Derwent London Regulatory News (DLN)

28 February 2017

Derwent London plc ("Derwent London" / "the Group")

RESULTS FOR YEAR ENDED 31 DECEMBER 2016RECORD LETTING YEAR, FINAL DIVIDEND UP 25% AND SPECIAL DIVIDEND ANNOUNCED

Financial highlights

· EPRA1 net asset value per share increased 0.5% to 3,551p from 3,535p at 31 December 2015, 1.3% lower than 3,598p at 30 June 2016

· Net rental income increased 5.2% to £145.9m from £138.7m in 2015

· EPRA earnings rose 8.9% to £85.7m from £78.7m last year

· EPRA earnings per share increased 7.9% to 76.99p per share from 71.34p in 2015

Final dividend increased 25%

· Proposed final dividend per share increased by 25.0% to 38.50p making 52.36p for the full year, an increase of 20.6%

· Increase reflects strong recurring earnings growth since 2014 and de-risking of 2017-18 pipeline

Operational performance

· Record year of lettings totalling £31.4m, on average 6.3% above December 2015 ERV

· Estimated rental values (ERV) on an EPRA basis increased by 5.1% in 2016 (by 1.0% in H2)

· Portfolio valued at £5.0bn; underlying fall in value 0.2% in the year, with a decrease of 1.7% in H2

· Valuation uplift on developments was 4.7% in the year

· Total property return was 2.9% which was ahead of the IPD Central London Offices Quarterly Index of 2.6%

· True equivalent yield was 4.83%: a 31bp rise in 2016 of which 25bp was in H2

· Investment property disposals totalled £208m on average 3.7% above December 2015 values

· Capital expenditure was £213.5m and acquisitions £18m 

Good growth potential and a strong start to 2017 and special dividend of 52p per share proposed

· Total cash rental reversion was estimated at £134.2m in December 2016, which requires £363m of outstanding capital expenditure, and was 39% contractual or pre-let

· New lettings since December 2016 total £11.5m, including the pre-letting to Arup of 41% of the main 80 Charlotte Street W1 development building completing in 2019

· Current development programme 44% pre-let by income, up from 8% in December 2015

· Leases regeared enabling Expedia to take at least 231,400 sq ft at Angel Building EC1 from 2020 until 2030

· Agreements to dispose of two properties in excess of book value raising £327m before costs

· Proposed special dividend of 52p per share

Robust financial position

· Financial ratios: interest cover 3.7x, dividend cover 1.5x and LTV 17.7%

· Net debt marginally lower at £904.8m in 2016

· Debt maturity was extended to 7.7 years in 2016 from 7.3 years in 2015

· Cash and undrawn facilities of £383m exceed committed project capital expenditure of £363m

 1Explanations of how the EPRA figures are derived from IFRS are shown in Note 22

Robbie Rayne, Chairman, commented:

"Despite economic and political headwinds last year, today's results demonstrate the strong progress made by Derwent London in 2016, providing evidence of the underlying strength of our business and the quality of our people and portfolio. The Board has proposed a 25% increase in the final dividend, reflecting our financial position and the de-risking of our 2017/2018 pipeline in the last twelve months. In addition, following the value-enhancing transactions announced today, we are proposing a special dividend of 52p per share."

John Burns, Chief Executive Officer, commented:

"These results highlight how our business model of creating well-designed and innovative office space in improving locations can make meaningful progress even in less buoyant market conditions. Whilst we believe it is right to remain cautious, we are in a strong financial position with a well balanced portfolio rich with opportunities which gives us considerable scope to create further growth in our business. 2017 has started well for us as evidenced by this morning's announcements."

Webcast and conference call

There will be a live webcast together with a conference call for investors and analysts at 09:30 GMT today. The audio webcast can be accessed via www.derwentlondon.com.

To participate in the call, please dial the following number: +44 (0)20 3059 8125

A recording of the conference call will also be made available following the conclusion of the call on www.derwentlondon.com.

For further information, please contact:

CHAIRMAN'S STATEMENT

Overview

Derwent London delivered its operational strategy successfully throughout 2016 despite a background of significant political change and the ensuing uncertainty originally stemming from June's EU referendum. 2016 was another record year of lettings for us which, combined with those achieved in recent years and reduced finance costs, resulted in an increase in EPRA earnings per share for the year of 7.9% to 76.99p.

Today's results demonstrate the resilience of our business model which is underpinned by continued demand for our well designed mid-market product in improving locations. We have a strong financial base, and an investment market that allows the balance between secure income and development opportunity to be maintained. In addition, we have talented and experienced people across the business with well established relationships with occupiers, third party professionals and local communities. These strengths are the result of considerable investment which has helped reinforce the Group's reputation, culture and brand.

Over the last few years we have looked to bolster the recurring earnings side of our total return model and this year's increase should be seen as a continuation of the substantial growth achieved in 2015. We have also significantly de-risked our development pipeline over recent months, and together, these two strategies have enabled us to recommend raising the final dividend by 25.0% to 38.50p, which takes the full year dividend to 52.36p. At this level the dividend will be covered 1.5 times by recurring earnings, and our average annual dividend growth since we converted to a REIT has been 9.8%. In addition, following the value-enhancing transactions announced today, we are proposing a special dividend of 52p per share to be paid along with the final dividend in June 2017.

The change in market sentiment in the second half of the year resulted in considerable share price weakness across the sector and a fall in the underlying value of our portfolio by 1.7% since June and 0.2% for the year. However, as stated above, the Group's recurring earnings have seen a strong increase and generated a positive total return for the year. Consequently the EPRA diluted NAV at 31 December 2016 was marginally higher at 3,551p per share, an increase of 0.5% over the year.

Whilst overall take-up in London offices slowed in 2016, our letting activity captured £31.4m pa of rental income on 547,500 sq ft, which surpassed our previous record achieved in 2015 by 16%. Despite a quieter period around the EU Referendum activity was spread evenly between the first and second halves.

The ongoing resilience of our particular markets, together with the Group's financial strength and the attractive potential returns of the Brunel Building development in Paddington W2, gave us the confidence to continue with this project. Overall, we incurred £213.5m of capital expenditure on our development projects during 2016 and at the year-end we were on site at four, Brunel Building W2, 80 Charlotte Street W1, White Collar Factory EC1 and The Copyright Building W1. Capital expenditure in 2017 is estimated at £158m, with no major schemes due to start.

The second half of the year saw a significant devaluation of sterling and an increase in overseas demand focussed on properties that produce long-term income. We took advantage of this supportive market and made 98% of our total investment sales of £208.0m after June. Overall, these disposals produced a 3.7% surplus over December 2015 book value.

During the year we extended the maturity of our debt through the issue of £105m of bonds in a US Private Placement and the extension of both our bank facilities. At the year end our financial position remained strong with interest cover of 3.7 times and LTV of 17.7%, while our undrawn facilities and cash exceeded our future capital expenditure on committed projects.

Our Sustainability Report, which is published simultaneously with the Annual Report, demonstrates the further progress we have made in this area. A major part of our sustainability programme is our work on relationships with our communities. We are therefore pleased to have extended our commitment by inaugurating a Tech Belt Community Fund to operate alongside our similar longstanding arrangement in Fitzrovia. Given the importance that the Group attaches to its sustainability performance, it was pleasing to be ranked 12th overall and top in the UK in Corporate Knights Global 100, an annual list of the world's most sustainable companies announced at the recent World Economic Forum at Davos.

One of the Group's distinctive features is its focus on innovative design and this has again been recognised externally with two recent schemes, Turnmill and White Collar Factory, both winning awards.

Team

I would once again like to thank the Derwent London team for their continued expertise, enthusiasm and dedication without which these results would not have been possible.

The Board

Stuart Corbyn, who has served as a non-executive Director of the Company since 2006, is due to step down from the Board at the forthcoming AGM in May 2017. I would like to thank him for the advice and sound judgement that he has provided throughout this period. The Nominations Committee has started the process of finding a replacement for Stuart to allow a smooth transition. We anticipate making further announcements concerning this matter over the next few months.

Outlook

We expect much of the current economic uncertainty to persist as UK-EU negotiations are likely to be protracted. How this impacts on London businesses remains to be seen but, so far, activity has been surprisingly resilient with UK economic activity improving in the second half. However, although we believe that it is right to remain cautious and have positioned the business accordingly, we have limited space currently available and our product and locations continue to attract good occupational and investment demand.

CHIEF EXECUTIVE'S STATEMENT

The Group's operating performance in 2016 illustrates how our business model of creating well-designed mid-market flexible office space in improving locations can make meaningful progress even in less buoyant market conditions.

Derwent London has taken advantage of the recent levels of occupational demand to achieve a record level of lettings in 2016, although the pace of market activity has slowed with the increased uncertainty surrounding Brexit negotiations. We start 2017 with a low EPRA vacancy rate in a central London portfolio let at an undemanding average topped-up office rent of £45 per sq ft. This is comfortably at the lower end of our middle-market target range of £45 to £80 per sq ft, and very much at the affordable end of the spectrum. Our average lease length is 6.5 years or 7.8 years allowing for pre-lets.

Even after allowing for the changing outlook in the last eight months, our contractual cash rent of £150.3m, the basis of the portfolio's net initial yield, can grow by £75.8m from the expiry of rent free periods, minimum uplifts, pre-lets, or from reversions within the investment portfolio. Since then we have moved towards this by regearing the leases on 231,400 sq ft of the office space at Angel Building EC1 so that Expedia can occupy the majority of the building from 2020. This enabled us to capture the significant existing reversion, and there are now minimum uplifts at the next reviews in 2020 and 2021. In addition the income has been extended by between 9 and 14 years to 2030. CBRE estimate that this initiative has enhanced the building's value by 10%.

Letting our developments under construction and vacant space could add another £58.4m to rental income, after allowing for £363m of future capital expenditure to complete. Since the year end we have pre-let £10.7m, or 18% of this additional potential, principally from our first letting at 80 Charlotte Street W1 to Arup, and also another floor at White Collar Factory EC1 to Adobe. As a result our full development programme, which will not complete until 2019, is now 44% pre-let by income compared to 8% in December 2015.

In total, the reversionary gains in our existing portfolio could raise our contractual cash rental income by more than 85% in the next five years. In the coming 12 months, we aim to continue capturing our investment reversion, let the available space in our 2017 project completions and achieve more pre-lets on the 2019 deliveries. This strategy gives us the opportunity to tie in substantial income growth again this year while de-risking the development programme.

The Group continues to look for opportunities to replenish our future pipeline. However a lack of suitable opportunities meant that our only acquisition in 2016 was the long leasehold interest on part of The White Chapel Building. Conversely we were able to identify a number of opportunistic disposals which enabled us to sell £208m of property in 2016 where we felt that we had limited short-term value to add. These disposals have reinforced our balance sheet strength and our LTV ratio has fallen again to 17.7%. Since the year end we have agreed to sell an additional £327m of property above book value, which will further improve our financial position.

We, and our occupiers, face a number of challenges this year with heightened political and economic uncertainty and the impact of business rate increases in London from April 2017. It is still far too early to know what longer term impact these may have on the London market. So far the UK and London economies have been resilient and business confidence indicators have recovered from June 2016 levels. Our portfolio is well-balanced and opportunity rich. We have a skilled management team and financial flexibility. These attributes give us considerable scope to create further growth in our business over the next few years.

OUR CENTRAL LONDON OFFICE MARKET

Although overall office take-up in 2016 failed to match the high levels of recent years, the outcome proved to be much better than had been expected in the middle of the year. In total take-up of 12.2m sq ft was 17% below the previous year, but still close to the long-term trend. Despite the talk of an exodus of London bankers, important global businesses continued to make major commitments to London notably Amazon, Apple, Expedia, Facebook, Google and Wells Fargo among others. Three sectors continue to dominate take-up: business and professional services represented 28.6%, TMT's share has risen to 24.6% and banking and finance fell to 20.3%. However central London vacancy rates have risen from 2.3% to 4.3%. In the West End the vacancy rose a little less from 1.9% to 3.5%.

One year ago CBRE estimated that 7.1m sq ft of office space would be developed in 2016. In the event only 61% was delivered. This year it is estimated that 7.2m sq ft will be built, which, if completed, means that over the two years new supply is 2m sq ft lower than was expected at the beginning of last year. In total there is currently 12.5m sq ft under construction, which is 53% pre-let. Therefore the vacant element totals 5.9m sq ft or 2.6% of the total market. The West End's share is 1.9m sq ft under construction which is 41% pre-let, leaving 1.1m sq ft available or 1.2% of the local market.

Overall office rental growth slowed significantly in 2016 with CBRE reporting prime rents up just 1.3%, and West End rents falling marginally by 0.8%. This is the first fall since Q1 2010, and was driven by weakness in the Mayfair/St James's market, which fell 6.3%. Other West End markets were static or showed modest growth. One exception was Paddington where rents rose 8.0%.

The investment market saw strong Q1 and Q4 activity, but was relatively quiet in between which meant that activity levels at £13.1bn were 19% down on 2015. The immediate impact of the EU referendum vote was for yields to move out c.25bp to reflect heightened uncertainty and some early forced sales by the open-ended funds which created an initial sharp adjustment. However the market quickly stabilised: tenants have been resilient and the weaker level of sterling has attracted fresh investment interest as demonstrated by the £4.1bn of deals in Q4. West End annual activity at £4.4bn held up better and was only 8% lower than in 2015, seeing a much higher degree of domestic interest, which accounted for 46% of the transactions as opposed to 30% for the market as a whole. There have already been a number of significant transactions in Q1 2017 which suggests that demand remains robust.

Against the current background, projections on the future must be treated with caution. The London office occupier is likely to face additional costs following the rise in business rates introduced from April 2017, and it is widely expected that some financial and associated jobs will move to other cities in the EU. The latter will ultimately depend on the outcome of UK-EU negotiations, but a number of banks have already suggested that several thousand jobs are earmarked to move. Despite these challenges we believe that there is still scope for selective rental growth, although this is unlikely to occur across all our London villages. On average we expect ERV movements across our portfolio of between 0% and -5% in 2017. We have seen our property yields move out 31bp since December 2015, and these may drift out a little further in the current year.

VALUATION

The Group's investment portfolio was valued at £5.0bn at 31 December 2016, a similar level to last year. The valuation themes were positives from rental growth and our on-site developments, but these were offset by an outward movement in valuation yields. In addition we benefitted from an uplift on 132-142 Hampstead Road NW1 where we had conditionally agreed to sell the property. As a result the valuation would have been flat apart from the additional impact of a rise in Stamp Duty Land Tax in March 2016 that lowered values by around 1%. The net outcome was a valuation deficit for the year of £20.9m, before accounting adjustments of £23.3m (see note 11) giving a total reported deficit of £44.2m. This equated to a marginal underlying valuation decrease of 0.2% which followed a 16.5% increase in 2015. The result was an outperformance when measured against our capital value benchmarks, the IPD Quarterly Index for Central London Offices, which decreased by 0.7%, and the wider IPD All UK Property Index which fell by 1.3%.

By location, our central London properties, which represent 98% of the portfolio, saw an underlying valuation decline of 0.1%, with the West End down 0.7% and the City Borders up by 1.0%. The latter area benefitted from letting progress at the White Collar Factory EC1 and The White Chapel Building E1. The 2% balance of the portfolio is our non-core Scottish holdings and these were down 1.9%.

The portfolio's total property return was 2.9% for 2016 compared to 19.9% in 2015. The IPD Index for total return was 2.6% for Central London Offices and 3.5% for All UK Property. Although we outperformed our more comparable benchmark we underperformed the broader index as a consequence of the higher property yields outside London.

Within the investment portfolio, we were on site at four major developments during the year. Two of these, White Collar Factory EC1 and The Copyright Building W1, will be completed in 2017 and two more, 80 Charlotte Street W1 and Brunel Building W2, are in the early stages of development. In total, these projects were valued at £662m delivering a 4.7% valuation uplift. This outperformance came from strong letting activity above ERVs and the valuers releasing development surpluses as projects neared completion. Accordingly, our two near-term completions were up 14.1%. The two recently commenced developments were marked down 5.9% as our valuers increased the development margin targets for a more uncertain market.

The valuer's estimate of the net rental value of these four developments was £65.4m and at year end £18.3m or 28% of this had been secured through our pre-lets. Since then we have signed two further lettings at £10.7m pa, thereby taking our developments to 44% de-risked. The average lease length on our pre-letting activity is 15.4 years. Capital expenditure required to complete these four developments is £347m. While prime West End office rents declined marginally during the year, our mid-market rental locations, such as Fitzrovia, Victoria and the Tech Belt, continued to grow, albeit more slowly than in recent years. Our rental values, on an EPRA basis, rose by 5.1% and followed 11.8% in 2015. During 2016 the West End saw rental growth of 5.5% and the City Borders 4.4%.

On an EPRA basis the portfolio's initial yield was 3.4% which will rise to a 'topped-up' 4.1% following expiry of rent free and half rent periods and contractual rental uplifts. For the previous year, these figures were 3.1% and 3.8%, respectively. The true equivalent yield at year end was 4.83%, a 31bp outward movement over the year and follows 21bp of yield tightening in 2015. This movement was the first outward yield shift since 2009 and was mainly in the second half of the year, when the equivalent yield moved out 25bp. While the economy remained resilient during the year, especially in the second half, the outlook post the referendum remains uncertain and as a consequence buyers are seeking higher yields to reflect the greater potential risks to the rental outlook.

As noted in our 2015 Annual Report we expected a greater proportion of our future return to come from income, developments and asset management. This proved to be the case. As set out in the Portfolio Management section, our asset management initiatives also had some notable success. The outcome was a strong uplift in our annualised contracted rent. Our contracted rent rose 9.6%, from £137.1m to £150.3m, despite disposals lowering income by £6.7m and no income-producing acquisitions. The portfolio's ERV was also up, to £284.5m. Thus, the rental reversion at year end was £134.2m. Of this potential growth £52.0m is contractual from fixed uplifts, the expiry of rent free periods or pre-lets. Adding this to the current income takes our 'topped-up' rent to £202.3m which is 17.2% higher than last year.

The majority of the balance of the reversion comes from letting vacant space, either currently available to occupy or under construction. This totalled £58.4m. The main elements of this are the ERVs of our two recent development starts: 80 Charlotte Street and Brunel Building, which total £41.2m. These properties will not be delivered until 2019.

The final component comes from lease reviews and renewals. We made excellent progress in capturing some of this in 2016, but there is still a further £23.8m of potential income to come.

PORTFOLIO MANAGEMENT

In 2016 the Group achieved a new annual letting record of £31.4m, surpassing the previous 2015 record by 16%. Activity was evenly spread between the first and second halves and, on average, exceeded the December 2015 ERV by 6.3%, as can be seen in the table below. This reflected the amount of space we had available, predominantly either being developed or refurbished, the suitability of our product and the success of our letting campaigns. As a result we start the year again with a low existing vacancy rate, but with considerable latent letting opportunity in our development pipeline.

Letting activity 2016

1 Includes short-term lettings at properties earmarked for redevelopment

Last year started well with the pre-let of the whole office element of The Copyright Building W1 on a 20-year lease at an average rent of £86 per sq ft. We continued to let floors of the White Collar Factory EC1 throughout the year, achieving a new record rent of £67.50 per sq ft on the tower. We launched The White Chapel Building leasing campaign in Q2 and the property is now 78% let. The refurbishment at 20 Farringdon Road EC1 is also largely let. On our investment properties we achieved a new rental high at the Johnson Building EC1, and let the last available floor at 1-2 Stephen Street W1.

Principal lettings in 2016

1 Excludes reception area.

Active asset management is one way we capture growth. During 2016 we concluded lease renewals and reviews on 419,400 sq ft achieving rents of £19.5m, 40.5% above previous levels and 8.9% above December 2015 ERV. In addition, we regeared leases on 174,600 sq ft adding a further £9.1m of income 59.9% above the previous income and 16.3% above ERV. In total this covered 594,000 sq ft or 12% of our completed portfolio.

Asset management 2016

Among these transactions we secured significant uplifts on rent reviews at 20 Farringdon Road EC1, Angel Building EC1 and 1-2 Stephen Street W1 where we achieved rents of c.£50, £60 and £70 per sq ft, respectively. We also completed notable lease regears at 60 Whitfield Street W1 and 1 Oliver's Yard EC1. At the former, we provided a capital payment in return for improvements, our current income will increase from £1.6m to £2.2m in 2018, and the lease on 36,200 sq ft has been extended from 2018 to 2029. At the latter we have increased the income on 50,300 sq ft from £1.39m to £2.34m and extended the lease by three years to 2021, with the tenant retaining a break at 2018 on 17% of the space. Both these deals exceeded ERV and improved certainty of income.

At the year-end our EPRA vacancy rate was 2.6% despite a number of completions. We started 2016 with an exceptionally low 1.3% vacancy rate which peaked at 3.3% in November 2016. We have a number of properties completing this year, which could see our vacancy rate rise to 4.5% if we achieve no further lettings.

Lettings in 2017

Since the year end we have pre-let the 13th floor at The White Collar Factory EC1 to Adobe, who had already taken two other floors in the tower. The new letting comprises 14,900 sq ft for a rent of £1.0m pa or £67.50 per sq ft. It is for 11.5 years and incorporates a minimum uplift with a cap and a floor on rental review in five years' time. Adobe received incentives equivalent to 22 months rent free.

We have also made our first pre-letting at 80 Charlotte Street W1, where Arup have agreed to take 133,600 sq ft of offices in the main building taking it to 41% pre-let. They have signed a 20 year unbroken lease at an initial rent of £9.74m, which is equivalent to £75 per sq ft on the main office floors. This income stream will rise by 2.25% pa for the first fifteen years of the lease at which point there is an upward only open market review. After allowing for the impact of the indexation the average rent over the first five years is in line with our December 2016 ERV for the lower floors. In return Arup is receiving incentives equivalent to 33 months rent free. They also have an option to take another 40,700 sq ft.

As reported earlier, the Group has regeared a number of leases with the Expedia group and Cancer Research UK at Angel Building, Islington EC1. Expedia will occupy at least 231,400 sq ft or 93% of the office space from 2020 and has extended its tenure from 2021 to 2030. There are minimum rental uplifts on reviews in 2020 and 2021. In return Expedia will receive incentives equivalent to 21 months rent free. The income from the total office element of the building will rise from £13.3m to a minimum of £15.0m in 2020.

PROJECTS

Derwent London is principally a property investor and asset manager, with developments representing 13% of our portfolio by value. These come with a major £363m capital expenditure commitment and an element of operational risk resulting from our approach of starting schemes speculatively. However we do not commit to projects that would unduly stress the balance sheet and only start schemes where we believe the risk/reward ratio is attractive. We have a track record of de-risking our projects as they progress, and our potential profit margins allied to a long-term investment approach allow us significant flexibility on lease terms. Our success in this regard can be seen in the substantial progress we have made in pre-letting 292,000 sq ft or 73% of our 2017 deliveries, which compares to 22% in December 2015.

Major developments pipeline

The delivery of construction projects across the London market continues to be tested this cycle which has led to some delays. White Collar Factory is nearing completion a few months behind our original schedule. The 237,000 sq ft tower building is 80% pre-let with only the top two and a half floors available. The half floor is under option until six months after practical completion. We are now focused on marketing the lower rise buildings surrounding the new open space. Currently we have pre-let 15,600 sq ft of this office space, and 9,000 sq ft of retail is conditionally under offer, which leaves 23,400 sq ft of lower rise offices and the 8,000 sq ft residential space still to let. The ERV of the project is £16.9m and the remaining capital expenditure is £11m.

Last year we announced the pre-letting of the office element of The Copyright Building for twenty years at an average rent of £86 per sq ft thereby largely de-risking the project. We have just started to market the remaining 20,000 sq ft of retail and restaurant space. The project remains on course for delivery in the second half of this year. The ERV of the building is £7.3m net, and the remaining capital expenditure is £24m.

We considered delaying Brunel Building following the Brexit vote. In the event the Group made the decision to continue work due to the development's merits and good levels of occupier interest. This canalside building will provide column-free floors and is located opposite a Crossrail station. Though it caught up a bit in 2016, Paddington has lagged much of central London this cycle and has seen limited development activity. We believe current rental levels are attractive, and the opening of Crossrail in 2018 will significantly enhance eastward public transport links to central West End and the City. Outstanding capital expenditure totals £99m and the ERV is £14.8m net or £62.50 per sq ft. We estimate our breakeven rent at c.£46 per sq ft.

80 Charlotte Street is our largest current project and demolition is underway. The space is designed to be multi-let and comprises three buildings. The largest is 309,000 sq ft of offices and 14,000 sq ft retail. There is an adjoining 14,000 sq ft private residential building and a smaller property opposite at 53-65 Whitfield Street comprising 12,000 sq ft of offices, 21,000 sq ft private residential and 10,000 sq ft affordable residential. With outstanding capital expenditure of £213m and an ERV of £26.4m, this is our most significant current project. The ERV is based off an average office rent of c.£80 per sq ft, whereas we estimate our breakeven rent at c.£58 per sq ft. Since the year end, we have pre-let 133,600 sq ft of the largest building to Arup at a rent of £9.7m. More details of this transaction are discussed under Portfolio Management above, and under Investment Activity below.

During 2016 we had an unusually high level of refurbishment activity, principally due to our opportunistic acquisition of The White Chapel Building E1 with vacant possession. In addition we had projects at 20 Farringdon Road EC1, 78 Whitfield Street W1 and 78 Chamber Street E1. Adjusting for the joint venture interest at Chamber Street these projects totalled 326,000 sq ft and all were completed during the year. They are now 71% let producing £11.7m of rent. The remaining 93,000 sq ft has an ERV of £4.4m. In the current year we will consider whether to commit to Phase 2 at The White Chapel Building, which comprises 85,000 sq ft of ground and lower ground floor space.

Longer term we have planning consent for two well-located schemes including 1 Oxford Street W1, the site over the eastern Tottenham Court Road Crossrail station. The other major scheme located immediately south of the White Collar Factory is Monmouth House EC1, where last year we received consent to replace two tired properties with a new 125,000 sq ft project: this represents an 81% uplift in area. We have flexibility as to when to start both projects. Beyond that we believe another 25% of our portfolio, or 1.5m sq ft, has redevelopment or refurbishment potential which means that our overall portfolio remains rich with opportunity.

INVESTMENT ACTIVITY

We comfortably exceeded our initial sales target during the year with virtually all our transactions in the second half. The three major office property sales comprised investments where we considered that the potential to add further significant short term value was limited. At Balmoral Grove N7 we had previously conditionally sold the property for residential redevelopment. All these conditions, including receipt of planning consent, were achieved during the year. We retain a potential overage interest in this property as well as at Riverwalk House SW1, which was sold in 2012 and where the residential development was completed in 2016. Any future profits will be dependent on the success of each scheme, and currently no value is attributed to these potential gains in our balance sheet. Earlier in the year we sold our remaining available residential units at The Corner House, 73 Charlotte Street W1, and Queens W2. In total we raised £224.7m of cash from sales in 2016.

Principal disposals 2016

1 Includes rental top-ups for vacant space and rent free periods. 2 Retail space only

As there were few acquisition opportunities that met our criteria during the year we acquired only one property, which was the long leasehold interest in one of the lower ground floors at The White Chapel Building. This has given us the option to refurbish Phase 2 as discussed above.

Principal acquisition 2016

1 Lower ground floor. Main building purchased in December 2015.

Disposals in 2017

Since the year end we have agreed to sell two office buildings for £327m before costs.

The larger of these was a conditional put and call option to sell 8 Fitzroy Street W1 for £197m. This freehold property comprises 147,900 sq ft let to Arup for a rent of £7.2m. The purchaser is Arup and the transaction formed part of the pre-letting negotiations at 80 Charlotte Street W1 discussed above. The disposal price reflects a net initial yield of 3.4% and a premium of 2.8% before costs to its December 2016 value. Completion is expected on 23 June 2017.

The second disposal is the freehold of 132-142 Hampstead Road NW1 which we have agreed to sell to the Secretary of State for Transport for £130m. This property provides 219,700 sq ft and is let to University College London for £1.7m. We acquired the property in 2007 and achieved planning for 233,000 sq ft of offices and 38 residential units. The new offices were designed to be our first White Collar Factory, but we were unable to carry our plans forward due to the proposals to build HS2 announced in 2012. The December 2016 book value of £115m did not reflect the full benefit of the very valuable planning consent.

FINANCE REVIEW

Financial overview

In a year dominated by unexpected political events and increased uncertainty, Derwent London has reported further recurring earnings growth, a step change in the proposed final dividend and a small increase in net asset value backed up by a very strong financial position.

After several years where large valuation uplifts provided substantial net asset value increases for the Group, in 2016 the net asset value attributable to equity shareholders marginally increased by £10m, with the IFRS net asset value (NAV) remaining at the same rounded £4.0bn reported a year ago. The combination of a maturing London office property cycle and the EU referendum vote, among other things, gave rise to an outward yield movement on our portfolio averaging 31bp in 2016. This was partially offset by the positive impact of continuing rental growth, record letting successes and strong rent review settlements but the portfolio valuation was down as a result in H2 2016. The fall was lower than we had anticipated in the immediate aftermath of the June EU vote and was more than offset by retained recurring earnings. We have also been able to demonstrate that our carrying values remain supported by transactional evidence with £208m of property investment disposals in H2 2016 at an average price 3.7% above December 2015 book values.

These property sales had another benefit as available undrawn facilities increased by the year end to the extent that our committed development pipeline was fully funded at December 2016.

Earnings per share and profit before tax on an IFRS basis include fair value movements arising from the revaluation of investment properties and interest rate hedging instruments and can therefore be volatile from year to year. Those fair value movements have moved from a net £657.6m uplift in 2015 to a £36.8m downward movement in 2016 with the result that the IFRS profit before tax was £54.5m in 2016, down from £779.5m in 2015. In common with best practice in our sector, alternative performance measures are also provided to supplement IFRS guidance based on the recommendations of the European Public Real Estate Association ("EPRA"). EPRA Best Practice and Policy Recommendations (BPR) have been adopted widely throughout this report and are often used within the business when considering our recurring operational performance as well as matters such as dividend policy and elements of our Directors' remuneration.

EPRA NAV per share on a diluted basis was up by 16p to 3,551p from 3,535p in 2015.

EPRA earnings increased more strongly with a 8.9% rise to £85.7m (2015: £78.7m) and EPRA earnings per share increased by 7.9% to 76.99p. Building on the substantial 31% rise in recurring profits in 2015 and with our pipeline out to 2019 now substantially de-risked due to recent lettings, we believe that this progress justifies the decision to propose a 25% increase in the final dividend. The total annual dividend remains 1.5 times covered by EPRA earnings per share at this level.

Our gearing ratios have fallen again too, though only marginally. They now stand at the lowest level for many years. The Group's loan-to-value ratio was 17.7% at 31 December 2016 (2015: 17.8%) and NAV gearing was down to 22.6% from 22.8% in 2015. Interest cover has also risen again to 370% in 2016 against 362% in 2015.

The property sales and letting progress announced with these results are expected to lead to a reduction in debt levels of £327m by June 2017. They also further de-risk the pipeline and provide additional long-dated income for the Group. The net impact of these transactions is expected to add 56p per share to the net asset value. Combined with the low level of existing gearing, the Directors are therefore proposing a special dividend of 52p per share to be paid along with the final dividend in June 2017.

Net asset value

The net asset value of the Group was almost unchanged in 2016, retained profits after dividends being almost exactly matched by the downward fair value movements on our property portfolio and interest rate swaps. IFRS net asset value increased marginally to £3,999.4m against £3,995.4m in 2015 and EPRA diluted NAV per share increased to 3,551p per share at 31 December 2016, up from 3,535p a year earlier. The main reason for the increase in EPRA NAV per share during 2016 came from the removal of dilution in relation to our 2019 convertible bonds following the decline in share price during the year to a level below the conversion price of 3,335p. The movements in NAV per share during the year are summarised below compared with the prior year:

A detailed reconciliation showing adjustments from the IFRS to EPRA NAV per share is shown in note 22 to the financial statements and explanations of the valuation movement for the year are provided within the Valuation section.

Excluding joint ventures the total revaluation deficit for the year was £44.2m (or 0.9% of the portfolio value) of which £1.6m was in respect of apartments under construction held as trading stock and £5.5m related to the portion of 25 Savile Row W1 that we occupy; the balance of £37.1m related to investment properties. In addition, the Group's share of the joint venture revaluation surplus was £1.8m.

As a REIT, we generally do not provide for deferred tax on upward property revaluations. The main exception is for the properties that we hold around Baker Street W1 in a joint venture with the Portman Estate (TPE). The split of ownership is 55%/45% in our favour and we have operational control. As a result, we consolidate these properties and provide for deferred tax on our share of the 45% outside the REIT regime as well as recognising a non-controlling interest in relation to TPE's share. The value of these properties declined in 2016 which is the main reason behind the reduction in the deferred tax liability to £3.1m (2015: £5.5m) and the non-controlling interest to £67.1m (2015: £72.9m).

It is also worth noting that the accrued income, which arises as a result of the 'straight-lining' of rental income under IAS17 and SIC15, reached £116.9m (2015: £97.0m) by the year end. This takes account of rent-free and reduced rent periods, other tenant incentives and fixed future rental uplifts. Part of the overall portfolio fair value is allocated to this balance, the overall split being as follows:

In addition, the Group owns £37.8m of properties in two joint ventures, this figure representing our 50% share of those properties at fair value. The net carrying value of the investments as at 31 December 2016 was £36.0m (2015: £30.7m).

Medium and longer term interest rates fell in the UK during the year with very significant declines around the middle of 2016 followed by some subsequent correction. The mark-to-market cost of our interest rate swaps would have risen accordingly but, as a result of £9.0m paid to terminate or re-profile swaps during the year, it was reduced from £17.6m to £17.3m. The decline in longer term rates also fuelled a £24.5m increase in the fair value adjustments for our long-term fixed rate debt and bonds but this was almost matched by a £22.0m reduction in respect to the 2019 convertible bonds, the latter movement due to the lower share price. After taking these movements into account, diluted EPRA triple net asset value fell marginally to 3,450p per share (2015: 3,463p).

Income statement

It was noted in our 2015 finance review that we were progressing through a long London office property cycle and that, as that cycle matures, the recurring income component of our total return business model should increase. Capturing rental reversion and growing earnings have been among our main themes in 2016, balanced by our development activity and our property disposals.

Gross rental income increased by 4.8% to £155.4m and net rental income by 5.2% to £145.9m. With lower levels of trading activity on residential apartments in 2016 and a £1.6m write-down on the trading stock under development at 80 Charlotte Street W1, net property and other income was only marginally higher at £149.2m in 2016 against £148.6m in 2015. The prior year figure also included £3.7m of compensation received from contractors on schemes delivered late.

In a year when net property dispositions were higher than usual, rental income was down £5.1m due to disposals and only increased by £0.3m due to acquisitions. The main rent increases came from lettings and reviews which added £21.1m while rent reductions from lease breaks, expiries and voids totalled £5.3m and with £3.9m from schemes commencing.

Administrative expenses increased by 3.0% to £30.9m in 2016 but the trend is down as the reported figure takes account of a bonus under-provision in 2015 of £0.9m.

Our EPRA cost ratios were similar to the previous year at 24.0% (2015: 24.3%) of adjusted gross rental income including direct vacancy costs and 22.4% (2015: 22.3%) excluding those costs. As in previous years, no overheads or property costs were capitalised.

In more uncertain market conditions, investor appetite for London offices has held up more strongly than most expected and we were able to book a profit of £7.5m on disposal proceeds of £210.6m in 2016, most of which came after the EU referendum vote. In addition, there was a £1.9m trading profit on the sale of apartments during the year.

Total finance costs reduced from £35.2m in 2015 to £27.8m in 2016 after capitalising £13.0m of interest, £4.7m of which related to phase 1 of The White Chapel Building up to the date of practical completion in October 2016. Because it was acquired as a vacant property in December 2015, interest was capitalised on the purchase price as well as the subsequent development costs. The rent already contracted from the building is £7.0m so, post practical completion when the capitalisation of interest ceased, the net impact upon future earnings is expected to be positive.

Following the sale of the Grafton Hotel property in December 2016, we decided to break £10m of interest rate swaps and to reduce the rate payable under a further £135m of swaps. This cost £6.6m in total. With £2.4m paid to defer a £70m forward start swap by a further 12 months, total swap breakage costs were therefore £9.0m in 2016.

After allowing for the revaluation deficit on our property portfolio, the overall result was an IFRS profit for the year of £53.6m, down substantially from the £777.2m reported for the year ended 31 December 2015. Adjusting for profits on disposal, fair value movements and other items which are non-recurring in nature, EPRA earnings increased by 8.9% from £78.7m in 2015 to £85.7m for the year ended 31 December 2016.

A table providing a reconciliation of the IFRS results to EPRA earnings per share is included in note 22.

After removing the impact of development activity, acquisitions and disposals, EPRA like-for-like gross rental income increased by 5.1% during the year with net property income on a similar basis up by 5.7%. A full analysis is shown in the table below.

Taxation

The corporation tax charge for the year ended 31 December 2016 increased to £2.0m in 2016 from £1.9m in the previous year, due to the profits arising on the sale of residential apartments that were held as trading stock and therefore outside the REIT tax environment.

The movement in deferred tax liabilities for the year was a credit of £2.4m. This was made up of £1.1m (2015: £0.4m debit) passing through the income statement due to the change in tax rates and the valuation impact for non-REIT Group properties and £1.3m in relation to the owner-occupied property at Savile Row.

In addition, and in accordance with our status as a REIT, £5.6m of tax was withheld from shareholders on property income distributions and paid to HMRC during the year. The Company also made significant contributions to the UK public finances on a wide range of taxes borne and collected during the year.

We have recently issued a statement of tax principles and this is included on our website at www.derwentlondon.com. The statement explains our approach to taxation, founded on the principle of retaining our low risk tax status with HMRC.

A fully funded committed pipeline

The combination of property disposals and £105m of new debt capacity means that the Group's committed pipeline of projects was fully funded as at 31 December 2016. Available undrawn facilities and cash totalled £383m and our committed pipeline stood at £363m at 31 December 2016.

Our refinancing activities during 2016 were focused on arranging some more long-term fixed rate debt in the capital markets to further diversify our funding sources, to extend our overall debt maturities and fix into attractive long-term rates. We also extended both our revolving bank facilities and reduced the mark-to-market exposure on our interest rate swaps.

In May 2016, we drew down £105m of new 12 and 15-year US private placement notes that were arranged in February 2016. Full details were provided in our 2015 report and so are not repeated here but we were very pleased to welcome three new lending relationships to the Group.

At the year end, the Group had £613m of fixed rate debt, including £150m of convertible bonds due in 2019, with a weighted average interest rate payable of 4.0%. This rate takes account of the £175m 2026 bonds at 6.5% issued by London Merchant Securities in 2001. We have considered refinancing these to lower our overall cost of debt but concluded for now that such arrangements would be neutral at best from a net present value standpoint. It remains a matter for future consideration.

Our principal bank facilities, which are fully revolving and unsecured, included two one-year extension options on top of their original five-year terms. The first extension option for our £75m Wells Fargo facility was exercised just before the middle of the year. This facility now has a term date of July 2021 with the second one-year extension option remaining, subject to the usual consents. We also extended the maturity of the £550m unsecured revolving bank facility, £450m of the facility amount now falling due in January 2022. The remaining £100m retains a January 2021 repayment date but we have agreed an accordion option for this portion which could extend the effective repayment date to January 2022.

These steps have helped us take the weighted average maturity of our debt to 7.7 years at December 2016, up from 7.3 years a year earlier.

We have also reduced the interest rates payable under our swaps to compensate for the higher rates payable under the long dated USPP notes when compared to our marginal bank loan rates of 1.5%. In April 2016, we extended the maturity of a £70m interest rate swap from April 2019 to April 2023 at no cost, thereby reducing the rate payable from 2.00% to 1.74%. Then, in December, we cancelled £10m of swaps and re-set the rates payable under a further £135m for an overall cost of £6.6m. As a result, at December 2016 the Group held £243m of swaps at an average rate of 1.82% compared with £253m at a rate of 2.44% a year earlier. The £70m forward start swap has also been deferred to March 2017 at a cost of £2.4m.

Taking all of this into account, the overall interest rate paid on our debt at 31 December 2016 fell slightly to 3.65% (2015: 3.68%). Under IFRS accounting, an additional interest charge is taken against earnings to unwind the equity component of convertible bonds; allowing for this takes the notional interest rate to 3.90% at the year-end (2015: 3.93%).

The proportion of our debt that is fixed or swapped into fixed rates was 95% as at 31 December 2016 excluding the £70m forward start swap. The proportion increased over the year due to the additional fixed rate debt arranged and the property disposals which occurred towards the end of the year.

Net debt and cash flow

Capital expenditure in 2016 was our highest to date at £213.5m including capitalised interest of £13.0m. We spent £18.0m on property acquisitions during the year, almost entirely relating to The White Chapel Building, £6.0m of which was Stamp Duty Land Tax in connection with the acquisition of the main part of the building in the previous year. As a result, the cash invested in the portfolio marginally exceeded disposal proceeds of £224.7m from the sale of properties.

With the net cash from operating activities increasing to £77.7m from £76.0 in 2015, after allowing for a £5.3m incentive paid to Capita and their existing landlord to enable them to lease office space at the Copyright Building, net debt was almost unchanged at December 2016 from a year beforehand at £904.8m (2015: £911.7m). This included a higher cash balance than usual following the sale of the Grafton Hotel, a property charged to one of our lenders. We were in the course of documenting the substitution of new replacement security at the year end and, accordingly, £10m of cash was held in a restricted bank account. It will be released once the new security is in place.

Dividend

With the 25% increase in recurring earnings per share in 2015 followed by a 7.9% increase in 2016, dividend cover has increased significantly in the last two years. The final dividend was increased by 10% in 2015 but, now that we have let the main part of the development pipeline through to the end of 2018 and with continuing low vacancy rates in our portfolio and the expectation of further growth in recurring earnings in the next few years, the Board has recommended a 25.0% increase in the proposed final dividend to 38.50p per share for payment to shareholders on the register on 5 May 2017 to be paid on 9 June 2017. 32.70p will be paid as a PID and the balance of 5.80p as a conventional dividend. The interim and final dividend for the year will be 52.36p per share, an increase of 20.6% over last year. There will not be a scrip dividend alternative. It is also intended that the 2017 interim dividend will be increased by 25%.

In addition, following the value-enhancing transactions announced with these results and taking account of the impact upon our already low gearing, a special dividend of 52.00p per share is being proposed to be paid at the same time as the final dividend in June 2017.

Directors' responsibilities

The Directors are responsible for preparing the Annual Report, the report of the Remuneration Committee and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements;

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the report of the Remuneration Committee comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess a company's performance, business model and strategy.

Each of the Directors confirm that to the best of their knowledge:

· the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

· the Strategic Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

On behalf of the board

John D. Burns Damian M.A. Wisniewski

Chief Executive Officer Finance Director

28 February 2017

GROUP INCOME STATEMENT

GROUP STATEMENT OF COMPREHENSIVE INCOME

GROUP BALANCE SHEET

GROUP STATEMENT OF CHANGES IN EQUITY

GROUP CASH FLOW STATEMENT

NOTES TO THE FINANCIAL STATEMENTS

1. Basis of preparation

The financial information does not constitute the Group's statutory accounts for either the year ended 31 December 2016 or the year ended 31 December 2015, but is derived from those accounts. The Group's statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 will be delivered following the Company's Annual General Meeting. The Auditor's reports on both the 2015 and 2016 accounts were unmodified, did not draw attention to any matters by way of an emphasis of matter and did not contain any statement under Section 498 of the Companies Act 2006.

The financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted by the European Union (IFRS), IFRS Interpretations Committee interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention as modified by the revaluation of investment properties, property, plant and equipment, available for sale investments, and financial assets and liabilities held for trading.

Going concern

The Board continues to adopt the going concern basis in preparing these consolidated financial statements. In considering this requirement, the Directors have taken into account the following:

- The Group's latest rolling forecast for the next two years in particular the cash flows, borrowings and undrawn facilities. Sensitivity analysis is included within these forecasts.

- The headroom under the Group's financial covenants.

- The risks included on the Group's risk register that could impact on the Group's liquidity and solvency over the next 12 months.

2. Changes in accounting policies

The accounting policies used by the Group in these condensed financial statements are consistent with those applied in the Group's financial statements for the year to 31 December 2015, as amended to reflect the adoption of new standards, amendments and interpretations which became effective in the year as shown below.

New standards adopted during the year

The following standards, amendments and interpretations endorsed by the EU were effective for the first time for the Group's 31 December 2016 year end and had no material impact on the financial statements.

IFRS 10 (amended) - Consolidated Financial Statements;

IFRS 11 (amended) - Joint Arrangements;

IAS 1 (amended) - Presentation of Financial Statements;

IAS 16 (amended) - Property Plant and Equipment;

IAS 19 (amended) - Employee Benefits;

IAS 27 (amended) - Separate Financial Statements;

IAS 28 (amended) - Investments in Associates and Joint Ventures;

IAS 38 (amended) - Intangible Assets;

IAS 41 (amended) - Agriculture; and

Annual Improvements to IFRSs (2012 - 2014 cycle).

Standards and interpretations in issue but not yet effective

The following standards, amendments and interpretations were in issue at the date of approval of these financial statements but were not yet effective for the current accounting year and have not been adopted early. Based on the Group's current circumstances the Directors do not anticipate that their adoption in future periods will have a material impact on the financial statements of the Group.

IFRS 2 (amended) - Share Based Payments;

IFRS 4 (amended) - Insurance Contracts;

IFRS 9 - Financial Instruments;

IFRS 16 - Leases;

IFRIC 22 - Foreign Currency Transactions and Advance Consideration;

IAS 7 (amended) - Statement of Cash Flows;

IAS 12 (amended) - Income Taxes;

IAS 40 (amended) - Investment Property; and

Annual Improvements to IFRSs (2014 - 2016 cycle).

In addition to the above, IFRS 15 Revenue from Contracts with Customers and an amendment to IFRS 15 were in issue at the date of approval of these financial statements but were not yet effective for the current accounting year and have not been adopted early. The Group has not yet completed its evaluation of the effect of their adoption.

3. Significant judgments, key assumptions and estimates

Some of the significant accounting policies require management to make difficult, subjective or complex judgments or estimates. The following is a summary of those policies which management consider critical because of the level of complexity, judgment or estimation involved in their application and their impact on the financial statements.

- Property portfolio valuation.

- Compliance with the real estate investment trust (REIT) taxation regime.

- Outstanding rent reviews.

- Contingent consideration.

A full explanation of these policies is included in the 2016 financial statements.

4. Segmental information

IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the chief operating decision maker (which in the Group's case is the Executive Committee comprising the six executive Directors and four senior managers) in order to allocate resources to the segments and to assess their performance.

The internal financial reports received by the Group's Executive Committee contain financial information at a Group level as a whole and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements. These internal financial reports include the IFRS figures but also report the non-IFRS figures for the EPRA earnings and net asset value. Reconciliations of each of these figures to their statutory equivalents are detailed in note 22. Additionally, information is provided to the Executive Committee showing gross property income and property valuation by individual property. Therefore, for the purposes of IFRS 8, each individual property is considered to be a separate operating segment in that its performance is monitored individually.

The Group's property portfolio includes investment property, owner-occupied property and trading property and comprised 95% office buildings* by value at 31 December 2016 (2015: 94%). The Directors consider that these properties have similar economic characteristics. Therefore, these individual properties have been aggregated into a single operating segment. The remaining 5% (2015: 6%) represented a mixture of retail, hotel, residential and light industrial properties, as well as land, each of which is de minimis in its own right and below the quantitative threshold in aggregate. Therefore, in the view of the Directors, there is one reportable segment under the provisions of IFRS 8.

All of the Group's properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided to the Group's Executive Committee and, therefore, no geographical segmental analysis is required by IFRS 8. However, geographical analysis is included in the tables below to provide users with additional information regarding the areas contained in the strategic report. The majority of the Group's properties are located in London (West End central, West End borders and City borders), with the remainder in Scotland (Provincial).

*Some office buildings have an ancillary element such as retail or residential.