Workspace is a London-focused property company. So it benefits from the strength of London's economy and, to a lesser extent, the London property market. However, its shares trade at a huge discount to London specialists such as Derwent or Shaftesbury - and that looks unfair.
- Strong demand for office space
- Attractive development projects
- Discount to NAV
- Rising dividends
- Fragmented tenant base
- Perceived as vulnerable to recession
Of course, Workspace is not - like the companies just mentioned - a play on the West End, where property has become a safe-haven asset for overseas investors. It owns a scattering of offices in off-centre locations, such as Southwark and Clerkenwell, which contribute about 30 per cent of its rent-roll. It also controls a long tail of industrial properties in the suburbs, which certainly don't benefit from the rarefied dynamics of London's inner core.
Moreover, its tenant base - small businesses - is far more fragmented than the corporate occupiers of most central London offices. That, theoretically, exposes it to the wave of bankruptcies expected in a recession. Partly for this reason, Workspace almost went to the wall during the 2008-09 property crash.
WORKSPACE (WKP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 252p | MARKET VALUE: | £364m | |
| TOUCH: | 250-252p | 12-MONTH HIGH: | 210p | LOW: 256p |
| DIVIDEND YIELD: | 3.8% | TRADING PROPERTIES: | nil | |
| DISCOUNT TO NAV: | 24% | |||
| INVESTMENT PROPERTIES: | £759m | NET DEBT: | 72% | |
| Year to 31 Mar | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 234 | -360.4 | -1,304.5 | 15.92 |
| 2010 | 243 | 26.0 | 21.8 | 7.27 |
| 2011 | 283 | 52.8 | 45.4 | 7.99 |
| 2012 | 305 | 48.5 | 36.3 | 8.79 |
| 2013* | 331 | 62.3 | 42.3 | 9.67 |
| % change | – | +28 | +17 | +10 |
Normarl market size: 1,500 Matched bargain trading Beta: 0.9 *Deutsche Bank estimates (net asset value is not comparable with historic figures) | ||||
Yet it's vital to remember that London is not in recession. That has helped Workspace report a steady recovery in both occupancy levels and rents since 2009. Like-for-like occupancy rates rose from 86 per cent to 88 per cent over the financial year to 31 March, and by the end of June, at 88.4 per cent, were within a whisker of their 2008 peak. The average rent has also been rising.
This trajectory is crucial for two reasons. First, it gives Workspace a capacity for growth that most London-focused property companies lack, with their 97-98 per cent occupancy rates. Workspace has always cited 90 per cent occupancy as a level at which it can increase rents steeply; that level is rapidly approaching. Rising occupancy should sustain dividend increases, while rental growth is the key to the valuation gains that drive net asset value (NAV).
Second, the strength of tenant demand should ensure the success of its ambitious refurbishment and extension programme. The group has planning consent for 704,000 sq ft of new or refurbished space in 14 properties; eight projects are under way, with two due to complete this summer.
Where it makes sense, Workspace also partners housebuilders to deliver residential projects on redundant but well-located industrial sites. It has two such projects under way - in Highbury and Wandsworth - and has just submitted a planning application for another in Bermondsey.
One concern is how Workspace will fund its refurbishments; at 41 per cent, its loan-to-value ratio is comfortable but leaves limited room for manoeuvre. New chief executive James Hopkins seems keen to sell industrial assets with little growth potential and invest in the higher-value office portfolio, which seems sensible as long as the dividend remains covered. Meanwhile, the group has nearly £80m of undrawn debt and cash left over from a fundraising.
