Old Street's Long Shadow: Derwent London's £45.8M Provision Punctures a Buoyant H1
Rental growth hits a decade high and AI takes 700k sq ft of London offices, but a provision against a site not yet acquired refocuses the story on capital allocation — right as the CEO hands over.
DLN.L · Earnings Call · 2026-08-06
The Sum of Small Moves
Derwent London's H1 2026 results are a study in contained contradictions. The rental growth engine is humming — ERV up 2.6% in the half, the strongest first-half increase in a decade, with new leases signed 5.1% above ERV and a further £5.3M under offer setting up "likely to be one of our highest years for new income on record." Yet EPRA NTA fell 2.1%. The finance team explains it as a 6bps outward yield shift plus a £45.8M provision against a site the company does not yet own. It's the kind of half that rewards reading the footnotes. The occupational market is doing the heavy lifting. Central London vacancy is now below 7%, West End Grade A vacancy sits at just 1.2%, and demand stands at its second-highest level on record. Against that, the development pipeline is constrained, with a third of space under construction already pre-let or under offer.Old Street: A Provision Before You Even Own It
The most unusual line in the results is the Old Street Quarter provision. Derwent signed the deal four years ago at £239M, expects to complete in Q4 2027, and as of December 2025 had determined no provision was required. Six months later, after updating inputs and considering "additional strategic delivery options," it booked £45.8M. As the CFO put it: “after updating all the inputs and considering additional strategic delivery options for the site, we booked a provision of GBP 45.8 million.” — Damian Wisniewski, Chief Financial Officer · 2026-08-06That is Damian Wisniewski, the CFO, responding to an analyst question about whether the model assumed a 100% chance of disposal. It is a revealing admission: the provision's size swings dramatically depending on how the company chooses to deliver — a full development, a partnership with Related Argent, or a quick flip. Management discloses that the 2.5-acre site has drawn approaches, and that "it's extremely unlikely we would deliver it ourselves." The market may read this as a messy, judgment-heavy charge; the more important signal is the embedded optionality — a site that can be developed, partnered, or sold, with the provision adjusting accordingly.Well, it's very sensitive that provision. As you sell the scheme without going through the developments, you obviously give up development profit. So that would increase the provision. I'm not going to give you an actual number because there are so many other moving parts, but it would be substantially higher than the existing.
Capital Allocation at a Crossroads
The capital allocation framework laid out in February is being executed. Disposals of £280M completed "within 3% of book value," a £50M share buyback is more than halfway done, and 2026 earnings guidance has been raised. But the buyback question has turned existential. The share price has risen since the buyback was announced, and the economics have shifted. Wisniewski on the tradeoff: “the buybacks even at today's share price are obviously quite accretive to NTA, but what you give up is the ability to grow earnings.” — Damian Wisniewski, Chief Financial Officer · 2026-08-06 That is a notable pivot from February, when the same CFO was more circumspect about what it would take to trigger buybacks — “let's get some disposals out of the way... we need to get sort of 200 plus under our belt before we can seriously look at what we do.” — Damian Wisniewski, CFO or Finance Director · 2026-02-26 Now the conversation is a live weighing of NTA accretion against the earnings growth that only development can deliver. The 50 Baker Street commitment — which Paul Williams describes as a project “which we forecast will deliver the highest development return for several years with an ungeared IRR in excess of 12%” — P. Williams, Chief Executive Officer · 2026-08-06 — is the counterweight. The message is deliberately anti-buyback: the 25%–30% EPRA earnings growth to 2030 comes from schemes, not share repurchases.AI Is Moving Into the Office
The sleeper theme of the call is AI as an occupier. H1 AI take-up in London hit 700,000 sq ft — nearly double 2025's full-year total — with another 600,000 sq ft of active demand in the sector. Emily Prideaux's framing is almost geopolitical:This is a genuine reversal in narrative. Back in February, the prior call was fielding worried analyst questions about "perceived AI risk to tenants" — whether AI would hollow out office demand or erode tenant covenants. Emily's answer then was defensive: “we're not seeing that reflected negatively by any means in the valuation piece.” — Emily Prideaux, Executive, likely CFO or similar senior finance role · 2026-02-26 Six months later, AI is the demand driver, with the pre-let of Network to Databricks — a tenant literally in the AI-infrastructure trade — signifying where the growth is coming from. That single letting delivered rents 5% above December ERV, and the wider AI wave is now embedded in the development thesis behind the Baker Street projects and the recycled-concrete sustainability story. The CEO transition adds a valedictory coda. Paul Williams, after nearly 40 years, hands over to Jonathan Murphy on September 1. The results carry a farewell tone, but the substance — strong leasing, provisioned optionality, disciplined capital returns, and an AI-tinted rental cycle forecast across all London submarkets — suggests the next decade may look rather different from the last. At a 3.9% average interest rate, refinanced lower, the squeeze is on the balance sheet, not the income statement — for now.AI has been a standout theme in the market this year. H1 AI take-up reached 700,000 square foot, nearly double 2025's full year total with a further 600,000 square foot of active demand in this sector still to be satisfied. London is a beneficiary of this direct demand. When AI companies choose Europe, they choose London.