Profit from a return to the office with Workspace

Listed real estate investment trusts (REITs) are starting to get their mojo back. Nowhere is this more apparent than in the office sector. In the immediate years following the pandemic, office values across the UK struggled as investors tried to grapple with the future of work and the implications for office buildings. However, over the past 24 months, the return to offices has accelerated and supply is struggling to keep pace with demand.

Total returns – ie, including rents and valuation – for the UK office sector were 2.7% in 2024, according to real-estate firm CBRE. That lags the overall return for UK commercial property at 7.7%, but there are growing signs of momentum. Take-up of office space across the UK reached 20.3 million square feet in the second quarter of 2025, the highest rolling 12-month level since the third quarter of 2022.

Market dynamics suggest some level of hoarding. Between 2019 and 2024, the number of people employed in office jobs is estimated to have increased by 2.4%, while occupied office space has decreased by 1.3%. Space per person has fallen by around 20%. To restore office space to 2019 levels, companies in London would have to acquire 39 million sq ft more space, reckons CBRE.

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To put that into perspective, 1 Undershaft – currently the largest office tower under construction in the City of London – will provide just 1.7 million sq ft of office space across 73 floors.

The lack of space, coupled with a growing desire for remote working, means there’s a rising demand for flexible workspaces. Demand for this space has surpassed pre-Covid levels by more than 200%, according to Savills. This market was dominated by the likes of Regus (part of IWG) until WeWork disrupted the market. WeWork’s model failed, but it’s left a lasting legacy. A fifth of London’s offices are expected to be co-working sites by as early as 2030, according to CBRE.

Workspace's new strategy is working

This brings us to Workspace (LSE: WKP), whose portfolio comprises approximately 4.2 million sq ft of flexible work space in more than 60 properties in London and the South East, renting to over 4,000 customers. The group was founded in 1987, grew through acquisitions, and nearly collapsed due to excessive debt during the 2008 financial crisis. However, the near-death experience taught the company a valuable lesson: do not underestimate the value of having unleveraged freehold property (something WeWork overlooked). Workspaces’s loan-to-value (LTV) ratio is around 35% and is projected to fall to 30% by the end of the decade, according to Berenberg.

The share price took a hit last week when it said that uncertainty around the Budget has led businesses to delay leasing decisions – a theme echoed by other REITs – as well as reporting a first-half loss on the basis of falling valuations. Occupancy at the end of September was close to 80%, which is the crunch point for the group. Historically, rents have started to come under pressure at this level.

However, Workspace is now implementing a “fix, accelerate and scale” strategy under Lawrence Hutchings, the new CEO who joined from Capital & Regional in November 2024. The overarching goal of the new strategy is to sell underperforming assets, upgrade existing assets, keep leverage low and return cash to investors. Last quarter, the group completed £52.4 million of disposals against a £200 million target, at an aggregate discount of 1.6% to recorded value. Berenberg forecasts Workspace will have net tangible asset value (NTAV) of 754p per share for the 2026 fiscal year, suggesting the REIT is trading at a near-50% discount to the value of its property given the current share price of 362p.

This appears unwarranted. The fundamentals of the office market, particularly in and around London, remain robust, and Workspace has laid out a clear strategy to unlock value.

Workspace Group debt

Still, one cloud hanging over the group is the cost of debt. REITs are required to distribute 90% of their net property rental income to shareholders to maintain their Reit tax benefits. That can put pressure on cash flow if other costs, such as capital expenditure (capex) and interest charges, rise. More than one Reit has fallen foul of these restrictions in the past and has either been forced to borrow more or sell assets to fill the gap.

Workspace has 82% of its debt on fixed or hedged rates, with the average interest rate on this being 3.3%. However, 75% of Workspace’s fixed-rate debt is set to mature in the next three years. There’s only one other REIT (New River REIT) that has a higher volume of debt maturities over the same period. As debt is likely to be refinanced at higher rates, the cost of financing is expected to increase by nearly 30% by the end of the decade.

Still, rental income growth is expected to offset most of this growth, with interest coverage falling to a low of 2.6 times in 2028 before rising to 2.8 times in 2029. Disposals will cover most of the cost of refurbishing old assets and additional capex, meaning debt shouldn’t increase materially from current levels. So the changes shouldn’t force a material change to the strategy.

That would be good news for Workspace’s dividend. The stock currently yields just shy of 8%, which is one of the most attractive yields in the UK Reit sector. So Workspace has all the hallmarks of a traditional value play. It’s trading at a near 50% discount to the value of its underlying assets, offers a market-beating dividend yield and is suffering from cyclical, not structural headwinds.

There’s little to no financing risk. In the worst-case scenario, the balance sheet is full of freehold property. As the REIT works through its near-term issues, there’s scope for decent upside from current levels. Investors will be paid to wait.

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