.1.5%. The expected current market valuation for the two property acquisitions is c.£198m, 7.8% below the gross purchase consideration, which approximates to the usual market allowance for purchasers’ costs.
The purchase consideration will be met from existing undrawn facilities and cash.
DLN : Derwent London adds to West End portfolio