The market continues to undervalue Workspace

From a property valuation perspective, Workspace (WKP) looks weak. The flexible London office landlord's shares sank 7 per cent the day it posted a hefty half-year pre-tax loss due to a valuation hit. As has been the case for several real estate investment trusts (Reits), higher interest rates have sapped the spending power of commercial property buyers and dragged down values. 

Some Workspace rivals look like they have done better because they have posted valuation gains, or less of a fall in their most recent results, but this has more to do with timing than anything else. When measured over 18 months, Workspace's valuation drop is no worse or better than any other London office Reit.

What the equity market is overlooking with its pricing of Workspace is its operational performance. Since lockdown ended, Workspace's net rental income has surged as companies unsure about their office needs post-Covid have opted for shorter leases with Workspace. In its interims, this trend continued with a 9 per cent boost in net rental income. 

The company said pricing in most centres is back to or above pre-pandemic levels. This is not the case for its dividend. Though continuing to increase, it has yet to return to its 2019 heights. Still, for investors buying into the company now at this price, the prospect of dividends rising from this point onwards should be enticing. If net rental income keeps ticking up, that should be the case. 

A recession might knock that trajectory, as small businesses collapse and exit their leases, but the long-term post-Covid bet on its flexible offering seems worth a punt at this price, although this corner of the property market is still evolving. Buy.

Last IC view: Buy, 502p, 01 Jun 2023