Valuation decline arrested at Workspace

“As our half-year results show, those who predicted that the pandemic would lead to the end of the office are being quickly disproven,” says Workspace (WKP) chief executive Graham Clemett in his interim results commentary.

On its own, attacking a straw man isn’t going to close the flexible working landlord’s discount to net assets. But several elements of the underlying trading picture offer encouragement. Most important are like-for-like occupancy levels, which kicked on to 85.6 per cent in the period and helped rent to rise slightly to £35.50 per square foot after a first-quarter dip.

Asset values also look to have troughed. Acquisitions and disposals aside, CBRE shaved off just £15m from the value of the portfolio, or 0.7 per cent on an underlying basis. To some, the stability of prime London office valuations over the last year has been suspicious, but the pronounced volatility in Workspace’s portfolio – whose value fell 10 per cent in the year to March – arguably means its estimated rental value is a truer reflection of its current market than some peers.

This stood at £144.8m at the end of September, including properties currently undergoing refurbishment and redevelopment work. The group is now confident it can convert increased lettings interest into a higher rent roll, as its core tenant base of smaller entrepreneurial businesses returns to London, albeit on hybrid working arrangements.

We prefer Workspace’s balance of asset ownership and flexible offering to IWG’s (IWG) lease and service model. The shares’ 10 per cent discount to March’s consensus book value estimate is arguably a little harsh, but this is a market still in recovery. Hold.

Last IC View: Hold, 889p, 3 Jun 2021