One London-based real estate investment trust, Workspace Group, breaks that familiar mould. The flexible office space provider has a diverse tenant base. Around 50% of its real estate is used for non-office functions, such as art studios, podcast production, fashion and travel agents. 

Formed from the privatised assets of the former Greater London Council in the 1980s, Workspace’s management team has steered the group through challenging economic conditions, from real estate booms to financial crises.

Adapting to the new normal

Commercial property has, of course, attracted some negative headlines in recent years. Post-Covid-19, increased hybrid working has led to lower occupancy rates in office blocks. By one estimate, just one-third of UK companies now work fully on site, compared with nearly two-thirds before the pandemic (1) . Even well-established real estate operators have struggled to adapt.

Scratch beneath the surface, though, and there are well-run businesses that continue to thrive and could even benefit from changing working patterns. Workspace isn’t immune to lower adoption of office space. However, its diversity of tenants offers an element of protection.

Leveraging short leases

Workspace tenants tend to be on much shorter leases than the 10 to 15 years common in more traditional office blocks. While this can mean less long-term dependable income sources, there are also clear positives. With short leases, the real estate investment trust (REIT) is also able to turn over its rental yield more quickly. We also believe short leases help Workspace tap into the structural growth in creative small to medium enterprises taking place in the London area.

Greening real estate

Workspace has just one sterling bond outstanding, maturing in 2028. This is a green bond, meaning the proceeds must go towards improving the business’s carbon emissions profile or enhancing its environmental capability.

Green bonds tend to be a relatively easy win for real estate operators, as there are many ways to put investment to use. Workspace is using the bond proceeds to retrofit existing properties and enhance new builds. The aim is to achieve third-party verified green certificates as part of its wider ESG strategy.

Focusing on the fundamentals

While the green bond is good for Workspace’s sustainability credentials, we also focus on the fundamentals.

The group’s commitment to keeping debt low is a key strength. Over the last 10 years, the REIT has maintained a low loan to value (LTV) percentage in its property portfolio, reaching as low as the mid-teens. This metric rose following the acquisition of property investment firm McKay Securities in 2021, hitting the 30% mark. But even this level compares favourably with Workspace’s peers.

Staying agile

The lack of secured debt on Workspace’s existing properties is another positive. Management has the freedom to stay agile – updating or even selling properties to suit its portfolio with relative ease. There’s also a clear benefit from our perspective as senior unsecured bondholders. Workspace’s unencumbered portfolio means we aren’t subordinated to other existing debtholders in secured bonds and enhances liquidity.

Appreciating the underappreciated

Valuations are the main driver for our approach to short-dated corporate bonds, as we search for returns that are superior to cash without compromising liquidity and without excessive volatility. With the benefit of fundamental, bottom-up research, we take a close look at whether we are being overcompensated or undercompensated for a holding’s credit risk. 

We believe the market is yet to fully appreciate the underlying fundamentals of Workspace’s green bond. Currently rated as BBB- by Standard & Poor’s, the bond is on the cusp of investment grade.

However, with the company consistently demonstrating good credit metrics (such as the low LTV), we believe it is more in line with a mid-BBB credit. We also think there is potential for upgrades from credit-rating agencies in the next 12-18 months.

Why short-dated corporate bonds, why now?

Short-dated corporate bonds like this one can hold an advantage in periods of normalising interest rates. With only four years to maturity, investors have better visibility on the issuer’s capacity to repay. The yield curve – closely watched by fixed-income investors – is now significantly inverted, implying investors expect to see a slowing economy and interest rates coming down.

Usually, short-dated bonds would trade at a premium as they offer more predictable cash flows and earnings over a two- or three-year horizon. However, with the inverted yield curve, there’s now an opportunity to access these bonds without giving up any yield or credit spread in the process.

Final thoughts

Short-dated bonds can help fixed-income investors looking to de-risk their overall credit allocation and avoid gambling on duration or interest-rate risk.

Thanks to the company’s sound business model, flexible portfolio and competent management team, Workspace’s short-dated bond has the potential to offer investors income and growth backed by diverse revenue streams. Furthermore, investors benefit from the opportunity to put capital to work building greener real estate in and around London.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.