Goldman Sachs Maintains Buy Rating for Derwent London with Target Price of 2,410p

Overview

This report provides commentary on the Q1 2026 trading update from UK London office developer Derwent London (DLN.L). Goldman Sachs views the company's operational performance as strong, with new lease signings significantly exceeding last year’s levels and demonstrating notable rental premiums. The company has also made progress in asset disposals and announced a new share buyback program. Given its high-quality portfolio, redevelopment opportunities, and current substantial discount to net asset value, Goldman Sachs maintains a 'Buy' rating with a target price of 2,410p.

Core views

Strong operational performance: As of Q1 2026, the company signed new leases worth £20.0mn, far exceeding £2.7mn in Q1 2025 and £11.3mn for full-year 2025. The average rent for these new leases was 5.2% above December 2025 estimated rental values (ERVs). Additionally, the company has £6.7mn of leases under negotiation and signed £5.3mn of renewals and restructuring agreements. Although the vacancy rate stood at 5.2% at the end of March (up 110bps from 4.1% in December 2025), management noted that it has declined to the mid-3% range in Q2, with strong demand for premium assets. Asset disposals and capital management: In Q1, the company completed £278mn of asset disposals at a blended net initial yield (NIY) of 5.8%, priced 3% below the December 2025 book value. Discussions are underway for an additional £120mn in disposals, with a target of £1bn in disposals over three years. Concurrently, the company announced a £50mn share buyback program, expected to commence on May 18 (post-AGM). Management indicated that up to £250mn from the £1bn disposal program could be allocated to shareholder returns, including share buybacks. Financial health: As of end-March 2026, the company’s loan-to-value ratio (LTV) was 29.4%, unchanged from end-2025. The weighted average debt cost declined to 3.9%, down 20bps from 4.1% in FY2025. Total liquidity (cash and undrawn facilities) stood at £383mn, down from £627mn in FY2025, primarily due to asset disposals and the buyback program. Valuation and rating: Goldman Sachs considers Derwent London’s valuation attractive, with the current share price trading at a 53% discount to FY2026 EPRA net tangible asset (NTA) per share. Given the quality of its existing portfolio and further redevelopment opportunities (e.g., the Network W1 project was practically completed on May 5 and is expected to generate positive revaluation in H1), Goldman Sachs maintains a 'Buy' rating with a 12-month target price of 2,410p, implying approximately 40% upside.

Analysis framework

Goldman Sachs’ analysis focuses on three dimensions: operational metrics, balance sheet health, and valuation. First, it evaluates the company’s leasing capabilities and asset attractiveness in the current market by comparing new lease signings, rental premiums, and vacancy rate trends. Second, it assesses the progress and yield of asset disposals, capital recycling potential, and financial flexibility (e.g., share buybacks) by analyzing LTV and debt cost trends. Finally, it derives valuation conclusions and investment ratings based on EPRA NTA discount rates, peer comparisons, and company-specific redevelopment catalysts.

Methodology notes

• Valuation MethodologyNAV (Net Asset Value) Approach

  EPRA NTA (Net Tangible Assets) Discount Analysis

  The report uses the European Public Real Estate Association (EPRA)-defined net tangible asset value (NTA) as a valuation anchor, calculating the share price discount to NTA per share (53% discount) to determine whether the stock is undervalued. This is a common valuation method for REITs.

• Industry/Sector Analysis FrameworkVolume-Price Breakdown

  Leasing Volume and Rental Premium Analysis

  The report breaks down leasing activity into 'volume' (£20.0mn in new lease signings) and 'price' (average rents 5.2% above ERVs) to assess operational quality more granularly, rather than relying solely on total revenue.

• Company Fundamentals & Financial FrameworkFree cash flow analysis

  Capital Recycling from Asset Disposals & Shareholder Returns

  The report highlights how the £1bn asset disposal program translates into free cash flow and is allocated to shareholder returns (e.g., share buybacks), reflecting an analysis of capital allocation efficiency.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Derwent London (DLN.L)

  Direct coverage target, benefiting from strong demand for premium London office space and proactive capital management strategies.

  Strengths

  High-quality portfolio in prime London locations; notable rental premiums for new leases; low financial leverage (LTV 29.4%); clear asset disposal and share buyback plans.

  Weaknesses

  Short-term volatility in vacancy rates (though declining); asset disposal prices slightly below book value (-3%).

  Comparison

  Attractive valuation among Goldman Sachs’ European real estate coverage (53% discount to EPRA NTA).

  Risks

  Weaker-than-expected growth in the London office market; slower-than-expected leasing progress for development projects.

Key data

• New Lease Signings (YTD)£20.0mnSignificantly higher than £2.7mn in Q1 2025 and £11.3mn for full-year 2025
• New Lease Rental Premium+5.2%Above December 2025 estimated rental values (ERVs)
• Asset Disposals (1Q26)£278mnBlended net initial yield (NIY) of 5.8%
• Share Buyback Program Size£50mnExpected to commence on May 18
• Loan-to-Value Ratio (LTV)29.4%Unchanged from end-2025
• Weighted Average Debt Cost3.9%Down 20bps from 4.1% in FY2025
• Target Price2,410pBased on EVA model, implying ~40% upside

Impact & implications

Goldman Sachs expects this trading update to positively impact Derwent London’s share price, driven by progress in asset disposals, strong leasing performance, and the announcement of a share buyback program. The company is optimizing its portfolio by disposing of non-core assets and using proceeds for share buybacks, which could enhance per-share value and shareholder returns. Additionally, the low LTV and declining debt costs demonstrate financial resilience in the current interest rate environment.

Risks

• Weaker-than-expected growth in the London office market, leading to poor leasing performance
• Slower-than-expected leasing progress for development projects

What to watch

• Whether the Q2 vacancy rate continues to decline to the mid-3% range
• Progress and completion of ongoing asset disposal negotiations
• Execution pace of the share buyback program
• Revaluation of the Network W1 project in the half-year report