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Ladies and gentlemen, welcome to the Derwent London 2018 Q3 Business Update. My name is Hailey, and I will be the operator for your call this morning. [Operator Instructions]I will now hand you over to John Burns. Please go ahead.
Thank you. Good morning, and thank you for joining us for Derwent London's Third Quarter Business Update 2018. I'm here with Damian Wisniewski, our CFO and Director; and my Co-Director, Nigel George. I will briefly talk through the updates and then open the call for any questions. A key point today is there has been no slowdown in our letting activity year-to-date. In fact, it has been accelerating, with our second half lettings exceeding the first half and our Q4 lettings already higher than Q3. To date, we have made GBP 23 million of new lettings, 7.8% ahead of December '17 ERV, with second half lettings 6% above June ERVs. Incentives have been stable, and details are given in Appendix 1. Our total lettings are now 95% above the level we previously announced in August. Our vacancy rate has dropped from 4.2% to 2.3% in the second half. A large part of this year's progress has come at our Brunel Building in Paddington where we have pre-let 164,000 square feet for GBP 12 million of rent, which on average exceeded last year's December ERV by nearly 15%. New tenants at Brunel include the FA Premier League and luxury fashion company, Coach, who will be joining Sony Pictures. The building is now 68% pre-let, so the on-site projects are now 73% pre-let. That's up from 60% in August. We're seeing very good interest in the remaining space of Brunel. Construction on these 2 developments remains on plan, and we expect to deliver Brunel in the first half of 2019; and 80 Charlotte Street, where 90% of the office space is pre-let 1 year later. This leaves Derwent London well-placed to proceed with our next projects. Preliminary work is underway at Soho Place West 1, that's over the Tottenham Court Road Elizabeth line station. And we will gain vacant possession of the site of The Featherstone Building next to White Collar Factory at the end of the year. We remain in a very strong financial position, both to fund our development program and to invest in any fresh opportunities that we might see. I'm now going to hand you back to Hailey, the operator, and we'd be pleased to take questions.
[Operator Instructions] Your first question today is from the line of Ben Richford of Crédit Suisse.
I just want to check, the lettings you've done up to now, I'm surprised to hear that you're doing really well and beating ERV. But could you give a bit more detail on the incentive packages I see there between 20 and 30 months? And is the lease length shorter than you might have underwritten?
I don't think it's any shorter than we might have underwritten. I think what's happening today is that with 10-year leases, it's hard to negotiate more than that. In this case, what we've done is we've done 12-year leases on the principal lettings, and the single floors we've let on a 10-year basis. As far as the incentives, they've been pretty stable. I suppose you're talking sort of 20 to 24 months for 10 years and a bit longer for 12 years. But we've certainly seen no more than that at the moment, and I think it's going to stay that way.
The next question is from the line of Michael Burt of Exane BNP Paribas.
I appreciate you don't normally update your rental growth guidance for Q3. But do you think the sort of plus 2% to minus 1% guidance you gave at the half year looks a little conservative in light of how well you've been leasing versus year-over-year to date?
Well, I think the way we're going, we thought we'd be at the top end of that last announcement. And in view of the fact we've done so well with these lettings, I think that's going to be. We don't normally use these forums to forecast, but I think they're doing pretty well. Certainly, we'd disappoint you at this stage if they were less than positive.
I think, John, if you strip out the Brunel lettings that have done exceptionally well, the underlying is about 1.2%. So I think you could get a bit of step from that, so that's more the underlying portfolio.
Great. And in terms of -- can I ask one more, please?
Please, sure.
Just in terms of the 2 new projects that may go on site in the first half of '19, I was just wondering what factors would determine whether they're sort of a go or no go. Is it sort of -- is there any pre-let requirement there? Or is it some kind of sort of clarity on Brexit that you need to be able to commit to these projects?
I think the factors have been the success we've had at 80 Charlotte and Brunel. And I think at the moment, it's likely that we will get on-site. We're going to pull down Featherstone, and start in January, that's on the cards. As you know, we're clearing the site of the Elizabeth line, so the intention at the moment is in view of what we're doing, we will be continuing, and there's no -- certainly no pullback at the moment.
[Operator Instructions] The next question is from the line of Osmaan Malik of UBS.
Just one quick question for me, and it was just on a follow-up to one of your responses a second ago. You said it's harder to negotiate more than 10-year leases today. Could you just drill into that a little bit more? And I guess, primarily, is it Brexit related? Or is it a broader thing, maybe relating to the different accounting treatment for long-term leases?
No. It's maybe the accounting treatment a little bit, but I think it's more flexibility. I think everybody's been talking about this, we have for quite some time, and people like a little bit of flexibility. We took a stance on our lettings of Brunel. The 3 big lettings are 12 years unbroken, and some can go on to 15. And at 10, we're quite happy to have single floors let for 10 years. So I think there is a bit of flexibility. But obviously, the more space you get, the longer leases that you need. But we're very happy at these levels, and we're also very happy that they wouldn't impact any investment value at all.
Okay. I guess -- okay, so that last point was my follow-up. You don't think this impacts the investment value? I mean, a value is going to treat this -- I trust it's either a 15- or a 20-year lease. Does the market really value that?
If you've got 15 or 20, you'll get a little bit more. But I think today, in a mixed building like that, where a lot of leases are around 12, and we made longer, I think that's going to be perfectly acceptable.
You got to look at the starting point of where the value is -- the value the site's at. But basically, it's working on the basis that the market will get 10 years and putting an appropriate yield for that. And therefore, it's upside on that if you get a longer lease, which we have done -- we do occasionally. So they're not assuming a 20-year lease and then having to work back from that. The market works on sort of about a 10-year, 10- to 12-year lease.
[Operator Instructions] This concludes our question-and-answer session. I would now like to turn the conference back over to John Burns for any closing remarks.
Good. Thanks, Hailey, and thanks, everybody, for listening and for the questions. I'd like to remind you that you're very welcome to the investor presentation, which is going to be a property talk focusing on our development program. That's on the 30th of November. We'll be around in the office if you want to make some calls to us. Have a good day, everybody.
Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect. Goodbye.