Good afternoon, and welcome to British Land's investor presentation. Today, we have a replay of British Land's 2025 Full Year Results Presentation from the 22nd of May and then a live Q&A with Jonty McNuff, Head of Investor Relations and Strategy. Questions are encouraged throughout this webinar and can be submitted via the Q&A box situated on the panel on the right-hand side of your screen.
I will now hand over to the British Land management team to begin the presentation.
That's 9:00. So good morning, everyone. Welcome to our full year results. Great to have you here. Great to be joined by David and Kelly. Today's agenda, we've got 3 parts to it. David will take you through the financials first, then Kelly, occupational investment markets. And as usual, I'll wrap up with the strategy and the outlook before we go to Q&A.
But before we do any of that, I just wanted to take a step back. I'm pretty sure that most results presentations at the moment start with referencing the volatile geopolitical backdrop. But I do think that for businesses that are nimble, this creates a real opportunity, and we've shown that this year. If you think what we've done, we started off with the sale of Meadowhall. We reinvested all of the proceeds rapidly into retail parks, replacing the earnings. David's team issued a bond at a record tight credit spread for British Land just before Liberation Day.
Then in terms of retail park activity, we bought a big portfolio, funded it with an equity placing. And then, of course, there was the pre-let to Citadel and then the JV with Modon. So we've been busy in that market. And you'll hear today how the operational and financial momentum continues over the last few years. We've leased well across the business, 9% ahead of ERV. Together with our cost discipline and successful asset management, we've been able to grow underlying earnings by 4% and maintained earnings per share despite significant development activity. And you'll hear today how that development activity is going to be a key source of future earnings growth.
Values are up, driven by ERV growth at the top end of our guidance range. As we predicted, campuses passed an inflection point with values increasing in the second half. We're seeing strong fundamentals in our key markets. Return to the office is in full swing. Retailers are competing aggressively for space on our retail parks and supply in both markets is very constrained. So we've continued to deploy capital into these markets.
We committed to develop 2 Finsbury Avenue and the Broadgate Tower and invested over GBP 700 million into retail parks, which now represent 1/3 of our business. We're 5 years on from the first COVID lockdown. I'm struck by how differently things have played out from what was the perceived wisdom back then. Many people were convinced that work from home would be the norm and most of our shopping would be online delivered to our front doors. We were not so sure. So we sat down as a management team and we scrutinized the data coming into the business.
We also stayed very close to our customers, and we looked at what we were doing in our own lives and across British Land. Based on this, we became increasingly convinced that we could make good money by taking a contrarian position. So we kicked off 3 million square feet of office development and bought GBP 1.2 billion of retail parks.
Five years on, the return to office trend is very clear, and our retail parks have never been busier or more highly occupied. This has driven strong net absorption of space in both markets. At the same time, very little has been built. The result is we're seeing above inflation rental growth on both our retail parks and at our campuses. And this is driving investor appetite back to these sectors, which is an excellent point to hand over to David.
David, over to you.
Thank you, Simon. Good morning, everybody. It's been 4 years since I last presented our full year results, and it's great to be back today. I've really enjoyed reconnecting with so many of you over the last 6 months and very much looking forward to doing more of that over the next couple of weeks. Before that, though, today, I'm going to talk about 4 things. I'm going to talk about our financial performance to the end of March, share some thoughts about how we're managing the balance sheet and allocating capital. I'll talk you through the levers I identified to drive earnings growth in the business and share some views on guidance for FY '26 and the outer years beyond that. And finally, I'll update you on what's been another really good year of progress in terms of sustainability.
Let's start by going through the P&L for FY '25 and first, net rents. We continue to recycle capital during the year. So the loss of income from the sale of Meadowhall and other noncore assets was offset by a subsequent investment into retail parks, including the 6 months of benefit of parks we bought following our equity placing in October. Developments drive future value. And while 1 Triton Square, Broadgate Tower and 1 Appold Street moved into our development pipeline and reduced net rents in the year by GBP 11 million, this was partially offset by leasing progress at our newly completed schemes at Norton Folgate and 3 Sheldon Square over at Paddington.
Surrender premium receipts added GBP 9 million to net rents as we actively manage campus assets by taking back floors at 155 Bishopsgate and 20 Triton Street. And this allowed us to capture rental growth as we relet the space. And encouragingly, 88% of this space is already relet, significantly ahead of previous passing rent. There was a negative movement of GBP 8 million for provisions, and this was the key driver of the increase in Propex that mainly reflected the payment we received from Arcadia in FY '24.
Finally, like-for-like growth added GBP 10 million to net rents. So let me take you through this in a bit more detail. We delivered 3% like-for-like rental growth overall. And like-for-like growth, as you know, can be lumpy. Despite some expiries and breaks in the period, campus like-for-like rents were up 2% and up 3% when you look at our 3 core campuses. It was driven by good leasing across the portfolio, including deals in buildings such as 338 Euston Road and 155 Bishopsgate. Overall, our campus leasing versus previous passing rent was positive 21.8%.
It's been another strong year for our retail business. Like-for-like growth was 5% as we capitalized on the excellent supply-demand dynamics in retail parks. Kelly will go through the detail of our leasing in more detail later.
As you know, increasing fee income and managing costs is a key focus for us. Fees and other income grew to GBP 25 million in the year, and we now earn the full fee from managing Meadowhall and further fees from campus joint ventures. We delivered a GBP 5 million reduction in admin costs, which are now down over 8% in the last 3 years despite the inflationary environment. And as a result, our EPRA cost ratio is 17.5%.
Net finance costs were also GBP 5 million lower as the impact of sales over the last 2 years was partially offset by development spend. In addition, our hedging continues to mitigate against higher market rates and our weighted average interest rate at the end of March was 3.6%. Bringing this all together, we delivered underlying profit of GBP 279 million. That's up 4%. Underlying EPS was 28.5p, in line with last year as the profit growth we delivered fully offset the negative impact of taking properties into development. As a result, the dividend for the year is unchanged at 22.8p per share. That's in line with our policy of paying out 80% of underlying EPS.
Turning now to the balance sheet, which is in good shape. NTA is up, and our debt metrics remain within our internal ranges. There was an inflection point in property values during the year, which were up 1.6% overall, adding 13p to NTA. This more than offset the impact of the equity placing, which funded the earnings accretive acquisition of retail parks, but reduced NTA by 11p. You'll hear from Kelly shortly the detail of these value moves, including how well these retail parks are performing for us so far.
Underlying profit increased NTA by 27p, which was partially offset by the dividend and other movements, resulting in NTA per share of 567p at the year-end and a total accounting return of 5%. We manage the balance sheet to ensure it remains strong and resilient, providing the business with a platform for growth, so we can take advantage of opportunities as they arise. And we're guided by our financing principles, which you can see here on Slide 12.
First, we work to ensure we have a diverse range of funding options available to us. And this year, we've enhanced this diversity with over GBP 2 billion of financing activity, including our new sterling bond. Second, we focus on ensuring our debt has the right level of flexibility, and that's where we benefit from our use of RCFs, which we can draw down on or repay rapidly as required. We maintain a mix of secured and unsecured debt across the business and the maturity profile is well phased. So based on our current commitments, we have no requirement to refinance until late 2028. That provides the liquidity and stability we need to take the long-term decisions that drive growth.
Finally, we're focused on maintaining strong balance sheet metrics. We know that's important to our investors, our lenders and rating agencies as we maintain our A rating from Fitch. So moving on to our financing activity and those debt metrics in more detail. As you can see, we've again been very active in the debt markets. That includes GBP 1 billion of new unsecured RCFs and the extension of a further GBP 700 million of facilities.
In March, we successfully issued a 7-year GBP 300 million unsecured sterling bond. Rated A, the bond was 3x oversubscribed and priced at 98 basis points above gilts as we acted to capitalize on these attractive spreads. These transactions have further diversified our sources of finance, extended our debt maturity profile and improved our liquidity. So they're very much aligned to the principles I just described.
And we ended the year with GBP 1.8 billion of undrawn facilities and cash. Net debt at the year-end was GBP 3.6 billion. Our LTV was 38.1% and net debt to EBITDA on a group basis was 8x. Now while these metrics are at the upper end of our internal ranges, we feel comfortable at this point in the cycle and expect them to reduce over time with values inflecting, income to come from our development pipeline and a continued focus on capital recycling.
If I take net debt to EBITDA, for example, the acquisitions we made in FY '25 and the expected financing of JV developments when they complete will reduce the ratio to around 7x on a normalized basis. These balance sheet metrics provide the framework that we use to take capital allocation decisions. We dispassionately recycle capital from lower -- more mature, lower returning or noncore assets into higher returning opportunities. Currently, that means retail parks and best-in-class office developments.
All of our capital allocation decisions are returns focused and anchored to our cost of capital. Today, that's around 8% with appropriate risk premiums applied for each subsector. If we have capital employed that does not beat these hurdles, we look to recycle it through sales or share risk and accelerate returns through the use of third-party capital. You've seen us do this pretty proactively over the last few years, in each case, at the right point of the asset life cycle.
This slide highlights some of the key activity we've undertaken in the last year. Simon will go through it in a bit more detail later.
As you know, we target 8% to 10% total accounting returns over the medium term. And to be clear, we see this target as income focused. Given that, I wanted to talk you through the levers I identify to drive earnings growth, like-for-like rental growth, leasing of our developments, a rigorous control of costs, active capital recycling, and linked to that, increasing fee income. These are the things we focus on as a team.
So let me take each of them in turn. First, like-for-like rental growth as we capitalize on the strong fundamentals in our core markets to drive rents in the standing portfolio. This is the engine room of our business. We expect to deliver around GBP 3 million of incremental net rents for every 1% like-for-like growth, and we expect growth of 3% to 5% in FY '26. Leasing our development pipeline is the second earnings lever as new developments complete and come on stream into a market, which is supply constrained, but where the demand for best-in-class space we create continues to strengthen. Our committed developments are expected to deliver around 5p of EPS with 80% of this or 4p coming through by the end of FY '27.
Third, I will retain a rigorous focus on cost control, as I'm sure you would expect, and that includes admin costs, which we reduced by GBP 5 million in FY '25. Over the last 6 months, I've completed a thorough review of our cost base. And as a result, we've taken more action to reduce costs since the end of March with an expected benefit of a further GBP 5 million on an annualized basis. These latest savings will improve efficiency and productivity. So I expect admin costs to be below GBP 80 million for FY '26, helping to offset any cost inflation and the selective investments we make to drive growth.
Alongside admin costs, we also actively manage our finance costs with well-timed issuance like this year's bond and the benefits of our existing hedging. Our active approach to interest rate management is something that we will also, of course, continue.
Capital recycling is a material earnings growth lever as we exit lower returning assets and quickly redeploy into higher returning opportunities. Importantly, when we acquire new assets, we integrate them at minimal incremental cost, just as we did with the 15 retail parks we bought in FY '25. This drives an attractive conversion rate being the drop-through from those incremental net rents into underlying profit and cash.
As the fifth and final lever, we will work with existing and new JV partners to increase fee income as we did most recently at 2 Finsbury Avenue. Fee income is currently GBP 25 million, and I expect this to grow by 10% a year going forward. And again, the vast majority of this will drop to the bottom line as we capitalize on the strength of the platform. These 5 levers of growth play firmly to our strengths, and they will increase earnings trajectory over the medium term with a strong focus on cash generation.
So turning to earnings guidance. Our immediate focus is delivering on the levers I just described, especially driving like-for-like, leasing up developments and controlling costs. And we will also benefit from the full year impact of our FY '25 acquisitions, including the retail parks we bought in October alongside the placing. FY '26 does, however, have a number of moving parts as we progress our committed developments, lease up our completed schemes, grow fee income and see an increase in finance costs.
Taking all of that into account, we currently expect EPS for FY '26 to be broadly flat, which equates to underlying profit growth of around 2%. But looking further ahead, we expect to deliver 3% to 6% earnings growth in subsequent years, and we would anticipate being towards the top end of that range in FY '27 as we benefit from our development pipeline, adding 4p to EPS.
Now moving on to sustainability. During my 5 years responsible for sustainability, I've worked closely -- I've worked tirelessly to ensure our approach has always been viewed through a commercial lens. And these 2030 targets were very much set in that context. Sustainability is embedded in how we do business, and it gives us a real competitive advantage. There is growing evidence that more sustainable buildings, not only let quicker at higher rents, but are worth more and are more liquid in the investment market.
That's why EPCs have been a focus. They're widely seen in the market as a key indicator of the sustainability credentials of a building. And here, we've had another strong year with A or B ratings now at 68%, up from just 36% 3 years ago. We've spent a total of GBP 26 million to achieve this so far and recovered around 70% of that through the service charge by making thoughtful interventions, working closely with our customers at the right times.
Our efforts in sustainability are consistently recognized by a number of industry bodies, including GRESB. We've retained our 5-star rating in their annual survey, outperforming last year's scores for standing investments and developments, where we scored a perfect 100 out of 100.
So to summarize, we've delivered earnings ahead of consensus with good like-for-like rental growth and rigorous cost control, offsetting the impact of our active development program. Our financial position remains strong and flexible, giving us the platform we need to grow and the ability to act quickly when opportunities arise. We have a consistent, clear strategy and deliverable levers of earnings growth that play to our competitive strengths. So we look ahead with confidence.
Kelly?
Thank you, David, and good morning, everyone. Last time I was up here, I was only a few weeks into the role. So I am delighted to be back and able to present a strong first full year set of occupational and investment activity. I'll start with valuations, which are up 1.6% overall, driven by above inflation rental growth of 4.9% and at the top end of our guided range of 3% to 5%. On our campuses, values were down 0.8%. But as we predicted, they have passed an inflection point with values up 0.8% in the second half. This was largely driven by developments, which were up 3.2% in the second half.
The value of our retail park portfolio was up 7.1% due to inward yield shift of 32 basis points and strong ERV growth of 6%, exceeding our full year guidance. Shopping centers and other retail was up 2.1%. London urban logistics values declined by 4.9% based on outward yield shift of 13 basis points. ERV growth on the standing portfolio was 0.8% in the year with performance impacted by the small size of the portfolio and lack of lease events.
So let's turn now to offices and the market backdrop. Demand continues to focus on the best space in the core. If you compare the first quarter this calendar year with the same quarter last year, take-up of new and recently refurbished space in Central London is up 29% and in the City core has more than doubled. Looking forward, it's also positive. Under offers in the City are 23% ahead of the 10-year average and active requirements for over 100,000 square feet are at a record high. And it's quite stark when you see the charts on the right-hand side here, giving us confidence that growth will continue.
The graph on this slide demonstrates what we've been saying about location. Best-in-class offices within a 5-minute walk of Liverpool Street Station have delivered significantly more rental growth than those even just a 5- to 15-minute walk from the station. And that shows the huge benefit that occupiers see in having the most accessible locations in London.
We've talked before about strong demand for new space in core locations, and that new space is in very short supply. As a result, existing space in these locations is increasingly sought after and availability is declining. Availability of existing stock in the city has declined by 21% since 2023. Availability of sub-let space has declined 66% since the peak in 2023 -- '21. And rents are increasing. You can see this on the right-hand side, which shows our recent deals on existing space at Broadgate. The depth of the demand is such that we expect this trend to continue in the medium term.
Against the positive occupational backdrop, we have delivered an excellent leasing performance with deals on 1.5 million square feet, double the volume of last year and 7.5% ahead of ERV. This includes 0.5 million square feet of renewals and regears, demonstrating the demand for existing assets in core locations.
Excluding new space and under offers, campus occupancy is reassuringly stable at 97%. EPRA occupancy has increased from 78% to 83% with the majority of vacancy being recently delivered space, which is also the most sought-after space. We have 250,000 square feet under offer, 9.2% ahead of ERV with active negotiations on a further 1.7 million square feet.
We are well positioned to benefit from the lack of supply of best-in-class office as we're delivering over 2 million square feet of new space over the next 3 years. We kept momentum on our developments despite the challenges of COVID, supply chain disruption and inflation, and this is paying off. At Broadgate, we're delivering 1.7 million square feet, 63% of which is already pre-let or under option, including the 380,000 square feet pre-let Citadel during the year.
At Regent's Place, we're positioning the campus for science and tech occupiers given its location in the Knowledge Quarter, and Simon will cover this in more detail later.
And in Cambridge, we've let all of the optic on a 20-year lease with CPI uplifts. And this is a site that we purchased in FY '23, and we've turned it around in just over 2 years. That really demonstrates the capabilities of our deeply experienced teams. We've bought it, built it and leased it well.
Turning to the office investment market. We all know it has been challenging, but is turning a corner. If you cast your mind back to early 2023, the feeling was that the city was in decline and demand was concentrated in the West End. Volumes were down, demand limited to small lots and rents were forecast to fall 20%. We've seen them rather rise by nearly that same amount.
As a result, we're now seeing the investment market catch up. In the whole of 2024, there were just 10 deals over GBP 100 million. Already in just the first quarter of this year, there have been 7. This includes our own deal in January, where we sold 50% of our stake in 2 Finsbury Avenue to Modon, 10% above book value. I'm reassured that investors like Modon see London as a safe haven with strong rental growth supported by a 4% 5-year swap.
Moving on to retail. Our parks continue to perform strongly. We completed 1.1 million square feet of leasing in the year, 9.6% ahead of ERV. And we have a further 0.5 million square feet under offer, 11% ahead of ERV. The portfolio remains virtually full at 99%, driven in part by a 93% retention rate for those with breaks or expiries in the year.
Retail parks are the most efficient format for most of our occupiers, which is incredibly important considering cost pressures on the retail sector.
Importantly, there was no drop in leasing transactions after the autumn budget. And you can see here, it was quite the opposite. Second half volumes were more than double those of the first half, and we have a further 0.5 million square foot under offer, really demonstrating the affordability of the format as well as the competition for space.
We've said before that we acquire well due to the scale of our retail portfolio and our experience, which gives us competitive edge for underwriting deals. During the year, we bought 15 retail parks worth over GBP 700 million at a yield of 7%. We've leased or regeared 110,000 square feet across these parks, 3% ahead of our underwrite. And as an example, we bought Didcot in September. And since then, we made a key letting to Mountain Warehouse, who upsized to a unit that hadn't been let since 2017. Hotel Chocolat then backfilled their space, highlighting demand beyond traditional retail park occupiers. And we're pleased that footfall in the second half was up 6% like-for-like to the prior year.
Turning now to logistics. The long-term fundamentals of the sector remain strong and logistics vacancy in London is very low. For Zone 1 to 2 urban logistics, it's just 0.2%, and this is where we're delivering our first developments, starting with Mandela Way in Southwark. Further out in East London, vacancy has increased while the fundamentals in retail parks have strengthened. So last month, we took the decision to keep Thurrock as a retail park.
We already have 78% of the space let or under offer and expect to reach near full occupancy over summer. In the meantime, we continue to generate good rental income on the logistics standing portfolio.
So I'd like to leave you with 3 things. First, our portfolio has passed an inflection point with values up, driven by strong ERV growth at the top end of our guidance. Second, demand for existing London office space in the best location is now growing due to a shortage of new space, as shown by our second highest volume of leasing deals in at least 15 years. And finally, as the market leader in retail parks, we're driving real value, including from our new acquisitions with footfall, sales, rents, values and total returns all up year-on-year.
Thank you very much. I'd also like to thank the team for a great 6 months. Now back to Simon.
Thanks, Kelly. As I said earlier, the return to the office is very much in full swing. Occupancy on our campuses from Tuesday to Thursday is back at pre-COVID levels, as you can see on this slide. And Monday is increasingly closing the gap on the middle of the week, probably safe to assume that Fridays will remain quieter.
So what does the return to the office mean for our portfolio? You've just heard from Kelly about the strong demand for new space in the core, but supply is very constrained, particularly in the city. You've seen this graph before. We estimate a 5 million square foot shortfall of new or substantially refurbished space to the period to 2029 in the city. As a result, rents are growing strongly. At Broadgate, for example, we've seen asking rents at 2 Finsbury Avenue increase by 10% to 15% since Citadel last year.
Cushman & Wakefield are forecasting rents for this type of space to grow by a further 8% per annum to 2028. So we're making the most of this favorable window by accelerating development, often with the help of third-party capital. Just as we did at 2 Finsbury Avenue in January through a new JV with Modon Properties. The GBP 100 million consideration has crystallized part of the profits from the pre-let and also placing the main build contract. And we're recycling the proceeds into the Broadgate Tower refurbishment. Here, we're capitalizing on a shortage of tower floors in the city. The scheme is expected to complete in late 2026 when supply is particularly tight with just 12 floors available. We expect to attract occupiers looking for well-located, high-quality space in a thriving campus environment. And we're already responding to requests on over 100,000 square feet.
We plan to replicate the overall success of Broadgate at Regent's Place. Like Broadgate, it benefits from some great transport connections, which will be further enhanced by HS2. It also benefits from its proximity to a unique cluster of world-leading institutions, as you can see on this slide. The Knowledge Quarter is growing about 50% faster than the rest of the London economy. This is driven by the science and tech sectors, especially where AI crosses over with medicine.
Based on these factors, we believe that Regent's Place has huge potential. It's perhaps 5 to 10 years behind Broadgate in terms of amenities, public realm and world-class buildings. So we were delighted to receive a thumbs up from the planet for the Euston Tower. As you know, office towers and large floor plates are very rare in the West End. This 31-story scheme has both. It's been designed by the award-winning 3XN who also designed 2 Finsbury Avenue. So we expect it to lease well, deliver a yield on cost of 7% with an unlevered IRR in the mid-teens.
We will look to bring in a partner given the scale of the scheme. And we have a strong track record of doing this with world-leading institutions who are attracted by our development and asset management expertise. Bringing in partners allows us to accelerate development, share risk and earn valuable development management fees. It's one of our key strengths. You heard from Kelly that there's a supply crunch for new space in the core. So this unfulfilled demand is now targeting good existing stock in these locations.
Secondhand availability is down sharply and rents are rising. We think this will be the dominant theme, but some more price-sensitive occupiers who still want to secure a new building are adding emerging locations to their searches. These markets have been quiet since COVID, but leasing activity for new space has more than doubled since 2023, albeit from a low base. And we are seeing increasing inquiries and negotiations for the space we've just delivered at Canada Water. The first phase here is now nearing completion. The placemaking is really beginning to take shape.
A new dock and boardwalk form the centerpiece of the scheme and our cultural hub, Corner Corner, opened last month, it's already had 100,000 visitors with another 0.5 million expected by the end of the year. We're seeing increased interest in the recently delivered Dock Shed. We're under offer with our first occupier and in active conversations on 180,000 square feet. We've sold 46 residential units at an average of GBP 1,250 per square foot, ahead of our underwrite.
We expect sales velocity to increase when we reach completion later this summer. Let's move now to the parks, where occupational fundamentals have continued to strengthen since we first identified the opportunity 4 years ago. The affordability, accessibility and adaptability of parks means a wide range of retailers are competing for space, leading to strong net absorption. Increased costs for retailers are likely to accelerate the shift from the high street and secondary shopping centers to this more cost-efficient format. There's been virtually no new supply of retail parks over the last 10 years, as you can see here. And it seems unlikely this picture will change given restrictions on out-of-town planning and values below replacement cost. For example, we bought assets this year at an average of GBP 250 per square foot compared to an estimated build cost of around GBP 400 per square foot, and that excludes the land.
With increasing demand, no new supply, it's obvious what is happening. Rents are growing strongly. This rental growth, together with attractive yields, limited capital expenditure requirements and liquid lot sizes makes parks a conviction sector for us. The investment market is more competitive, but we have a clear edge underwriting schemes given the scale and breadth of our retailer relationships. We're very happy to take leasing risk because we only buy good trading locations.
Let's look ahead to the outlook. Liquidity in our markets continued to improve during the year, supported by the strong occupational fundamentals, but heightened geopolitical and macro uncertainty continues. Against this backdrop, our portfolio's cash flow predictability and above inflation rental growth are increasingly important. The favorable supply-demand picture you've heard about gives us confidence in our continued guidance of 3% to 5% rental growth across our portfolio.
Assuming medium-term interest rates do not increase materially, we think investment markets will continue to improve. We're already seeing good activity for the parks, and we expect it to increase for larger offices. Our focus is on driving earnings through the 5 levers, David talked about. These translate into the capital priorities you can see here. At our campuses, we'll continue to recycle out of mature offices into super prime developments, bringing in partners to accelerate delivery and earn valuable fees.
We will grow our retail park business if we can continue to invest at attractive yields and below replacement cost. Before we finish up, I'd just like to emphasize a few points. If it's not clear already, we're in markets with favorable supply-demand dynamics. We create additional value through our development and asset management. And with a portfolio yield over 6%, strong rental growth prospects and development upside, we remain very well placed to deliver attractive returns going forward.
Thank you. Thank you for all of your questions. We have had a high volume of questions pre-submitted and submitted live. The first question is, you expect 3% to 5% rental growth per year. What gives you confidence in that number with the economy still uncertain?
Thanks very much. That's a great first question to start off with. I think it's -- as you would have heard from the presentation we've just had, it's the strength of the occupational fundamentals that we have within our core markets and the fact that we've got really strong net absorption in both campuses and retail parks. On the office side of things, we're seeing a supply crunch within the city as return to the office is very much in full swing, and that's leading to a shortage of space, which is ultimately driving rents up.
On the retail side of things, retail parks are the preferred format for many retailers. And that's meaning that they're now competing for space where parks are typically full. And so it's those 2 elements really that are giving us that confidence in the future. We've delivered ERV growth of 4.9% for this financial year just gone, and we think 3% to 5% is a very clear guidance for the future.
The next question is, you've got a lot of space under negotiation. How near term are these negotiations? And what types of tenants are most active right now?
Yes. Thank you. So we've got 1.7 million square foot of space in negotiations on 1.5 million of space across the portfolio. In terms of how near term that is, so in the last financial year, we leased just over 3 million square foot of space. So you can expect us to go through those negotiations over the next 6 to 12 months. I mean not all of those will come off, but we expect a good proportion of them to over that period.
And in terms of occupiers that we're seeing take space and looking for new space, on the retail parks, it's the usual blue-chip names that you'd expect, people like M&S, Next, Boots that are looking to expand their retail park presence. And then on the office side of things, it's really professional services firms and financial firms that are driving demand. Those firms that really want the best possible headquarter space for their employees, for their businesses, and they're looking really for that prime Central London headquarter, and that's what we're seeing drive demand at the minute.
The next question is, you mentioned return to office is ongoing. What does that actually mean from a statistics perspective?
Yes. Thank you. So we've called it as being in full swing. And -- but fair enough, that doesn't include statistics. So in terms of where we're seeing, you would have seen within the presentation, one of the slides showed a graph of office utilization across our Campuses compared to a pre-COVID level. And where we are now is that midweek, so Tuesday to Thursday is coming up to the 100% of pre-COVID levels, so effectively back to where we were before then. Mondays is a wee bit quieter, but is starting to catch up now with Tuesday to Thursday.
It's probably fair to say that Friday, which is sitting probably halfway on the graph in terms of utilization is going to be a bit quieter for the future. And I think that's something that will continue. But ultimately, occupiers are looking to make sure that their space is appropriately sized for that peak level of occupancy, which occurs between Tuesday and Thursday. And it's that, that's now back to pre-COVID levels.
Thank you, Jonty. We have a follow-up question on hybrid working. With hybrid working still popular, how sure are you that demand will hold up for office development? And how are companies using space in different ways?
Yes. So I think it's a really interesting feature of the last 5 years, hybrid working, and it definitely is something that's more prevalent in all our lives. That said, there are a number of occupiers that are mandating their staff back to the office 3, 4, 5 days a week, and you would have seen those names coming out in the press. And also, as you've pulled out there, occupiers are using space in a slightly different way. They're wanting to make sure that they've got capacity to deal with peak occupancy within the week.
And the world of ever shrinking square footage per person is coming down -- is shifting, apologies. So it was coming down over the last few years, and it's now expanding up. And the reason for that is because occupiers want more amenities, more breakout space, end-of-trip facilities where people can come into the work and work and cycle in. And so those softer parts of an office are becoming more important.
So overall, people are taking more space per person, and they're also looking for space that can meet peak occupancy. And so that's why we're looking ahead with confidence and expect that there will continue to be a supply crunch despite the fact that hybrid working is with us to stay in some form.
The next question is, how is the pipeline for new developments looking?
Yes. Thanks for the question. In terms of developments across the city of London, it would be fair to say that with rising costs and rising cost of building out developments, financing them, there's been a real slowdown in terms of space in the ground bringing buildings out. And that means when you look out to 2028, 2029 in terms of new office space and completions coming through, it really is quite limited in the space that's available, and therefore, occupiers don't have a huge amount of choice.
Now we took a slightly different decision, particularly at the start of last year where we committed to our 2 Finsbury Avenue development at Broadgate. And we took a view that we could see a real shortfall in supply, and that was going to mean that rents were going to go strongly. So we expect over the next 3 to 4 years, there to be a 5 million square foot shortfall of space over that period. And that's the reason that we've continued to develop. So we've got 2 Finsbury Avenue, which is completing in 2027. Half of that -- up to half of that building is let under option to Citadel. And we're having good conversations with others on that space with rents moving well on from where the initial rent has been agreed.
Also looking to capitalize on this demand that we're seeing. We've also committed to repositioning the Broadgate Tower on Broadgate campus. And this is a lighter touch refurb where we're looking to get tower floors back out into the market relatively quickly to provide high-quality space to occupiers. And so that will be completing towards the end of 2026. And again, as you would have heard from the presentation, despite only committing to that development 6, 7 weeks ago, we've already got 100,000 square foot in negotiation on that space.
Now moving on to retail. Retailers seem to be moving to retail parks from the high street and shopping centers. What is driving this shift? And will it continue?
Yes. And that's definitely a theme that we've been seeing over the past few years. And I think the statistics within the presentation showed that net openings of stores on retail parks have been positive over the last 8 years in stark contrast to shopping centers and the high street. What we think is driving that comes down to what we call the 3 As. First of all, the space is affordable. It's typically cheaper than operating in other retail formats. And that's largely because these things are big boxes, low service charge, low rents and that means that retailers can trade profitably from those stores.
They're also accessible in terms of they're located on major trunk roads around the U.K. They've got free car parking. And so customers like going there. It's very easy for them to go and pick up things, do click and collect as well as other things. And they're also adaptable for us as well. They are still boxes. It's very easy to cut and carve add mezzanine space in there. And that means that retailers like them and we like them as well because there's a number of varying occupiers that can use that space. So as we look forward to the next financial year, we know there's a number of pressures coming in on retailers around costs, particularly to do with national insurance increases, through the budget and also changes to employment law. But we think actually that pushes retailers further towards the lowest cost format, which is retail parks.
On retail parks, retail parks continue to outperform. While Campuses saw modest value growth, do you foresee a strategic shift in capital allocation towards retail assets?
That's definitely something that we've signaled. It's something we've been doing over the past few years, and we will continue to do that in the future. Capital recycling for us is business as usual. It's very much part of day in, day out, what we do as a business. You've seen us typically recycle and sell down of around GBP 500 million worth of assets per year over the last few years. And typically, where those sales will come from will be more mature, lower returning assets.
And at the minute, that is largely offices within London, where we've previously developed and added value, now it's time to move those properties on to better holders of them long term. And so our redeployment of that capital will be into higher returning opportunities, which definitely includes retail parks. So retail parks make up 32% of the portfolio today, and that's up from lower levels kind of back in 2021 when we first set out our strategy. So could we see that percentage continue to increase? Yes, definitely over the next 2 years.
The next question on retail is with some large retail companies going bust in the last 12 months, do you see any issue from a retailer's perspective?
I think we've -- yes, we've spoken a little bit about the pressures that are out there on retailers. And it's fair to say that it's -- for some, it's a tough trading environment. I think what I would say is some retailers are actually thriving in this environment. So if you look at the likes of Next and others, they're actually doing very well. They've found a format that works and they're continuing to exploit that. We are seeing pockets of retailer distress. We obviously -- that's obviously something we keep a very close eye on. And through our connections to retailers, we are able to be a little closer to those instances where they come up and prepare for them.
But I think where we are with retail parks at the minute means that actually we look upon those types of opportunities, those type of events being a potential opportunity for us. One of the things about having such a high occupancy, and we're 99% occupied on retail parks is that it's quite difficult to move on the rental tone and move rents on in a park when you're completely full. Actually, we've got some good examples where occupiers have gone into administration or some form of CVA or restructuring. And actually, that's given us back space that we're then able to relet at higher rents.
Carpetright would be a good example of something that's happened in the past 18 months. Very quickly, we got these 7 stores that were within the portfolio relet on to other tenants. And actually, we find ourselves now in a better place than when Carpetright were originally in occupation. So definitely some risks out there, not something we're blind to, but an opportunity for us for the future.
Thank you, Jonty. Now moving on to looking at costs within the business. How are you managing the risk of interest rates changing? Are most of your loans on fixed or floating rates?
Yes. Thank you. So you would have heard David talk about our policy for managing the debt book across the portfolio. How we like to manage things in terms of interest rate risk is that we look to be predominantly fixed at the front end of a 5-year period, but slowly moving to predominantly being floating rate at the end of a 5-year period. So we're 97% fixed on our interest rate costs for the next 12 months. And then over the 5 years, we're 77% hedged in terms of our costs. And so that means that over time, we will revert back to market rate in terms of interest rate costs, but they are predominantly hedged in the near term. At the minute, our weighted average interest rate at the end of March was about 3.6%, and we flagged that, that will go up to around 3.8% for FY '26.
The next question is admin cost reduction to below GBP 80 million. Can you tell me what this is made up of?
Yes. So our admin costs crudely are around 2/3 people costs. So that's the platform that we operate. We are an active asset manager and developer, and that means that we do have people and experts on the ground delivering that. So it's around 2/3 of our costs come from people and then 1/3 of our costs are typical PLC costs that you would expect, audit fees, listing fees, other things.
So when it comes to us making savings, and we've reduced our admin costs by GBP 5 million this year. We signaled that we're looking to do something similar again next year. It does get incrementally harder. But ultimately, that blend of 2/3 people, 1/3 other costs is -- can be taken as a proxy for where those savings will come from in the future.
Thank you all for your questions. There's been a high volume of questions. So we'll just take 2 final questions, Jonty. What was the reason for the significant increase in operating expenses relative to a 2% increase in rental income? You talk about cost control. Can you go into more detail on this difference?
Yes. No, that's a very fair one to pull out. As part of last year's results, we flagged that we benefited from a one-off credit where we'd received prior arrears from Arcadia Group that went into administration a number of years ago. And through the guarantees that we had in place as related to that debt, we were able to recover those amounts in full. So that meant that our property operating costs were artificially lower last year. We flagged that as part of the results. And so what you're seeing this year is a more normalized level.
And one final question on ESG. ESG is an important element in any large business. How do you manage the importance of this relative to the performance of the business?
Yes. Thanks. And a good final question to end on. We always look at ESG through the lens of ensuring that it makes commercial sense for the business as well as being the right thing to do. So for us, it's about making sure that we're doing something that not only drives rent on in our buildings, but also is making buildings more investable for investors in the future.
We use EPCs across the portfolio, so energy performance certificates as a proxy for the overall sustainability of our portfolio. And we've made good progress on that over the past few years to where we're now 68% of the portfolio rated A or B on EPC. And we've spent around GBP 26 million doing that in the period, of which 2/3 is recovered through the service charge. So we always make sure we do it with a commercial lens, but we're making very good progress.
Thank you, Jonty, and thank you all for your questions. I will now hand back over for any closing remarks.
Yes. Thank you very much. And I think I'd just like to end with 4 key things to highlight around the investment case for British Land. Firstly, that we operate a value-add approach. We're active asset managers and developers, and that means we've got a great track record in delivering property returns that are in excess of the market return. Secondly, the portfolio is yielding 6% today, and that rises to 7% earnings yield when you look at our consensus earnings for next year compared to the current share price.
Thirdly, there's future upside from the 3% to 5% rental growth that we've spoken about, and that drops down not only to our earnings, but also capital appreciation in terms of valuations. And the final piece is the development upside that we offer. Again, that drops down into our earnings, but also provides good development profit on the capital side. And so we very much look forward with confidence. Thank you very much for taking the time today to listen in.
Thank you for joining us today. That concludes British Land's investor presentation. Please take a moment to complete a short survey following this event. The recording of this presentation will be made available on Engage Investor. I hope you enjoyed today's webinar.
