Is workspace's 6% retail bond a good investment?

Workspace, the property company, has become the latest company to take advantage of the growing interest in bonds among retail investors with the launch of a seven-year bond, with an annual coupon of 6% (paid in April and October), to be traded on the Order book for Retail Bonds, the retail bond market. The minimum investment is £2,000 and the bonds can be held within an ISA or SIPP.

The Workspace issue follows a number of successful launches into the retail market. Last week, insurance company Beazley closed its bond issue having raised £75 million, at the top end of expectations, while property companies CLS Holdings and Primary Health Properties (PHP) closed their issues early following strong demand.

Workspace does not have a credit rating, which investors can normally use to gauge the quality of the offer. Instead it is offering guarantees in line with those given to its banking syndicate: that its net debt will not exceed 75% of its net assets and that its net rental income will be at least 1.5 times its interest expense in any 12-month period.

Over the past five years, it has comfortably exceeded those covenants: the average interest cover has been 1.7 times and its gearing has ranged between 44 and 54%. Its debt financing matures in two tranches, in 2014 and 2015, and the current strength of its finances and solid recent results means there is no reason to think that these will not be rolled over - although, of course, this could change by the time its facilities fall due.

Brisk with low risk

Workspace is an unusual type of property company. While the traditional model is to have large offices, let on long leases to one tenant, Workspace has 4,000 lessees spread among its 100 properties - including White Stuff and Moonpig -  all of them in London.

Finance director Graham Clemett, says the typical lease is for three years but they also allow tenants to vacate with three months notice so, in effect, they are extremely short term. The nature of the tenants - typically small and growing businesses - means some do fall by the wayside but Workspace takes three months' deposit and rent upfront, limiting potential losses.

Inquiries are also brisk - they average 1,000 a month - so vacancy rates are low. Occupancy is currently 88.5% and the low point, reached during the depths of 2009, was 83.5%. Bad debts are also relatively controlled at between £200,000 and £300,000 a year.

The funds, which will be used to diversify its sources of funding, will be the third financial call in as many years. In 2009, it raised £81 million to replace bank finance and ensure it met its gearing commitments. Last year, it raised a further £63 million for investment.

High returns

Clemett says it has no current intention of making major acquisitions preferring instead to concentrate on extending and refurbishing existing properties: nine refurbishment projects are underway and a further nine have outline planning permission.

He points out that the return on this investment can be high as the cost of the land - a substantial part of most property investments - will already be covered by the existing leases.

The level of gearing depends on the value of assets as well as debt levels. Historic figures have been encouraging: in the year to March 2012, a 5.1% rise in underlying values gave a total return of 13.4%, twice that for the IPD property index as a whole.

There are, of course, risks. A worsening of the economic outlook - and even the Bank of England admits that is a real concern - could affect occupancy and rent levels. That, in turn, could impact on valuations. While the sheer number of tenants does diversify risk, it also requires very active management and monitoring.

The annual coupon on the bond is above that offered by property groups PHP - which offered 5.375%- and CLS at 5.5% but below financial groups ICG, at 6.25%, and Provident Financial, which has had two issues paying 7 and 7.5%. That reflects both the uncertainty of financial markets and the asset backing offered by Workspace.

Compared to current bank rates, 6% is a decent return. Investors should, however, remember that if base rates show signs of rising, the coupon could look much less attractive. Trading in these retail bonds on the ORB has been brisk so far as investors seek out good yields but the more companies come to the market, the greater the risk that demand will be sated.

That could mean that the bonds fall to a discount, rather than the premium many are currently trading at. While that need not worry those who want to hold until maturity it should be borne in mind if you might need to sell within the seven-year term.

This article was written for our sister website Money Observer


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