Is fast-growing Workspace Group plc ord gbp1 a top property buy after 11.1% rent growth?

Roland Head explains why Workspace Group plc ord gbp1 (LON:WKP) may offer value after today’s Q3 results.

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Shares of serviced office space provider Workspace Group (LSE: WKP) edged lower this morning, despite it reporting total rent growth of 11.1% for the nine months to 31 December.

Workspace said that like-for-like rents rose by 3.5% during the final quarter of 2016, while LFL occupancy rose from 90.3% to 90.6%. The group’s dividend payout is expected to rise by 46% this year, giving a prospective yield of 2.7%.

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In this article I’ll look at the latest numbers from Workspace, and explain why the shares may offer value after last year’s 10% decline. I’ll also consider the appeal of another FTSE 250 property stock with a strong record of growth.

Significant attractions?

Property investors have become nervous about heavy exposure to large retail and office developments over the last year. But demand for Workspace’s brand of modern, serviced office space seems to have remained stable.

The group’s average annual rent per square foot rose by 12.6% to £27.38 in 2016, while its rent roll rose by 11% to £86.9m. Overall occupancy, including newly-refurbished units, rose from 85.8% to 87.4% during the year.

Workspace has low debt levels, with a loan-to-value ratio of just 14%. One reason for this seems to be that the group funds new development projects by selling on some of its properties with residential planning permission. Three such developments were sold in October for a total of £26.5m. This matches almost exactly the £27m required to fund two new development projects that kicked off during the quarter.

The firm’s stock currently trades at a 17% discount to its net asset value of 915p per share. This may reflect market concerns that Workspace tenants are typically on short leases. The group could be left with half-empty buildings during a major recession. Asset values could fall too.

Personally, I’d prefer to buy at a discount to book value of at least 20%, with a dividend yield of more than 3%. But Workspace’s current valuation isn’t that far from this target. In my view, the stock looks reasonably priced and could deliver positive returns.

A safer alternative?

Workspace isn’t the only property stock that does things a little bit differently. Self-storage specialist Big Yellow Group (LSE: BYG) has delivered a 159% return for investors over the last five years.

It recently said that like-for-like occupancy rose by 2.4% to 76% during the final quarter of last year, while revenue for the last nine months was 8% higher than the comparable period.

Big Yellow’s 89 storage units are spread across the UK, although there’s an emphasis on London. Measured by value, 96% of the group’s property assets are freehold, with the remainder on short leases.

Unlike Workspace, Big Yellow shares currently trade at a premium of about 25% to their book value of 594p. One reason for this may be that the shares offer a much higher dividend yield. The 2016/17 forecast payout of 27.7p equates to a yield of 3.9%, which is in line with the sector average.

Unless you expect Brexit to trigger a major recession, I’d argue that Big Yellow looks reasonably attractive at current levels. I’d be happy to buy.

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