Occupational demands are evolving in the office sector, with tenants using their premises to optimise the work experience for their employees. Amenity, connectivity, service and sustainability are encouraging businesses towards new buildings. At the same time, buildings that provide a poorer working environment are driving occupiers away.
This bifurcation of the market between the “best-in-class” and the rest is accelerating with rental growth continuing for the “best” and values falling for the rest. This will provide opportunities to acquire potential developments and major refurbishments at levels that allow for strong capital returns.
We have experienced a further significant outward yield movement in the Period, and while interest from potential occupiers has been encouraging, lease negotiations are taking longer to conclude. However, having taken the pain of reductions in value, Helical is now well positioned to drive growth through the letting of the vacant space in its investment portfolio.
At The JJ Mack Building, EC1, a prime example of a “best-in-class” building, recent letting progress has been encouraging and we will be c.60% let once the current space under offer completes in December. Each letting to date has exceeded the applicable ERV and the recent letting of the 9th floor sets a record rent for the sub-market. By concluding these lettings, the existing 25bps yield differential between vacant and let space will unwind providing a significant positive impact on valuations. Similarly, upon re-letting the WeWork space at The Bower, EC1, the capital value will be enhanced as the yield differential is removed and contracted rent increases towards its ERV of c.£24m, which is significantly in excess of our total annualised recurring administration and finance costs.
Our development pipeline is expected to provide surpluses for the foreseeable future. Scheduled to start in 2024 and be delivered from late 2025 onwards, this pipeline will be supplemented with additional “equity-light” opportunities as building owners seek specialists in office development and refurbishment to partner with them to maximise the value of their assets. In addition, banks and other financial institutions with non-performing assets should provide additional opportunities for Helical to create value.
The balance sheet is in good shape and maintaining financial discipline remains at the forefront of Helical’s approach. Recycling equity and seeking third party financing to fund the pipeline of opportunities will allow the Company to grow the business while containing gearing to appropriate levels.
There remains a shortage of “best-in-class” newly refurbished or redeveloped office space in central London. With an experienced management team, a substantial development pipeline with optionality over timing and funding, and no legacy assets requiring investment to meet minimum sustainability standards, Helical is well positioned to capitalise on current cyclical opportunities.
2024 Half Year Key highlights
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2024 Half Year Results