Discounted Workspace offers solid income

Workspace provides flexible office space for small- and medium-sized businesses in London, managing 4m square feet (sq ft) of business space across 64 properties that are let directly to clients. The rent roll was boosted by 12.9 per cent last year through a combination of like-for-like rental growth, acquisitions, refurbishments and redevelopments. However, there is still significant potential to increase rents based on current market rates. The overall estimated rental value of the portfolio stood at £127m at the end of March. Assuming 90 per cent occupancy (a little below the 90.9 per cent reported by Workspace last year), recently achieved market rents suggest a potential annual rent roll of £157m, a 23 per cent uplift. 

Refurbishments have are boosting rent, too. Eight were completed last year, adding 341,000 sq ft of new and upgraded space, taking the number of these types of projects completed to 13. The rent roll from refurbished buildings increased by £6.2m in the year to £21.8m, with overall occupancy of 72.9 per cent at 31 March 2019. Based on Workspace increasing occupancy to 90 per cent, property consultancy CBRE estimates rental values would rise to £30.2m. Work is under way on a further nine refurbishment projects (six of which are due to complete this year) that will add 409,000 sq ft of space or £15.2m in annual rent, based on 90 per cent occupancy. 

On the redevelopment side, Workspace tries to limit major development risk. Instead it obtains a mixed-use planning consent and agrees terms with a residential developer to undertake the redevelopment and construction, usually carving out a new business centre alongside residential space. Once planning is received, it sells the asset to the developer in return for cash, new commercial space and a cut of future development proceeds. Four redevelopment projects are under way at present, from which the group has so far received £30m 

Disposals proceeds totalling £52m (23 per cent above March 2018 book value) were outweighed by spending on three acquisitions amounting to £213m. Workspace is focused on boosting occupancy levels at the acquired properties. At the Centro one and two buildings in Camden, occupancy improved from 85 per cent at acquisition to 91 per cent at the end of March. As a result, the rent roll was boosted from £6.6m at acquisition to £9.5m, comprising £2.1m from the ending of rent-free periods and £0.8m from new lettings and rent reviews. These acquisitions were financed by a £180m share placing at 1,100p in June last year. The group’s loan-to-value (LTV) ratio remained at a conservative 22 per cent at the end of March and cash and undrawn banking facilities stood at £134m. 

Admittedly, there was a like-for-like rental fall of 0.4 per cent during the second half of the year, as five of the eight schemes opened in the year were adjacent to or on the same site as similar buildings. Over the whole year, rents were up 2.2 per cent, helped by a 3.8 per cent increase in rent per square foot to £39.80.