(Bloomberg) -- Derwent London Plc expects rents to surge this year as demand for the best new space outstrips supply. 

The London office landlord expects its estimated rental values to grow as much as 5% this year, up from the 2.1% achieved in 2023, according to a statement. 

London office demand has become concentrated on the small sliver of new, energy efficient and amenity rich buildings that can help companies reduce their carbon footprints and lure workers back to the office. That’s put pressure on the value of older buildings as developers weigh the hefty capital expenditure required to upgrade them in a bid to lure tenants.

“The continued bifurcation separating the best from the rest leaves developers such as Derwent in the enviable position of leasing much of their developments well in advance of completion,” Stifel analyst Denese Newton wrote in a note Wednesday.

Tired and energy inefficient properties have been hit harder by changes to working patterns that were accelerated by the pandemic, reflected in a 14.3% drop in the value of Derwent’s older buildings that it is planning to modernize or redevelop. That compares to a 8.1% increase in the value of its development projects as tenants committed early to new leases at rents that were higher than expected.

“We are seeing good demand for our product and while overall vacancy rates are elevated, our core areas in the West End have just 4.4% vacancy,”  Chief Executive Officer Paul Williams said in an interview Wednesday. “If you look at the vacant stock, about 70% of it is second hand and new supply has been deferred and delayed.”

Still, rising rents weren’t enough to offset the impact of higher interest rates on the company’s portfolio valuation, which declined 10.6% to £4.9 billion ($6.2 billion) in the year through December. 

UK property stocks have suffered a series of set-backs in recent years, as Brexit, the pandemic and rising interest rates have buffeted the sector and depressed share prices. Still, there are signs that markets over corrected anticipating deeper falls in valuation than have so far been reported, setting up the conditions for a bounce back. Segro Plc announced it had raised more than £900 million in an over subscribed share issue Wednesday.

Read more: Segro Share Issue Signals Comeback for Battered Property Stocks

“We think the pressure on yields is easing,” Williams added. “The bottom is close.”  

 

(Updates with analyst comment in the fourth paragraph and CEO interview in the sixth paragraph)

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