Citi upgrades Derwent London to "buy," sees 48% upside on rental strength

Investing.coom -- Citi Research has upgraded Derwent London (LON:DLN) to "buy" from "neutral," citing low valuation levels and resilient rental dynamics in the prime London office market, in a note dated Thursday. The price target was raised to £27.67 from £24.81, offering an expected total return of 48.2%.

The analysts said Derwent’s shares are trading at levels typically seen during financial crises, despite no comparable distress today.

The stock’s implied portfolio yield of 8.5% and a 42% discount to net asset value suggest a disconnect between market pricing and underlying asset value.

Citi flagged a sharp supply-demand imbalance in the West End office market, particularly for Grade A space.

The brokerageestimates potential rent growth of 30% to 50% as tenants upgrade to high-quality offices. Structural obsolescence and ESG considerations are also likely to reduce usable space, adding further pressure on rents.

Earnings per share are projected to decline in the short term, falling to 98.6p in 2026 from 106.1p in 2024, largely due to developments removing income ahead of completion and rising borrowing costs.

However, EPS growth is expected to resume in 2027. NAV per share is forecast to rise from 3,149p in 2024 to 3,573p in 2029, a gain of 26%.

The dividend yield is projected to increase gradually, from 4.3% in 2025 to 4.5% in 2027. The stock’s current PE ratio of around 19 is well below the 2010–19 cycle average of 37, providing further re-rating potential if growth returns.

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Citi noted that past real estate recoveries have triggered sharp valuation rebounds and sees parallels today.

While macro uncertainty remains, analysts believe much of the risk is already priced in and expect that falling rates and clearer growth signals will serve as catalysts.

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