Don’t call Workspace a co-working concept. Chief executive Jamie Hopkins is at pains to explain that the £1.8bn business is not a “co-working” space provider, but a supplier of “flexible” office space.But given the rise in co-working, serviced office space and all its variations, what makes Workspace work? And what is driving the company’s expansion plans?Walking around Workspace’s newly completed Record Hall redevelopment near Chancery Lane, EC1, you get an idea of what Hopkins means by flexible. At the front is the community space, the café, the large open reception and a room for co-working. So far so WeWork. But the rest of the 70,000 q ft building, i.e. 95%, is in whatever shape and size an occupier wants. From 50 sq ft to 10,000 sq ft. Or more.Which means, as Hopkins says, that the company offers truly flexible office space: what tenants want at any given time, reconfigurable at a moment’s notice. “I am allowed to say this because I am from the industry,” he says. “It has very much been we will build it, and they will come.“We know, every day that goes by, a customer is going to ask for something we have not got yet. And what we are going to do, as soon as we hear that, is provide it.”Strong words, but perhaps an indicator of where the office market in London is going.
An adaptable model
Sitting in a basement meeting room of the Record Hall, Hopkins is very, very confident about what Workspace is doing. Its portfolio of 69 offices around London recently delivered 13.7% like-for-like rental growth, based on this mixture of micro-management and flexible office provision.“What we are is the perfect combination – strong words to use but I think it’s absolutely right – of property ownership and management, coupled with customer ownership and management,” he says.What he means is the right balance between an office landlord of old, which builds an office then lets it for 25 years, and the new hyper management and marketing orientated co-working providers, which are less concerned with the actual building.While Hopkins sees serviced and co-working office providers as competition, they are only at one end of the spectrum.“We are certainly not saying we are not worried about all these others and there is no issue, but I think the positives far outweigh the negatives,” he says.Workspace works exclusively on an owner-operator model, buying, refurbishing and managing buildings itself.“The way they are getting real estate is signing long leases with upward-only rent reviews: taking long and selling short, which is an interesting model… Do we think a lot of these guys will survive the distance? Who knows?” says Hopkins.
A big part of the business is its management model, something Hopkins thinks new entrants will have trouble creating.Essentially, for shorter, smaller lets, management costs can spiral compared to a longer lease, reducing gross to net rents. Hopkins says this isn’t the case for Workspace, which keeps costs down through a variety of methods.Firstly, its simple leasing model means no lawyers or agents. Leases are two years standard, with no rent frees, capital expenditure or rent reviews.“We re-organise rents and market, we do not pay any brokers’ fees, which are probably more expensive than our own internal management,” Hopkins says.Tenants get a shell which they can customise how they wish and good communal spaces. This reduces bureaucracy and fees. Workspace does all its own lettings, which average 4,000 sq ft, while average length of stay is eight years.It also provides a massive amount of information about tenants and what they want.“We have everything from staff filling in forms and keeping databases, through to management teams on site and four customer surveys a year. The intensity of communication with our customers is daily,” he says.“We are capitalising on all that intel, and we use that for directing rents on buildings that are already let, buying new buildings and launching new ones.”Roughly, management costs across the portfolio are about 13%. Net initial yield is 5.5%.While a chief executive is going to talk up his businesses, analysts are not averse either.Hemant Kotak, managing director at Green Street Advisors says: “While it may seem logical to assume short leases equal greater risk, looking back at the last downturn, rental income and occupancy held up surprisingly well. It may seem counterintuitive, but tenant demand is expected to remain robust as flexibility and affordability become more appealing during Brexit discussions.”“Workspace is one of a few listed companies exposed to what we see as a structural shift in demand for flexible office space,” said a JP Morgan Cazenove note in June.
The future of workspace?
Hopkins says finding stock is “our biggest frustration”, and it has been paying more and more for bigger assets.The £98.5m acquisition of 13-17 Fitzroy Street, W1, and Salisbury House, EC2, for £158.7m shows how big it is willing to go. It raised £200m in August which will further contribute to new assets, but Hopkins says these will not only be in central London.“For us as a business it’s important that as well as mopping up the obvious areas we are also seen as a business that can go into other areas… and you do not have to take big bets.”As the company tries to triple its operating size, will Hopkins not take leases rather than buy in order to grow the business?He admits it is a topic that keeps coming up at board level, but is adamant that is not going to happen.“I would not want to run this business if we were taking long leases and selling short, and I made that quite clear,” he says.For the moment, he thinks Workspace is in the right place to benefit from an increasingly occupier dominated office market. “More and more traditional businesses are coming on to our website. Because people are generally becoming more and more confident to pick up the phone,” he says.“We are right at the forefront of what is happening change wise, and we are embracing it.”
Launched in 1987 as London Industrial, before listing in 1993. When Hopkins took the top spot in 2012 the company had a 60/40 office industrial split.Since then it has sold almost all its industrial assets, where necessary first getting residential planning permission, and is now involved in refurbishment and redevelopment.Currently it has a portfolio of 69 office assets around central London, providing 3.6m sq ft of flexible office space.Annual results to March saw the portfolio value increase by 2.1% to 1.8bn, while like-for-like rents grew by 13.7% to £59.6m. Total rent roll was up 14.5% to £89.5m. Occupancy stands at 90.3%.
An OPCO/PROPCO split
The operating side of the business, perhaps the most sophisticated aspect, is still relatively valueless, says Hopkins.“That is one of the problems we have – you have all these new marketing vehicles being valued on massive multiples, you have us valued on a traditional NAV basis,” he says.This however may change as the property sector wakes up to the changing way offices are being used and there is a recognition that management is now half the battle. Hopkins says he has been consulted by PRS operators about how to manage and measure occupiers.Of course, what there have been in the past is OPCO/PROPCO splits, which could be an easy way of realising the value of the operating company, though Hopkins says they have not done anything on it.“I just have this inherent view, though it’s not an overnight thing, the mixture of ownership of the right properties and understanding the customers and marketing to them is going to be worth a lot,” he says