It is hard to escape news about the flexible workspace revolution in London and other cities across Britain. They appear to be everywhere, shaking up the property industry by providing shorter leases or desks to rent by the day or month and catering for everyone from start-ups and freelancers to companies looking to downsize and large corporates wishing to take smaller spaces for breakout teams.
Most providers talk about their unique differentials, but all look much the same — exposed brick, a posh coffee stall, café tables made out of reclaimed material, coloured chairs and art installations. And they have become hot property for tenants and investors. Wework, of the United States, is the largest occupier of London office space, apart from the government. Softbank, the Japanese investment fund, placed $4.4 billion into the group. Office Group was bought by Blackstone, the private equity giant, for £500 million last year.
Such operations have done well enough to spook big landlords. British Land has launched a flexible workspace offering called Storey; Great Portland Estates is testing flexible and short-term leases; IWG, the owner of Regus, has launched a co-working operation called Spaces.
Then there is Workspace, the FTSE 250 real estate investment trust. The company began in 1987 as a vehicle for the privatisation of part of the Greater London Council’s industrial property portfolio, mostly in east London, but it has spent years moving away from its industrial roots. Workspace’s model is different from many as it caters mainly to larger companies with more stable revenues, and owns the buildings, which are dotted across London. The average price of £35.50 per sq ft is attractive.
Its shares have returned 109 per cent since June 2014, rising to £11.12 and a market value of £1.9 billion. Its portfolio has increased in value from £760 million to £2.2 billion in five years. It is landlord to more than 4,000 businesses in London, in 3.7 million sq ft of space in 66 properties. Rental income rose by 26 per cent to £112.9 million in the year to March, while it increased its dividend by 30 per cent to 27.3p. Occupancy was 91.6 per cent, above the key 90 per cent level. None of this suggests a company that has much to worry about.
Yet Workspace held a share placing yesterday that raised about £180 million after selling 9.9 per cent of the shares. It says that it wants to keep its loan-to-value below its present 25 per cent to nearer 15 per cent, to reduce some of the debt built up after buying seven properties in Camden this year and to finance its existing pipeline.
Workspace has a net debt of £517 million, an interest cover of 4.3 per cent and £71 million of undrawn facilities and cash. As it is a real estate investment trust, it has to give away 90 per cent of its trading profits as dividends. An equity rise such as this gives it an extra £500 million to take advantage of opportunities in the market.
However, some analysts are worried. Numis see no mention in the share placing move of money being used to fuel future growth and argue that therefore this is likely to provide a drag on an “already conservatively levered balance sheet”, meaning that forward returns on a per-share basis will be diluted.
The company’s net asset value also increased 8.8 per cent to £10.37, but this was split between 6.4 per cent in the first half and 2.3 per cent in the second, suggesting a slight slowdown, while its shares sit at a 12 per cent premium to the NAV.
ADVICE Hold
WHY A strong portfolio and terrific full-year results, but signs of a slight slowdown suggest that better value can be found elsewhere
Monks Investment Trust
A change of manager in 2015 has given impetus to the fortunes of the Monks Investment Trust. Its annual results, published yesterday, showed a raised dividend and performance above its benchmark index.
The £1.8 billion trust is run by Baillie Gifford, the Edinburgh-based asset manager. Charles Plowden became its manager in March 2015, when the share price was about 400p. Tempus suggested buying into Monks in January because of the strong growth in its shares, then being sold at about 800p, and since then they have improved still further, changing hands for more than 830p in recent days.
Monks focuses on capital gains but pays a modest dividend to maintain its investment trust status. The dividend of 1.4p for the year to April is up from 1.25p the year before. The net asset value total return in the year was 15.8 per cent, compared with 7.5 per cent for the FTSE World Index.
The trust said that 14 of its holdings had appreciated by more than 50 per cent in sterling terms over the year. Mr Plowden said that the benchmark index had returned 40.3 per cent since March 2015. Over the same period Monks had increased its net asset value by 57.9 per cent and the share price total return by more than 84 per cent.
The trust typically has a portfolio of up to 100 stocks. It categorises those into four bands. The stalwarts have strong brands and deliver profits in difficult conditions. Prudential, the insurer, and Moody’s, the ratings agency, are among these. Rapid-growth companies cover a large portion of the trust’s technology holdings. Think Amazon, Alibaba and Alphabet, as well as Facebook, Tesla and Ctrip. Its cyclical portfolio includes companies that it hopes are in the right position to capitalise on trends, such as the Taiwan Semiconductor Manufacturing Company and CRH, the building materials supplier. Those in the latent growth category, such as Apache, the oil company, and Samsung Electronics, tend to have a poor recent track record, but Monks sees a potential for them to return to growth.
ADVICE Buy
WHY Improvement since 2015 is marked and it appears that there is more to come
