Despite showcasing some impressive financial feats recently, Derwent London’s stock seems to be stuck in a decade-old valuation, puzzling investors and analysts alike.

Derwent London has been turning heads with its latest financial results, boasting the highest income from new lettings since 2019, a drop in vacancy rates, a boosted dividend, and an upgraded forecast for 2024’s rental income. However, these significant achievements haven’t translated into the stock market success one might expect.

Why Stick Around?

You might wonder why anyone would cling to a stock that seems stuck in the past. The answer lies in the fundamentals: Derwent London boasts a prime property portfolio, a strong balance sheet, and a yield that’s still attractive to income-focused investors. Plus, the stock is trading at a 38% discount to its net asset value (NAV) per share, a gap even wider than when Brexit uncertainties loomed large.

This discount could be seen as a market bet against the company’s property values, influenced by the rise of remote work, the challenges faced by physical retailers against online competition, and the looming specter of recession. Yet, there’s an underlying belief that the company’s assets and potential income justify staying the course.

The Role of Interest Rates and Economic Trends

Another factor at play is the broader economic landscape, particularly interest rates. Higher rates have increased borrowing costs for property developers and made the fixed income from real estate investment trusts (REITs) like Derwent London less appealing compared to other investments, like government bonds or cash, especially as these are perceived to be lower risk.

The expected dividend yield for 2024 stands at 4.2%, closely mirroring the Bank Rate and the yield on 10-year government bonds. While this comparison might make the stock’s yield seem less attractive, it’s crucial to remember that it’s the rent, not the asset valuation, that ultimately pays dividends. With the final dividend payment for 2023 on the horizon, investors are set to see their total dividend income from Derwent London significantly bolster their initial investment.

A Look Ahead

So, what could narrow the discount to NAV and reignite interest in Derwent London’s stock? Improved rental income and lettings activity could be key drivers, along with a shift in interest rate policies, provided they don’t signal a deeper economic downturn. The past decade’s ultra-low interest rates created a frenzy for yield, benefiting stocks like Derwent London. Now, with rates rising, investors have more options, leading to some recalibration in the stock’s valuation.