A discounted REIT to buy now
This real estate investment trust is carving out a niche for itself by recycling old offices. Investors should take advantage of the discount and buy now, says Max King.

Derwent London (LSE: DLN), a London-focused REIT has plenty of experience re-engineering old buildings, which should help it capitalise on current property trends across the capital.
“Refurbishment was our bread and butter,” says Director Nigel George, “notably the refurbishment of tired multi-let buildings.” Now, new builds account for around two-thirds of Derwent’s development pipeline and refurbishment only one-third but “we will do more in the future.”
He points out that the carbon “cost” of refurbishment is only around half that of re-build but, perhaps more importantly, so is the construction cost. With inflation in building costs of 11% last year (but only “low single digit this year”) there is a move towards refurbishment but, asks George, “will the rental value also be only half of the rebuild value? Tenants are a lot more discerning these days and refurbishment may not be able to deliver the required amenities.”
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
“Amenities” means catering areas, informal meeting places, quiet zones and leisure spaces. Gregory adds “occupiers, especially large corporate ones with net zero commitments, are also demanding the highest possible energy efficiency.” This has also become a regulatory requirement with the introduction of Energy Performance Certificates (EPCs). Though exemptions are available if the necessary improvements are not financially viable, few will want to own such buildings.
These requirements can be more difficult to accommodate in a refurbished building, even if it is stripped back to its core skeleton. The key, says George is the floor-to-ceiling height of the building. If it dates to the 1980s or later, there is likely to be sufficient space to accommodate ventilation and cabling but in older buildings, the space will probably be insufficient.
“People won’t spend money on regeneration if they can’t get a return,” says George, but how many planning authorities in their eagerness to embrace “net zero” appreciate that?
A REIT trading at an underserved discount
In the West End, Derwent’s key market, the vacancy rate is 3.7%, below the long-term average, but there is plenty of lower-quality secondhand space available. In many areas outside London, rising refurbishment and financing costs could result in these properties becoming so-called ‘stranded assets’ or assets no buyer wants to touch.
This is not a problem for Derwent (capitalised at £2.5bn) but its shares still trade at a 40% discount to the net asset value (NAV) per share. NAV fell 8.3% last year, but net rental income rose 6%, and the vacancy rate at the end of 2022 was 5% with 2023 lettings included - below the Central London average of 8.2%
A loan-to-value ratio of 24% (debt to NAV) leaves the company with plenty of financial headroom to
develop its property pipeline.
Derwent’s focus on the West End and around the City is paying off. Thanks to a shortage of supply, the demand for space remains strong and rental values are expected to rise modestly in 2023. The dividend yield is only 2.5% but that reflects a significant development pipeline.
You have to be very pessimistic about the outlook for the UK in general and London, in particular, to see the shares as anything but the wrong price.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
-
How much you need to follow the 25x retirement rule – will you have enough to be financially independent?
We explain what the 25x retirement rule is and the amount you would need to be financially independent in retirement.
-
Risk in investing: the importance of understanding how risk shapes your returns
To maximise their chances of beating inflation over the long run, investors need to understand how risk impacts their portfolio
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
-
Buy-to-let returns fall 59% amid higher mortgage rates
Buy-to-let returns are slumping as the cost of borrowing spirals.