Make money with Workspace by going back to the office

As the need for flexible office space grows, workspace is an underappreciated play on the real estate investment trust industry

The popularity of listed real estate investment trusts (REITs) is beginning to return. The office industry is the one where this is most evident. As investors attempted to consider the future of work and the implications for office buildings, office values in the UK suffered in the early years after the pandemic. However, the return to offices has increased during the last 24 months, and supply is finding it difficult to meet demand.

According to real estate firm CBRE, total returns for the UK office sector in 2024, including rents and valuation, were 2.7%. At 7.7%, that is lower than the total return for commercial real estate in the UK, but there are increasing indications of improvement. In the second quarter of 2025, office space utilization in the UK reached 20.3 million square feet, the highest rolling 12-month level since the third quarter of 2022.

A certain amount of hoarding is suggested by market dynamics. It is estimated that between 2019 and 2024, there will be 2.4 percent more people working in offices, but there will be 1.3 percent less occupied office space. The amount of space per person has decreased by about twenty percent. According to CBRE, businesses in London would need to purchase an additional 39 million square feet of space in order to bring office space back to 2019 levels.

To put that into perspective, the largest office tower currently being built in the City of London, 1 Undershaft, will only offer 1.7 million square feet of office space spread over 73 stories.

Flexible workspaces are becoming more and more in demand due to space constraints and the growing popularity of remote work. According to Savills, demand for this area has increased by more than 200% compared to pre-Covid levels. Prior to WeWork's disruption, companies like Regus, a division of IWG, dominated this market. Although the WeWorks model didn't succeed, it left a lasting legacy. By 2030, a fifth of London's offices are anticipated to be co-working spaces, according to CBRE.

The new approach from Workspace is effective.

This brings us to Workspace (LSE: WKP), whose portfolio includes more than 60 properties in London and the South East that rent to more than 4,000 clients and total about 4.2 million square feet of flexible work space. The group was established in 1987, expanded through acquisitions, and almost failed during the 2008 financial crisis as a result of excessive debt. Nonetheless, WeWork learned a crucial lesson from the near-death experience: don't undervalue the importance of owning unleveraged freehold property. According to Berenberg, the workspace loan-to-value (LTV) ratio is currently around 35% and is expected to drop to 30% by the end of the decade.

Last week, the share price suffered when it reported a first-half loss due to declining valuations and stated that uncertainty surrounding the Budget has caused businesses to postpone leasing decisions, a theme echoed by other REITs. At the end of September, occupancy was almost 80%, which is the group's critical point. Rent pressure has historically begun at this level.

But under Lawrence Hutchings, the new CEO who took over from Capital and Regional in November 2024, Workspace is now pursuing a "fix, accelerate and scale" approach. The new strategy's main objectives are to upgrade current assets, sell underperforming ones, maintain low leverage, and give investors their money back. With an overall discount of 1.6 percent to recorded value, the group completed 52.4 million disposals last quarter compared to a target of 200 million. Given the current share price of 362p, Berenberg predicts that Workspace's net tangible asset value (NTAV) for the 2026 fiscal year will be 754p per share. This suggests the REIT is trading at a nearly 50% discount to the value of its property.

This seems unjustified. The office market's foundations are still strong, especially in and around London, and Workspace has outlined a clear plan to maximize value.

Debt of Workspace Group.

However, the expense of debt remains a concern for the group. To preserve their Reit tax advantages, REITs must give shareholders 90% of their net property rental income. If other expenses like interest charges and capital expenditures (capex) increase, that could put strain on cash flow. In the past, several Reits have violated these regulations, forcing them to either borrow more money or sell assets to make up the difference.

The average interest rate on Workspace's 82 percent fixed or hedged debt is 3.3 percent. However, within the next three years, 75% of Workspaces' fixed-rate debt is scheduled to mature. The only other REIT with more debt maturities over the same time period is New River REIT. By the end of the decade, the cost of financing is predicted to rise by almost thirty percent due to the likelihood of debt being refinanced at higher rates.

However, the majority of this growth is anticipated to be offset by rental income growth, with interest coverage declining to a low of 2.6 times in 2028 before increasing to 2.8 times in 2029. The majority of the cost of renovating outdated assets and additional capital expenditures will be covered by disposals, so debt shouldn't significantly rise from current levels. Therefore, the modifications shouldn't compel a significant shift in the approach.

For the Workspaces dividend, that would be good news. The stock currently has one of the most alluring yields in the UK Reit industry, just under 8%. Thus, Workspace is a classic value play in every way. It has a market-beating dividend yield, is trading at a nearly 50% discount to the value of its underlying assets, and is facing cyclical rather than structural challenges.

Share price of Workspace.

The financing risk is negligible. In the worst case, there is a lot of freehold property on the balance sheet. As the REIT resolves its immediate problems, there is potential for a respectable increase from current levels. Investors who wait will be compensated.