Workspace Group

IN SUMMARY:

As 2009/10 progressed, the relative robustness of small and medium-sized businesses (SMEs) and the Workspace business model have once more proved themselves. Workspace has weathered the storm both in the economy and the property sector. Now the business is poised for long-term growth. The strengths of the business shown in the downturn – its brand and market leadership; its marketing and customer management; and its portfolio and asset management skills – are the same attributes that will underpin our future. Growth will result from a combination of continued improvements in occupancy and rents, from working the asset base, recycling our capital and from initiatives to use our brand more widely and capitalise on the opportunities these bring.

Workspace is the leading provider of space for London’s entrepreneurs. We offer a tailored product to new and established SMEs in buildings located in a broad range of locations across London, offering a superior level of customer service. The number of SMEs continues to grow: there are now over 160,000 small owner-managed businesses in London. With some 4,000 customers Workspace has ample scope to grow. An important part of maintaining our income during the year has been keeping close relationships with our customers – knowing their needs and what drives them, and providing them with the opportunity, through our flexible leases across more than 100 estates, to grow or contract as circumstances dictate. Alternative use potential has also always been important. Our estates in London are often near to good transport links, with low capital values (£126 per sq. ft.) which are well below replacement cost (£140 per sq. ft.) and they have low building densities. Many of these estates have considerable potential for intensification, regeneration or change of use. During the year we have progressed a wide range of initiatives, secured a number of planning consents and made specific disposals. In 2009/10 we have focused on four management themes, each of which we have made significant progress on:

1. Customer Management and Trading:
In a market where overall demand and enquiries fell, we increased our marketing investment to increase our market share of enquiries significantly. As a result ‘Enquiries’ – our key lead indicator – were maintained at an average of 1,000 per month. We sharpened our lettings processes, also recognising that it was better to reduce pricing than see significant voids arising. This helped maintain a high conversion rate resulting in around 100 deals being closed per month. Our site staff closely monitored existing customers. Where necessary some short-term flexibility on rents was given or a move was facilitated to alternative premises in our portfolio to reduce the loss of existing customers. The result of this management action has been an increase in underlying like-for-like occupancy from a low point of 82.9% in March 2009 to 84.7% at the end of the year. We are also beginning to see the opportunity to raise rents as occupancy rises. The like-for-like cash rent roll which had softened as we responded to market conditions bottomed out in December 2009 and has since improved.

2. Cash and Cost Management:
Steps taken in 2008/9 to reduce overheads; to reduce capital expenditure without compromising the quality of our buildings and to keep a tight rein on customer debt have continued. We have experienced no material change in bad debts which continue to run below 0.5% of revenue. In addition to controlling working capital, disposals of assets for a cash consideration of some £57m during the year gave the business the capacity not only to reduce the debt on its existing facilities but also, with a £19m equity issue in December 2009, to re-acquire control of the former Glebe JV portfolio with stapled debt provided by Bank of Scotland.

3 Portfolio Management:
Disposals in the financial year, for a cash consideration of £57m, were at an exit income yield of 6.3%. We bought back the former Glebe JV portfolio – some 1.1m sq. ft. – at an income yield of 7.3%, and with considerable potential for improvement in both occupancy and added value. The net effect is that our directly held portfolio at March 2010 is both bigger and has greater potential for uplift in value than that held at March 2009.

	March 2010	March 2009
Floorspace	5.5m sq. ft.	5.0m sq. ft.
Cash rent roll	£50.7m	£50.8m
Occupancy	81.90%	80.30%
Rent £ per sq. ft.	£11.22	£12.64
Capital value £ per sq. ft.	£126	£132

The value of our portfolio at the year end was £717m, with a like-for-like cash income yield on 83 properties of 7.9%. Whilst prime properties with long-term covenants have benefited from considerable yield shift this has yet to be reflected in the valuation for our kind of properties, which also have customers on flexible leases and therefore more perceived uncertainty of future income. In due course, as confidence becomes more widespread – as occupancy and rents improve and more disposals are achieved ahead of valuations – we would expect valuation yields to harden.

We create additional value by securing and progressing planning permission for the regeneration of a number of our sites. This can be from intensifying existing use or obtaining approval for a change of use on part or all of a site. We opened the year with some £38m of this added value on our balance sheet, converted £15m of this potential into cash from sales during the year and created a further £12m of new added value.

4. Debt Restructuring:
During the year we reduced the debt on our existing facilities from disposals and secured a new £68m five year facility when we acquired the former Glebe JV portfolio. We are currently in advanced discussions to replace the existing debt facility provided by GE Real Estate with a £200m five year bank facility from a new group of lenders. We hope to announce the conclusion of these discussions shortly. With these initiatives the business has demonstrated its resilience. We recognise the constraints and risks still apparent in the economy and remain positioned for this. We are also well placed to take advantage of any upturn in the London economy.

Looking forward there are three broad themes in our activities to grow the business.

‘Deliver Underlying Value’ from the existing portfolio. We will be looking to improve underlying values from our own actions, not just relying on external movements in property yields. Our marketing and brand should continue to deliver improvements in core occupancy towards 90%, at which level there can be more general uplifts in rental levels. Even now on a number of estates we are seeing a return to high occupancy levels which is providing the scope to increase pricing.

Meanwhile, through the downturn we have been working hard on the forward planning of our estates seeking out opportunities for intensification and change of use – a characteristic given added impetus by the acquisition of the former Glebe JV portfolio.

Our property hopper is well developed both to deliver significant increases in alternative use value over the next two to three years, and to recycle capital.

Our second focus for growth is on ‘Leveraging the Brand’. We have a brand which is recognised throughout London’s SME community and we have an expertise in the intensive management of estates with multi-occupation – situations which in the wider market are recognised as more difficult to manage. We are now building on this brand profile and have launched a dedicated website ‘www.anyspacedirect.co.uk’ where we use our marketing skills with other owners of properties throughout the UK. We are also working with the Greater London Authority (GLA) and other organisations in London who are increasingly seeing that our input in the provision of space for new and small businesses should be an essential component of new mixed-use regeneration neighbourhoods.

Thirdly there are a range of ‘Wider Opportunities’ that this work on our brand opens up. The opportunity to work with others on the acquisition and management of stock, both directly and indirectly held. With our brand and skill base we can be an attractive partner raising funds for acquisitions and securing enhanced returns on our equity participation. While we will focus on realising the value from our existing portfolio as we progress through next year, our initiatives in this wider area will also add to our momentum.

Your Company has come through a very challenging period. In so doing the core strengths of the business have been tested and have been proven. While the uncertainty in the general economic outlook still presents challenges, we have maintained a good level of enquiries and lettings since the year end and look to the future with an underlying confidence in the potential for Workspace to grow.

Harry Platt
Chief Executive