Corcept Therapeutics Incorporated (CORT) Q4 2023 Earnings Conference Call February 15, 2024 5:00 PM ET
Company Participants
Claire Mogford – Head, Investor Relations
David Sleath – Chief Executive Officer
Soumen Das – Chief Financial Officer
Conference Call Participants
Maxwell Nimmo – Numis
John Cahill – Stifel
Zachary Gauge – UBS
Robert Jones – BNP Paribas
Frederic Renard – Kepler Cheuvreux
Paul May – Barclays
Pieter Runneboom – Kempen
David Sleath
All right. Good morning, everybody. Welcome to SEGRO’s Full Year 2023 Results Presentation. Thank you all for taking the time to join us here in the room or online. Now the observant of you will have noticed that Soumen is not here in the room with us. You can’t see him yet, but he will be looming large on the screen above us all. And I can tell you that this is the first, but definitely won’t be the last reference today that I make to COVID-19. But Soumen, I hope you all are feeling okay and get well soon.
As usual, I’m going to make a few opening remarks before we go into the body of the presentation, and we will finish with Q&A. Now it was the macro environment that dominated headlines during 2023 as the world adjusted to higher interest rates and try to predict when they were going to settle. And in fact, as we know, it was only in the last few weeks of the year that the folks started to clear and markets gained confidence that we were nearing the end of the rate hike cycle, started turning their focus instead to when we might see the first cuts coming.
The impact of the monetary conditions on the investment market is well documented. But from an occupational market perspective, 2023 was the first time for quite a few years, probably going back to the GFC, that we saw the fundamentals of the industrial logistics sector tested by the economic headwinds. And I’m pleased to say that those occupational fundamentals or tailwinds, if you prefer, remained robust and enduring and helped us to deliver another strong operating performance.
These occupational fundamentals, together with more stable monetary conditions also, I think, provide a supportive backdrop for a recovery in investment markets. And as we look ahead with that backdrop, we’re confident that SEGRO is primed to deliver significant further growth through a combination of securing higher rents and delivering profitable developments in an increasingly attractive market.
Our strategy is clear, and it’s been consistent and it continues to deliver. It’s been designed to ensure we produce attractive performance on a long-run basis by taking a thoughtful and disciplined approach to capital allocation, pursuing operational excellence, having an efficient capital and corporate structure and taking a responsible approach to business. And 2023 once again saw that strategy in action, enabling SEGRO to deliver for all of our various stakeholders.
We focused our investments on the current and future development program, only committing capital to the most profitable and compelling opportunities. Operationally, we secured GBP 88 million of net new rent commitments, which is one of our best years ever, with a significant proportion of capital-light reversion capture coming from the existing portfolio and which contributed to a 6.5% growth in like-for-like net rental income.
Our balance sheet remains in good shape with modest leverage, substantial liquidity, a long debt maturity profile and a low almost entirely fixed average cost of debt. And as you’ll see in a moment, we’ve done well with our Responsible SEGRO commitments.
This slide shows how that consistent strategy has delivered attractive financial returns over a number of years. Since 2016, our passing rents have grown 12% per annum. This has supported compound annual growth rates in both earnings and dividends per share of 8%. Over the property cycle, we cannot control investment yields, which are highly correlated to government bond yields. But even after the recent market correction, we’ve shown a very attractive 10% CAGR in net asset value per share since 2016. This is pretty strong compounding performance, and we believe there’s still a lot more to come.
As I hinted a moment ago, we’ve also made some good progress with our three Responsible SEGRO commitments. Firstly, I’m delighted that we’ve now launched community investment plans in 12 of our markets. As part of these, we’ve organized 44 separate community and environmental projects during 2023 alone. Our education programs engaged over 8,000 young people, and we’ve supported over 1,300 unemployed people with training, 347 of whom are now in full-time employment. We had a record 707 days of employee volunteering, and we had 143 customers, suppliers and other business partners take part alongside us.
Secondly, it was a very active and successful year for nurturing our talent. We reshaped, broadened and strengthened our leadership team following the retirement of Andy Gulliford. We’ve put in place more challenging EDI goals. And importantly, we’ve developed a supporting action plan. We’ve continued to invest in the development of our people through our Management Academy, and we’ve maintained extremely high levels of employee engagement.
Finally, we’ve made terrific progress towards our decarbonization goals, where we’re focused on the entirety of the Scope 1, two and three carbon emissions. In fact, drilling into that in more detail, decarbonization has two parts: firstly, addressing our corporate and our customers’ emissions. Almost all of these, in fact, 98% are generated by the activity of our customers who use our buildings, which is a big challenge because we have no direct control over these, and we do not automatically have visibility of their emissions.
So one of our first priorities is to increase the visibility through adding green clauses to our leases and using our close relationships that our asset managers have with customers to get them to share their data with us. I’m really pleased that we now have visibility of 81% of our customer energy data, which is up from 41% in 2020.
With better and more accurate data, we can then direct our investments in an intelligent way, helping to improve energy efficiency, and so reducing our customers’ emissions and costs. Solar plays an important part of this. And during 2023, we added a record 15 megawatts of solar capacity, an increase of 34%, taking the total capacity to, in the portfolio, to 49 megawatts. And there’s another 25 megawatts that we’re planning for 2024.
And then the second area of focus is to reduce the embodied carbon associated with our development program, which accounts for 31% of our emissions. We carry out embodied carbon assessments using building information modeling on all our development projects, and we work closely with our consultants and construction partners to find ways of really reducing that carbon intensity. And we’re now three years ahead of our Science Based Target initiatives accredited target pathway to reduce our average embodied carbon intensity by 20%.
Complementary to this, most of our projects are also now assessed by BREEAM, which is an important measure, both for occupiers and by property investors. And 92% of our new developments were rated BREEAM Excellent or higher. So we’re making some really good progress with Responsible SEGRO, but we also recognize there’s still a long way to go.
Let me now turn to the rest of the presentation, which has got four sections. I’ll start by providing some context about the market fundamentals. Soumen will then take you through the financials, then back to me to talk about how we’re driving rents and profitable growth through asset management and development. And finally, why we’re increasingly excited about the future growth potential with SEGRO primed for profitable growth.
So let’s start by looking at the markets. We’ve discussed these long-term structural drivers in the past presentations, and I’m not going to go through in a great deal of detail today. Instead, I’d like to just highlight that as I reflect on 2023 and the occupier interest we’re already seeing in 2024, the drivers are still very much intact and, in some cases, accelerating.
E-commerce penetration is continuing to take market share, whilst the generation of data by businesses and consumers is exploding, in part by the emergence of generative AI, which is driving a lot more demand for data centers with some forecasters suggesting a requirement to triple capacity in Europe by 2028. Later, I’m going to come on to how we’re positioned to take advantage of this.
Also, more and more companies are looking at how they can optimize their supply chains to improve efficiency, improve customer service, reduce costs or improve the resilience of their supply chains. Ever-growing populations in the big European cities need more goods and services often supplied out of space like ours, but where available land is often shrinking due to the political imperative to deliver more homes.
And then finally, sustainability is driving demand for modern efficient space to help customers reduce their own carbon footprint by having modern efficient buildings in locations which reduce truck miles. So the structural drivers are still very much in evidence.
Now the question many people have been wondering about is this: what happens when the structural tailwinds meet economic headwinds? And the answer so far as the European logistics sector is concerned is that the fundamentals remain positive and enduring. Yes, clearly, take-up is down from the peaks of the pandemic, but it has been solid and above the pre-pandemic average.
Vacancy has remained low by long-term standards, and it’s even lower in our chosen submarkets. We also observed that new spectator development starts have slowed down in 2023, down by 34% in the U.K. according to Soumen. And with very prolonged planning processes, limitations on green belt release and a less active trader developer competitor group, we see supply remaining tight. Meanwhile, we’re seeing decent levels of inquiries from occupiers in 2024, and we already have a significant amount of space signed or under offer.
Turning to investment markets, these continue to be negatively impacted by the macro environment during 2023. Many previously active investors simply sat on their hands whilst would-be vendors we’re not willing to face the likely bid offer spread, so also remain quiet. All of this resulted in prime yields drifting further out as rates continue to rise during the first three quarters, although there appear to be a more positive sentiment towards the end of the year as the commentary from central bankers around the trajectory of inflation and interest rates fed into a tightening of government bond yields.
Investor surveys point towards industrial and logistics remaining the most favored or one of the most favored asset classes, and anecdotal evidence in early 2024 is of a more active market. Should expectations for rate cuts in the summer come to fruition, it’s quite possible that this point in time, we’ll turn out to the at or close to the bottom of the current market cycle, suggesting to us that 2024 could prove to be an excellent vintage for industrial and logistics investment.
So in summary, we believe the fundamentals for our markets remain attractive. So let me now hand over to Soumen, who’s going to take you through the financials.
Soumen Das
Thank you, David. Good morning, everybody. I’m very sorry, I can’t be there in person, but hopefully, this is the next best thing, and I’m coming through loud and clear.
So yes, I’ll take you through the results now for the year 2023. And starting on Page 12, please. Here’s a summary of our key financial metrics for the year 2023. And these really reflect those themes that David talked about. Positive occupier markets leading to higher earnings and dividends, but uncertainty in capital markets impacting the investment market.
Adjusted profit before tax is up 6% to GBP 409 million, and adjusted earnings per share is up 5.5% to 33.7p. So that means we’re recommending a final dividend of 19.1p, and that takes us to 27.8p for 2023 as a whole, and that’s up 5.7%. The portfolio is now valued at GBP 17.8 billion. That’s a small decrease of 4%, which has led to a 6% fall in NAV per share to 907p. But despite this, the balance sheet remains in really good shape with loan-to-value up a little year-on-year at 34%.
Next slide, please. So on Slide 13 now. Now this is the usual slide that looks at net rental income growth, which is the real key driver of earnings growth. 2023 saw a really strong year of growth in net rent. It’s up GBP 65 million, an increase of over 12%. Now you can see on the graph, there’s two main contributors to that growth. Rent on a standing portfolio grew GBP 31 million. Like-for-like growth, which you can see in the box above, was up 6.5%. Secondly, development completions added GBP 42 million during the period. Investment activity was fairly material for a net impact of just GBP five million.
Next slide, please. Turning to Slide 14 now. So we thought it would be useful to drill into the components of that GBP 31 million of like-for-like rental growth. It is going to be a key driver, we hope of rental growth going forward from here. Now in the box on the left, you can see that we added almost GBP 15 million to leasing up vacant space. That was offset by GBP 10 million of space that we’ve taken back to refurbish mostly to create new opportunities.
Rent reviews and renewals added GBP 18 million. This is all about capturing the significant gap between in-place rents and market rents within the portfolio, and there’s still a lot more to come, as David will talk about shortly. Indexation added a further GBP 11 million. Now at half our leases, mostly in Continental Europe, have annual CPI ratchets. That’s still a bit of a big benefit during this period of high inflation, and has led to the 8.5% growth in like-for-like rents on the continent.
Operating costs had a small negative impact of GBP three million. Now this includes bad debt, which was less than 1% of the rent roll, reflecting the resilience of our customer base despite those wider macroeconomic challenge within cash collection rates tracking at normal levels across the portfolio.
Turning now to the rest of the income statement, off to Slide 15. Thank you. So this slide looks at the key lines of the income statement. You can see on the table that the growth in net rental income, which I’ve just talked about, feeds through to growing profitability. Adjusted profit before tax at the bottom neck grew 6% to GBP 409 million, and EPS was up 6% to 32.7p.
A couple of things to highlight on this slide. In the first box, you can see our cost ratio was down slightly to just under 20%. And in the second box, you can see the biggest change from last year has been our finance costs, which we’ve also been flagging in the past couple of results presentations.
Net interest paid has increased from GBP 74 million in 2022 to GBP 106 million in 2023, mainly due to the higher interest rate on the new debt we put in place over the past two years. That’s been offset by higher capitalized interest. Our new debt has mostly been put in place to fund on newest projects and as we capitalized interest of those at our marginal cost of debt.
Given the higher rate environment, that has led to a big increase in the level of interest capitalized. That’s up to GBP 64 million in the period. But we’ve seen this being fairly stable in 2024, although it doesn’t obviously depend on where interest rates go next.
Turning now to the portfolio valuation. So Slide 16, you can see here that the overall portfolio value at December 2023 was GBP 17.8 billion. Now as you can see, the valuation saw a decrease of 4% in 2023, but that was much more modest than the 11% decline in 2022, which gives us confidence that bulk of the correction should be behind us.
The U.K. was down 3.4%, most of which came in the second half of the year and reflected tighter financial conditions in capital markets. Now public markets rallied significantly in the last few weeks of the year, but not in time to impact property investment markets, which typically show a lag. Continental Europe saw a decline of 5.1%, and that was fairly evenly split between the first and the second half.
Turning to Slide 17 now. Now you can see here that the valuation movements were due to 50 basis points of yield shift across the portfolio, offset by positive rental growth. The yield shift was much less than 110 basis points that we saw last year with 20 to 30 basis point moves in the U.K. compared to 60 to 70 basis point moves on the continent.
On the other hand, rents moved up in every market, 6% across the portfolio due to our asset management initiatives benefiting from that supply-demand imbalance, which David talked about earlier. The continent saw quite a bit better rental growth than the U.K., and Germany was particularly strong. Now the 5.3% property yield, together with that 6% ERV growth, continues to offer double-digit unlevered IRRs, which we would suggest is very attractive in any long-term context.
Next slide, please. So Slide 18 and talking of double-digit IRRs. We’ve added the slide here on self to show you the put you the 10-year performance fee into context. Now SELP was set up in October 2013 as a joint venture with DSV, the major public sector pension funds in Canada to invest in Continental European big boxes.
Now you can see on the chart on the left, the ventures growth from EUR one billion to just under EUR seven billion, which is a phenomenal performance over its first 10 years. Headline rent has grown fourfold in that time to GBP 322 million — EUR 342 million. And occupancy is 99%. Now all that has delivered a very attractive 10-year IRR of almost 13% to us and to DSV pre-FEED.
Under the terms of the joint venture, we’ve been paid a performance fee of EUR 103 million, which reflects the outperformance over the five hurdle rates. Net of our 50%, that’s a receipt of GBP 44 million to SEGRO. To remind you, as we mentioned in July, this and any future performance fees are excluded from adjusted earnings. And looking forward, we are looking forward to working closely with DSV to continue sales performance in this important part of our business for the next 10 years and beyond.
Slide 19, please. So this slide shows you the balance sheet, which remains in great shape and provides us with a significant liquidity to invest in our profitable development pipeline. Leverage has increased 2% to 34%. Now on the cycle, we look to pivot around 30% to the 23% low in 2021 has moved out to 34%, absorbing the 20% correction capital values at that time. So the capital structure has performed exactly as intended.
You will be aware, our credit rating was downgraded by Fitch, but it remains at A-, which is still higher than the vast majority of the real estate universe. Net debt to EBITDA has reduced significantly from 12x to 10.4x as EBITDA has grown and net rent — and net debt has been helped by disposals. Now expect more the same in 2024 as we capture more reversion and capture land into income, and so the ratio should fall further from here.
Our cost of debt stands at 3.1%, which is up slightly. And that step up in the cost of debt since 2021 is mostly due to the interest rate on new debt we put in place, just as I touched on earlier, in relation to earnings. Nevertheless, interest cover remains very strong at 3x.
In terms of capital allocation, looking ahead on the box on the bottom right, you can see that we’re expecting around GBP 600 million on CapEx this year, and that includes GBP 150 million on infrastructure. We continue to target disposals of around 1% to 2% per annum of our asset base, and we are at the upper end of this in 2023. We think it’s an important capital discipline in it’s smart portfolio management to review and then bottom slice the portfolio each year, taking that capital recycle into our development pipeline for accretive growth.
Next slide, please. Slide 20 shows you our debt profile, which stretches out 18 years to 2042. We have won the longest and most diverse debt structures in the sector as a result of the funding activity, which we’ve carried out over the past few years. This debt structure and the interest rate hedging that goes with it is designed like the rest of our business to perform through all parts of the cycle.
Our average debt maturity is 6.9 years. Within that, our short-term bank debt, which is the gray bars, were put in place relatively recently close to current rates to top up liquidity, where SEGRO’s bond and private placement debt to the red and the pink bars have a much longer maturity profile of nine years and at lower rates.
Now we’ve looked at how our interest costs evolve assuming debt is refinanced at current rates. And over 10 years, there’s a relatively muted headwind of around 1.5% to 2% per annum to earnings, which is very manageable in the context of the rental growth, which I talked about earlier. 95% of our debt is fixed or capped, and all of our caps are currently in the money. Now these caps were long duration spread over the next six years. So this gives us protection while it will also be a benefit if interest rates start to fall.
Next slide, please. So on Slide 21, to sum up on the financial side. By continuing to invest in the business to capture occupier demand and despite the higher finance costs, we delivered earnings growth of 6% during 2023, which is driven by reversion and indexation within the existing portfolio, alongside development activity to add new rent. That’s allowed us to grow the full year dividend by 6%. We saw a further modest decline in asset values. But if the market is right, that the next move in interest rate is down, then the bulk of the correction should be behind us. And whatever happens, our balance sheet is in great shape to deal with any uncertainty and volatility down to our long-term debt structure and high liquidity.
And with that, I’ll hand you back to David.
David Sleath
Thanks, Soumen. Okay. Now I’m going to look into the main drivers of our operational results and, in particular, how we are securing profitable growth from proactive asset management and development.
2023 was another successful gear for SEGRO’s customer-facing teams. We signed up an impressive GBP 88 million of new rent in the year, which is our third best year ever and only just shy of the exceptional pandemic levels. The signing of new pre-lets and leasing of speculatively developed space accounted for GBP 37 million of the total, covering 22 different projects and a wide variety of sectors from online retailers to data center operators, from automotive to suppliers of precision medical instruments and, of course, many involved in the distribution and third-party logistics activities.
Whilst the present environment means that company boards are often taking longer to mull over major commitments, we’ve continued to see occupiers making significant long-term commitments, usually underpinned by at least one of the structural themes I referred to earlier.
Now as you can see, there’s quite a variety of names, which is some of the ones that we’ve been helping through 2023. You’ll also see that the red part of the bar, the element relating to our existing portfolio at GBP 51 million became a much larger proportion of the total rent secured. And this reflects the particular success we had in capturing rent reversion, which has been building up over the past few years. So let me shine a little bit of light on that element.
And the first thing to say is the foundation of strong operational performance from our portfolio is actually having the right assets in the right places, which is why disciplined capital allocation is so critical. Beyond that, however, it’s the proactive and strategic approach to asset management that is an important element of SEGRO’s competitive advantage. And I’d highlight three particular elements of that approach.
Firstly, it’s about building strong customer relationships and industry knowledge, which is an integral part of our approach so that we better understand what’s going in the different — going on in the different customer segments and the particular companies we’re working with. We’re increasingly employing a variety of digital tools to help us create and utilize internal and external data to better understand our customers’ businesses.
Meanwhile, we’re driving a higher and more consistent customer experience for our occupiers across the entirety of their journey with us and across our different geographies, which enables us to develop ever-closer relationships. And of course, we’re constantly measuring customer satisfaction to provide a critical lens on how we’re doing.
Secondly, all of that gives us some great insights, but most importantly, it enables our asset managers to take a proactive approach to managing the portfolio, moving customers around, upsizing, sometimes downsizing, reviewing and regearing contracts, leasing vacant space, setting new rental levels and, of course, settling rent reviews. And in 2023, we had over 400 lease events across the entirety of our portfolio.
And then the third aspect I want to highlight is the ongoing refurbishment and upgrading of some of our older estates in our most heavily populated and congested market of London. This is where land and good buildings are in short supply, but rents are continuing to grow. And this provides us with the opportunity to add value through refurbishment or redevelopment whilst also improving environmental performance.
Depending on the phasing of take-backs, this can cause periods of elevated vacancy as we have seen in London over the past year or so. But our experience is that when we undertake high-quality refurbishments and provide well-specified and highly sustainable space in the right locations, there’s no shortage of occupiers willing to pay a higher rent to secure that space. One such refurbishment in West London was we believe the first industrial refurbishment in the world to be awarded at BREEAM Outstanding certification, and it’s currently under offer for a rent ahead of ERV and approximately double the previous passing rent of the un-refurbished unit.
This proactive approach to asset management helped us achieve a 31% uplift across all settled rent reviews and lease renewals in 2023. The U.K. was particularly notable at 40%, with the rent review structure here, meaning we’re usually picking up five years of accumulated rental growth. Most of the Continental portfolio is covered by annual indexation clauses. And therefore, you’d expect the uplift at lease renewal stage to be more modest, but we can be pleased with an average 8% gain that we’ve picked up there.
Turning to the right-hand side graph, you can see that despite the higher rents that we’ve been securing, we’ve kept a high occupancy rate in the middle of our target range, and customer retention is also being maintained, which shows that the majority of our customers are prepared to pay these higher rents to stay in the most well-located modern and sustainable space that enables them to operate their businesses most efficiently. And I’d add to those figures on the chart that overall customer satisfaction of SEGRO customers remains high at 86%, with 96% of them saying they’d recommend SEGRO as a landlord.
What that tells me is that our teams are doing a pretty good job of managing those customer relationships whilst also balancing occupancy with rental growth capture. And this gives us confidence in our ability to capture the remaining reversion in the portfolio. And there’s a significant amount to go at in the years ahead.
Today, the gap between the in-place rents and the market rents for our portfolio is GBP 137 million, excluding vacant properties. In the left-hand chart, you can see how it’s built up with a particular acceleration during 2021 and ’22. The chart on the right-hand side shows when we can capture that reversion based on the timing of lease events. And you can see that we can gain GBP 84 million of uplift over the next three years, which is not a million miles from the run rate of approximately GBP 30 million per annum we’ve captured in each of the last two years.
These figures will increase further with ERV growth up to the date of each lease event. And of course, they’ll be supported by indexation uplifts on the continent. All of this should drive continued strong like-for-like rental growth in the years ahead.
Now I’ll turn to the development program, which is also helping to drive income growth and has significant potential as we look ahead. We completed 34 projects in 2023, which added 626,000 square meters of new space, has GBP 50 million of headline rent associated, of which 87% was leased as at the year-end, delivering attractive returns with a yield on cost of 7%.
Highlights amongst the completed projects included a 3-building data center for a new customer, GTR, on the Slough Trading Estate; and completion of a distribution warehouse for DHL near Amsterdam Airport, a really interesting project this one because grid restrictions meant that we couldn’t get any power on to the site before the end of 2025 at the earliest. So to enable the project to go ahead, we created an energy center on site that was powered by three megawatts of solar capacity, supported by a 1-megawatt battery and backup power generators driven by biofuel that have been leased until we’re able to bring power directly on site.
We also completed our final unit at our U.K. Logistics Park at East Midlands Gateway, where we’ve now delivered almost 500,000 square meters of space, let to 11 customers and which has created over 6,000 jobs. When we started this project back in 2017, we planned it as a 10-year development program. We’ve fully completed it in just over half of that time.
And then finally, we finished our last phase of SEGRO Park Cologne, an urban estate on the former — on the site for former paint factory that we’ve built out over eight years in three different phases. The final phase was let three months before it was actually completed in September. And this estate is now home to 23 different businesses from a diverse range of industries and employing over 1,100 people.
Our capital allocation strategy in 2023 was entirely focused on supporting the current and future development program with an aggregate investment of GBP 931 million. Our current development program involved GBP 527 million of capital, with GBP 92 million invested in infrastructure, mostly in North Northampton, where we’re building another strategic rail freight interchange to support a logistics park of similar scale to EMG. GBP 435 million went into the construction of buildings on land we already own with the bias towards lower-risk pre-let projects and typically earning a 10% yield on the incremental capital.
We’re also pleased to be able to secure three exceptionally rare opportunities for future development at attractive pricing. This included the former Radlett Aerodrome, which is adjacent to the M25 motorway; the Bath Road shopping park in Slough, providing an opportunity for more data center development; and finally, the site of a former power station on the edge of Dortmund in Germany, where we’ll be building a logistics and light industrial park.
We’ve funded these investments through a number of targeted disposals, which included a portfolio of less core U.K. logistics assets and two logistics land plots where the buyers intend to develop for themselves for owner occupation, offering us an attractive risk-free profit.
Looking ahead, we see a great opportunity for more profitable development and improving margins. As I mentioned earlier, the structural drivers in our sector remain intact and are supporting continued occupational demand. Speculative construction starts have fallen, which means supply will remain constrained. This should be supportive of continued rental growth, whilst we’re seeing a moderation of construction costs across most of our markets.
These favorable conditions for development — or these are favorable conditions to development. And we have a superb land bank, which puts us in a great place to exploit that potential. We currently have developments capable of delivering GBP 71 million of rent already under construction or in advanced pre-let negotiations; and then a further GBP 372 million of potential rent in our land bank, much of which can also be delivered in the near term and some of which is clearly longer term.
The yield on total development cost, factoring in the cost of land and financing costs, is likely to be 7% to 8% on average, whilst as I’ve already said, the yield on new money is around 10%. We think this makes it a very profitable place for us to deploy our capital into.
And within this land bank and beyond, we have a particularly significant opportunity to capitalize on the strong demand for data centers, which, as I mentioned earlier, is a European sector that we think is set for significant growth in the years ahead. This is not a new area for us. As you can see from the bottom right, we’ve been growing the rent attributed to data centers over the past decade such that it counts for about 7% of our total rent roll at about GBP 51 million.
We believe the Slough Trading Estate where SEGRO began its life is already the second-largest data center hub in the world. We’ve had a specialist data center team in place for some time now. We know the customer sector well. And over the course of the last couple of years, we’ve been adding data center opportunities to the land bank in Slough and across Europe.
In headline terms, we currently have sites where we expect or already have the power and planning consent to support 24 potential data center projects that would provide an additional 1.2 gigawatts of capacity. Some of this potential relates to land and covered land and so is included within our development pipeline, where we expect to generate incremental rents of more than GBP 100 million, assuming we followed the power shell leasing model that has worked well in Slough, and this would take the total rent to more than GBP 150 million.
But that’s only part of the story because several of the 26 sites are not within the development land bank at all. They are, in fact, sites that are currently held within the existing investment portfolio such as on the Slough Trading Estate, which is where we’ve developed over 30 data centers, which have replaced older industrial assets. So the full potential associated with that one point to two gigawatts of capacity is considerably more than the GBP 100 million we are showing here.
At this stage, we are maintaining an open mind as to whether the powered shell approach is the right model, and we’ll adapt our approach to the specific circumstances of each site with the sale of a freehold site or of a completed project to a data center operator or indeed going further up the value chain being the potential alternatives. And I’m sure this is a topic we’ll be discussing further in the months and years ahead.
So let me summarize our view of the future and tell you why we are prying for further growth. We have a best-in-class existing portfolio, comprised mainly of modern, well-located assets that will perform through the cycle. two third of it is in the most supply-constrained urban markets, and the remaining one third consists of high-quality logistics parks in prime locations. We’ve got an exceptional land bank, and our market-leading operating platform with people on the ground in all of our key markets consistently drives growth from the existing asset base, executes the development program and gains access to new opportunities.
The vast majority of our buildings are extremely flexible and adaptable to many different uses. As a result, our customer base is highly diversified with no single name or industry segment dominating. The diversity of occupier demand, particularly in our urban portfolio, provides a constant source of new or expanding businesses that need high-quality, sustainable space in prime locations where land is exceptionally hard to acquire, permitting incredibly difficult and choice is very limited. Supported by the structural tailwinds, we believe this diversity will provide us with resilience, ongoing high occupancy and further rental growth.
So bringing all of that together, the growth potential embedded within our existing business at today’s market rents is set out in this chart. And you may notice that we’ve presented the slide slightly differently this time to particularly highlight the near-term opportunity over the next three years versus the longer-term picture.
So if I walk you through it, you’ll see that GBP 639 million on the left is the current cash passing rent. And over the next three years, we have the potential to increase that by over 50% to GBP 980 million through rent frees burning off, letting vacant space, capturing reversion that’s due to come up just in the next three years as well as through our current and expected development activity over that 3-year time frame.
So the development piece includes the GBP 71 million associated with the current on-site projects and pre-lets and advanced negotiation. We’ve also included an estimate of the additional projects likely to be concluded by the end of ’26 drawn from the future pipeline, which reflects our current development intentions. That’s the GBP 83 million you can see just before the GBP 980 million subtotal.
Most of this growth is largely baked in and within our control. And then beyond that, you can see we’ve got another 40% — 40% we can add to the rent roll through the version capture and the development that will happen from 2027 onwards. So altogether, that gives us the opportunity to more than double our cash passing rents to GBP 1.4 billion per annum. That’s ignoring any further ERV growth or indexation uplifts. It also ignores the uplifts from redevelopment and refurbishment of existing assets, including, importantly, several data center opportunities. And of course, it doesn’t allow for disposals, which as we’ve said before, are likely to continue at a run rate of 1% to 2% per annum.
As we’ve already said, we believe the favorable demand and supply dynamics will continue to drive ERV growth across all of our markets and segments. After two exceptional years of ERV growth during the pandemic and especially in London, rental growth is now returning to more normalized levels towards the upper end of our range of 2% to 4% in logistics and 3% to 6% in urban markets. That’s a level we are comfortable is sustainable over a long period of time.
So to summarize, occupier demand remains solid and continues to be supported by long-term structural drivers and limited new supply. We think investment markets are close to the trough with good prospects for recovery from around the current levels. SEGRO is well set for growth, both from the capture of baked-in rent reversion and from the improving development margins on our terrific land bank. And we think that it’s an attractive environment for investment into the industrial and logistics market in Europe.
So that concludes our presentation. Thank you for your attention. And we’re now going to move to questions. Hopefully, Soumen will be able to join us for those. We’ll follow the usual routine, we’ll do questions in the room first, and then we’ll join — and then we’ll go to the conference line and the webcast. So a couple of things to say. [Operator Instructions]
Question-and-Answer Session
David Sleath
So who’d like to go first, please, in the room? Yes, Max.
Maxwell Nimmo
It’s Max Nimmo at Numis here. I’ll stick with just one question. Soumen, you were talking a little bit on the income statement about costs and how that’s being managed. I noticed that the EPRA cost ratio has gone up by 400 basis points this year to, I think, 24%. I think it’s on Slide 45.
And just, I guess, just maybe give a little bit more color around that. Is it to do with some of the vacant space that you’ve taken back, things like that? And just generally a bit more because I guess we’d expect as you grow the business to become a little bit more efficient. And I’m not sure if that is indeed the case there. So a bit of color on that would be great.
Soumen Das
Max, hopefully you can hear me. So if you — on the presentation, which I covered, on Page 15, on the income statement, the cost ratio is down to just under 20%, 19.9%, which is just down 40 basis points and 20.3%.
Firstly, I’m not sure, I just hope we look at Page 43, and I’m sure why that says what it does, because the cost ratio is the 19.9% is the right number. And as you say, I think if I kind of look back at how that’s tracked over the past few years, we have grown the business. We’ve grown the top line of the business through new rental income well. We have increased our head count over the past three years or so.
But I think looking forward from here, I think there should be some decent operating leverage, which is coming through because we’re not planning to grow headcount. I mean, we think we’ve got the right-sized business we were great people across the — across our across 14 — our PA countries that we’re in. And therefore, as we continue to grow the top line rent we will — we should get to see that cost ratio coming down slightly.
The reason the EPRA number, which is as shown in the appendix there is up, is a take policy, which is that in the [indiscernible], which is the underground Paris — the underground price facility that we acquired that we are currently refurbishing and launching later this year. On the terms of the way we acquired the rights of that, there we bought the underground. We also had — we also provided the loan, and that loan has been written down.
Now in terms of the economics, it is where we are still up net of that write-down. But the EPRA cost ratio takes that loan right down into account. So it’s a technical issue as to why that’s gone up 400 basis points. It’s not an indication of the underlying cost ratio of the business.
David Sleath
Thank you, Max, for that question. I have to say one of the things I haven’t missed for more than 12 years since I gave up the CFO role was somebody coming to all his presentation and saying, why isn’t that number on Slide 45 agree to that number on Slide 15? So well handled, Soumen. Okay, John, you’re next.
John Cahill
John Cahill from Stifel. I just wanted to pick up on the comments you made on data centers, artificial intelligence becomes more pervasive — and the amount of space needed in data centers will increase and the amount of electricity required exponentially so. Are you starting to see your data center tenants prepare for that? And by extension, are you potentially as the landlord having to look at another super cycle in your sector to accommodate what appears to be coming out of the horizon?
David Sleath
Yes. I mean the data center sector is set for extraordinary growth. And there’s a lot of debate about where is that all going to happen as well. It won’t all be in the existing core clusters, but there’s no doubt in our mind that places like Slough and the major flat Dmarket, as I called in Europe, the major capital financial centers will continue to benefit from a huge amount. But actually, locating where you can get access to the power is going to be critical for some of these large language models that need huge amounts of computing power.
But everywhere — as has always been the case, the key to — or one of the keys to successful growth in the data center market is can you secure the power, can we get the planning, is it in the right location for latency purposes? And that’s why having sites where we can source power either today or reserve it for the future is critical to unlocking that potential. But it’s going to be an ongoing challenge for the whole sector for some time to come, I have no doubt. Yes?
Unidentified Analyst
Carlin Molly from Colytics. Just thinking about some of the levers that you can pull going into 2024 and beyond. And you talk a lot about the supply and demand imbalance in the sector. Has occupancy seen a step change up post COVID? And can we expect you to drive occupancy back up to that 97% range? Or have we normalized now back into that 95% where you are today?
David Sleath
Yes. We’ve always felt that having a healthy amount of vacant space is useful, particularly in the urban markets. In fact, if you look at — I think it was on Soumen’s side, if you look at big box in — on the continent itself, occupancy is 99% because that’s the kind of business where people take long-term leases for business reasons that means they’re locked in for a very long time.
In the urban market, we need space. I talked about London where we’ve been taking back some of the older space to refurbish and redevelop it. And so you need that, you need some of that space to build — to come back to be able to add value. And more generally across the industrial markets, the urban markets.
Again, if you’re fully occupied and you’ve got no lease events, and in some of these markets, we’re creating a product that doesn’t really exist. You go into some of the German markets, I remember for many years, it was really hard to get traction in rental growth because you needed new product or you needed new space to be leased up at higher rents to be able to prove that rents were growing, so the values could take that on board.
So I think we’ve said, look, 4% to 6% vacancy rate across the whole portfolio is where we’d like it to be. We’re comfortable where we are in the middle of that range. And it’s always a trade-off between trying to keep occupancy as high as we can, but also having enough space to be able to set those new rental levels. So there has to be a sort of trade-off there. And that’s what our teams are very skilled at judging on the ground is just how far to push where we’ve got more space coming back. We may take a slightly less firm approach, but in markets where it’s fully occupied, we’re clearly going to push for the highest rate we possibly can. Yes?
Zachary Gauge
It’s Zachary Gauge from UBS. Clearly, the headline rental numbers are still holding up very well, but we are operating in a slower economic environment and certainly a lower demand environment for industrial space. So if you could just touch on some of the softer indications. So have you seen any movement in rent-free incentives? Are you seeing any indications that void periods are moving out slightly and perhaps touch on sort of where they stand roughly across your portfolio? And then just sort of a very small follow-on question. Does the reversion number, the GBP 137 million, is that gross or net of incentives?
David Sleath
Okay. I’ll try and pick those up. I think in terms of the demand, I mean, it’s pretty solid everywhere we are operating. And I put those European wide logistics slides up there in the take-up levels, which sort of give you a sense of sentiment. But we are not in all markets all the way across Europe. And we’ve tried to focus the portfolio in the areas where there’s going to be the strongest enduring demand and less land available for competition.
So in virtually all of our markets, we’ve got a really healthy supply-demand dynamic. There’s nowhere where we’re particularly concerned about higher vacancy levels. The market we always watch and keep a particularly close eye on is Poland because there’s a much more active trader developer set out there. And there is more vacancy in Poland. I think country-wide, it’s something like 9% vacancy, but we’re down at about 4%.
So we’re in absolutely the best submarkets. And that’s why we’re comfortable that with — we don’t need the overall demand to be blowing the lights out. We just need a steady level broadly in line with pre-pandemic levels we can operate very effectively there, capturing opportunities from new development, but also securing the rental growth. And we’re really comfortable with where that dynamic between supply and demand sits in our particular chosen markets.
In terms of the GBP 137 million of reversion potential that is headline, bearing in mind that most of it will be captured through rent review clauses. And when you settle a rent review, you’re not usually giving away any rent-free incentive at all. So it’s only on the new leasing, which will be a piece of it related to actually not the GBP 137 million addition to that, the vacant space. Typically, you will offer or six to seven months of rent-free for a 5- to-10-year lease. And what we’d say is incentives are tracking exactly in line with our long-term averages, nothing particularly significant going on there. Rob?
Robert Jones
Just one on capitalized interest. Obviously, increased materially to GBP 64 million this year. I appreciate that your marginal cost of debt has obviously gone up but the changes is very material. Is that partially due to capitalized interest on land that you’ve acquired? And if so, for the GBP 60 million of guidance for 2024, should we therefore assume that a broadly similar level of land acquisitions?
David Sleath
Soumen, do you want to talk about that?
Soumen Das
Yes, of course. Rob, look, I think we’ve — I think we talked quite a bit about in the last 12 months or so. We talked about why we think it’s the right thing to do to be capitalizing the interest rates at the base for specific projects at the module, right? Because just the specific material cost on the cost related to a project are capitalized against it, those finance costs should be specific to the project.
We only capitalize projects where there’s activity going on site. So the vast majority of cases, that is — those are properties where — or those buildings actually come on stream in the next sort of 12, maybe 18 months because the development cycle is being very short in our sector. It does include a very small number of some of our larger schemes, which have longer-term infrastructure in place because, again, those sites are in the early stages of production. And those, therefore, will capitalize for a number of years.
But so when we think about the guidance we gave for sort of around GBP 60 million for 2024, that take into account from the two main factors, the volume of CapEx and the — and where rates are. Now the volume of CapEx, we’ve guided to GBP 600 million, but obviously, interest rate may evolve, will evolve as 2024 continues. What won’t affect it is whether it is if we buy new land plots during the year.
David Sleath
On which was — I think the last part of your question, we’re not planning on buying significant amounts of land in 2024. We’ve got some great sites. We’ve got plenty of land. Our real priority now is to activate that and bring it live and turn it into income-producing property. We’ll obviously keep our eyes open for any rare and special opportunities, but expect the land acquisitions to be considerably lower for the foreseeable future.
Okay. I think we should move to the conference line. So operator, have you got anybody waiting to ask a question, please?
Operator
[Operator Instructions] The first question from the phone is from Renard Frederic from Kepler Cheuvreux.
Frederic Renard
So my question would be on the current negative outlook that you have from Fitch. And I fully agree with you that you are one of the few in the space to have a — from secure rating. However, one of the conditions for a downgrade is the fact that your net debt to EBITDA remains above 9.5x sustainably, which is at the moment the case. I understand that you guide for lower net debt to EBITDA this year. But are you in discussion with Fitch? And how do you see that downgrade risk, which could be, I guess, more interpreted by the market?
David Sleath
Did you hear that, Soumen?
Soumen Das
I’ll touch during the presentation. Our net debt to EBITDA last year was almost 12x, and that has been a function of essentially the volume of non producing assets on the balance sheet rather than what we regard as high — big increase in leverage because in terms of short debt levels.
Now we recognize that we did need to do something. And so therefore, we have brought that down significantly from 12x down to 10.4x. And that’s been due to the EBITDA growing through the reversion capture and through the new rental income coming through some development, but also down the net debt has decreased because of the sales activity we took in the year about GBP 360 million or so.
So when I look forward from here, we’re hopeful that, that decline in net debt to EBITDA will continue to below 10x and that 5.5x area, which we would hope would get the rating agency comfortable with where we are for the A- rating. We will be due to meet with Fitch order course events in the next few weeks post results as we would normally do.
Operator
The next question comes from the line of May Paul with Barclays.
Paul May
David, you mentioned the outlook for acquisitions being a, I think, sort of vintage year for investment in industrial property in 2024. Just wondered how you plan to take advantage of that and how you plan to fund that investment? Because we’d agree with you, I think private equity maturity is going to create a lot of opportunities to invest. So I just wondered how you plan to take advantage.
David Sleath
Paul, thanks for the question. I mean, first and foremost, as I think we made clear during the presentation, we want to deploy our capital into profitable developments. That’s where we get an absolute knockout return we’re getting, as we said, 7% yield on total development cost and a 10% yield on average on the incremental capital we’ve got to spend and much that we think it’s an interesting environment, and we will keep our eyes open for opportunities. It’s unlikely we’re going to find many acquisitions of the same quality that we are creating through development that can match those kind of return expectations.
So for the time being, we’re going to be focused almost entirely on the development pipeline, and we’ll see what develops over the months ahead. But as Soumen said, in terms of where we are with our existing LTV and funding arrangements, we’ve got flexibility to deploy that capital for the foreseeable future. Anything you want to add, Soumen?
Soumen Das
No, I think that’s right. Look, I think we’ve always said that we’ve set our capital structure up to make sure we can do everything in front of us and more to offer 34% loan-to-value balance sheet because you talked about the net debt to EBITDA to come down considerably or should continue to fall. We’ve got really good capacity to do, not just what we — the GBP 600 million of CapEx, but more on top of that, as we look further ahead. We also keep all of our funding options under review at all times. And here’s mix that at any given point in time will depend on market conditions, but also the nature and the scale of the opportunities that we see at the time.
Paul May
Just follow up on it?
David Sleath
Yes.
Paul May
Just looking at the — I suppose, the quantum of investment, I think the problem with development is it’s fairly limited in terms of quantum for the overall size of the business. And so to kind of move the scale of the business on, you probably need to look for acquisitions. I think the second thing is, if you look at your various costs of capital, whether that’s debt or equity, I think it’s quite clear, your equity is probably the cheapest cost of capital at the moment. So it’s interesting you’re still focused on debt as the cost that you would prefer to use. But happy to take your thoughts on that.
David Sleath
Soumen, do you want to — do you want to answer that, Soumen?
Soumen Das
Yes, of course, I’ll take it up. Look, I think when we think about — there’s two sides of the question. One is the scale of the opportunity. The other side is kind of how we fund it. Now look, we have become the largest U.K. and European REITs over the last few years, not because we’ve been focused on scale because we’re focused on doing the right thing in terms of our investment approach.
And by following that, we’ve been very disciplined in terms of the quality and the returns that we’re looking for. We’ve been able to put capital to work. And in the last seven or eight years, yes, we’ve used our balance sheet, but we’ve also grown the balance sheet through new equity as well at the right amount of time. And we deployed that equity, I would say profitably, every time we’ve raised it.
So look, I don’t think it’s just about trying to be big. I think it’s absolutely about making sure that we deliver really healthy total returns to our investor base year in, year out. But given the tailwinds that David has talked about in terms of the structural trends, yes, look, we think there’s really a really good opportunity to expand. The organic growth of the development pipeline is default. And if there are inorganic opportunities that come along, we’ll have to appraise those at any given point of time. And we’ll have to get how best to fund that given market and the nature of that opportunity.
In terms of the cost of — well, we’ve got disposals, you’ve got equity and you have debt in terms of our funding options. Look, I’ve heard this said about cost of equity being the cheapest. I guess it depends how one thinks about it. And clearly, there are investors into this call. Yes, our dividend yield or our earnings yield is lower than our debt yield. But I think if I were an equity investor, I’m looking for a total return on my equity. So it’s not just the dividend of the equity, it’s the NAV return plus the dividend.
And those two together, I would suggest, it’s probably more expensive than debt. Having said that, and as we demonstrated at least four times for the past seven or eight years, we do think there’s absolutely a case for using equity in the right moment. We’ve not been shy about doing it in the past, but it will depend, depend on the nature of the opportunity in the market at that time.
David, do you want to?
David Sleath
No, I think you covered it very well. Thank you, Paul. Any more on the conference line?
Operator
The next question from the phone is from Runneboom Pieter with Kempen, please go ahead.
Pieter Runneboom
I’ve got one question on the slowing ERV growth in Greater London and the Thames Valley. Could you maybe give some additional color on this? What’s your view driving this? Is it a fusion so economy? Or are there more local drivers going on there?
David Sleath
I mean, look, in terms of rental growth, I think in London, we delivered 4.6% rental growth in 2023. Thames Valley was 6.2%, and I think both of those are bang in line, if not towards the upper end of the range that we’ve given, obviously 4%, 5%, 6%, that’s kind of where we expect rent worth to be. The point I was making was that we’ve come off a period of exceptional demand and supply shortage, particularly in London. We saw 20% rental growth, I think, in the peak of the pandemic in London. That is simply not sustainable on a long-run basis. We’re very comfortable with the guidance range we’ve given.
And so I’d rather than seeing 4.6%, 6.2% as a negative. I see them as very positive and absolutely supportive of the overall investment case for investing in those markets.
On the conference line, we think we’ve got one more question coming.
Operator
Next question is from with [ph]Polgar with BTI. Please go ahead.
Unidentified Analyst
I wanted to ask a quick question on the data centers, just to try to understand a little more on the economics there. I think you identified the yield on cost of 8% to 12%, which is obviously higher than kind of the development pipeline at 7% to 8%. And I was trying to understand the difference between why like your cost is a bit higher. And maybe if you could just go through as well, the decision-making for powered shell, specifically, is that just putting a data center provider kind of into a regular asset effectively and the CapEx cost is presumably therefore much lower than what we might think of as data centers in the wider market? I don’t know how much color you can provide on the economics there, but more would be helpful.
David Sleath
Yes, sure. The — I mean the first thing to say, if you look at the Slide 31 that we put up during the presentation, it happens to be a picture of a data center under construction on the slow trading state. And you’ll see at first glance, that’s absolutely not a standard industrial building. Whilst quite a number of the existing buildings we have in our GBP 51 million of rental income from data centers are generic industrial sheds.
They are becoming more specifically designed as data centers. And that is, if you like, the clue as to why the return on capital is so much more attractive because we are building the whole thing in this particular example, a 4-story building, and we’re realizing all three floors. And therefore, we’re getting a much stronger yield on the land we’re holding, and that’s why those returns are greater.
In terms of what we how we approach this question of what’s the best way to exploit the opportunity. As I said in the presentation, we’re keeping our options open. The power shell models work really well in slow for a long period of time. No reason why that couldn’t continue to be a very successful route of exploiting the opportunity.
But also, we’ll have sites around where, in some cases, an occupier or an end user will pay us a sufficiently attractive price that we will sell in the land or maybe sell a completed building. And there are other options as well. And we — it’s really around case by case, looking at the best way of extracting value from what we have, which is some very valuable land.
Unidentified Analyst
Yes. Okay. Can I just follow up? Maybe just — I don’t know if we can put some numbers to it. But in terms of the sort of CapEx, the square foot data center opportunity versus this is a regular development opportunity, is there a way you can kind of categorize what the difference might be, what difference in scale might be? And a slightly second one is on that point in time realizing all the floors, is that four story one, again, a standard data center structure, so most of your assets would be multi-floor? Or is that — that’s a good example because it’s your best example if you…
David Sleath
Yes. I mean, I won’t get into the detailed specifics blow by blow of build costs per floor and what that does to the overall economics other than to say, directionally, it’s a lot more profitable than building a single-story building. But the — yes, most of the new data centers with new technology because it’s all around how can you maximize what they call rack density to get more throughput in the existing floor space. It’s — they’re all going in this direction. They’re becoming really quite sophisticated pieces of technology.
You can use a standard industrial building, but the economics are stronger if you build something like the one we showed in that picture. And as I said, I mean, we’re not going to get into a lot more detail on this call today, but we will — we do expect to be sharing more about our data center plans in the months and years ahead.
Well, thank you. Claire has maybe got one or two that come in through the webcast, so Claire.
Claire Mogford
Yes, we have. There’s some of them we’ve actually I’m not going to bring out because we’ve already covered them. But there’s a couple of questions more on data centers in terms of how we would look to fund the data center pipeline, whether we would consider JVs, for example, whether we’d be relying on disposals.
David Sleath
Soumen, do you want to chat to that one, to the extent we can?
Soumen Das
Yes, of course, you just covered the point around data center, which is really today, we were highlighting the fact that we thought some fantastic opportunity there. And frankly, we’ve been long-term investors in that sector in terms of the things we’ve been building, particularly.
So look, we are funded to do more of the same in terms of pipeline, but there’s obviously a lot out there with — and as our thinking evolves in terms of where we might want to pursue different models, that might involve different funding opportunities.
In terms of whether we might want to joint venture or not, look, we’ve — it’s off — using private capital is always an option, clearly. I think it’s really important to remember that it does introduce complexity into the business. In the case of SELP, which I talked about in the presentation, it’s been a tremendous success.
But part of the reason of that success was because it was very clear what the strategy was and that we had a very well-aligned partner. So I think for the right opportunity, whether it’s data center or otherwise, frankly, yes, I think private capital is not a joint venture some form is possible. But I wouldn’t do it tactically or I don’t think it was right tactically or too small because I think the complexity is just not worth it.
David Sleath
Yes. Okay. Thank you.
Claire Mogford
Perfect. Another one on data centers as well. Are the power agreements and infrastructure works in place to cover the needs for the pipeline?
David Sleath
Yes, we’ve got — as I flagged in the presentation, 1.2 gigawatts of potential capacity, i.e., power, and we need power to support that. I think we’ve got something like 750 megawatts currently secured. The remainder is expected to come in the following years. So plenty of what we need in the immediate future. But it’s all about power and who’s got the power. So we at 1.2 gigawatts is something that we feel very comfortable we can bring through. But as anybody who’s been involved in the power industry knows, it’s a very difficult, complicated and elongated process. So if you have got sites where you’ve got that power or you’ve got it reserved, it’s a fantastic asset.
Claire Mogford
And then last one on data centers and specifically on the Slough Trade Estate, a question on the renewal of the simplified planning zone and what that will allow in terms of multistory data centers like the one in the presentation.
David Sleath
Sure. Well, I mean, one of the things that we — we’re in constant dialogue and consulting with Slough Bar Council about the renewal of the SPZ, which is due later this year. One of the things we’re keen to demonstrate is that not only is the data center an attractive sector with a lot of high-value jobs that it attracts to the area. But it’s not all about data centers. We still have a lot of industrial space, and we’re building new space.
We just announced some speculative space that we’re developing on the Slough Trade state in the last week or so. So we continue to do it on a balanced basis, industrial — traditional industrial as well as data centers. And you can see the kind of building that we’ve showcased in the slide presentation. We would hope and expect that the SPZ when it’s renewed would continue to allow those kind of buildings to be constructed and, therefore, enable our development program to proceed.
Claire Mogford
Thank you. Two last questions on rental growth outlook. One, in terms of construction cost inflation, with that easing, does that put any sort of downward — does it make it harder to grow rents with construction cost inflation easing?
David Sleath
Well, I mean, at the end of the day, rental growth is all around supply and demand. And there’s no doubt that part of the reason why supply has got tighter with less construction starts is related to higher interest rates for developers. More challenging funding formula, but also the much higher construction costs.
So take away one of those, and we do think that construction costs are easing in — certainly towards Eastern Europe and probably more flattish as you go further west into the U.K. I don’t think it’s going to fundamentally change the dynamic. It’s all about supply and demand. And I don’t think that supply is going to pick up materially not in our submarkets. So we’re comfortable with the guidance we’ve given.
Claire Mogford
Thank you. One last question. You’ve touched on the refurbishment in the London portfolio. But given the vacancy rates there at the moment, does that give you any concerns around being able to hit your ERV guidance in those regions?
David Sleath
No. I think we’ve got some pretty punchy rents in London, but the pleasing thing has been when we’ve created new space, particularly of the medium and larger-sized units that seem to be particularly popular. It’s not like we’ve got six or 10 people queuing up to take the space. We only need one or two looking at any one time to enable us to keep driving those rents forward.
I think of the vacancy base we had at the end of the year in London, we’ve already leased up something like one third of it or it’s under — it’s either leased or under offer, and all of it is at or above the December ERVs. So no, we feel okay with the rental dynamic and affordability for the right types of occupier that want to be in that high-quality space.
Claire Mogford
No further questions. Thank you.
David Sleath
Very good. Right. Well, thank you all very much for spending the last one hour and 20 minutes with us. Have a great day and a good weekend.
