Workspace faces pressure over discount to asset value as Saba pushes board overhaul

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Workspace faces board pressure

Highlights

Saba Capital has acquired a 25% stake in Workspace and seeks to replace the entire board, citing a significant discount to the £2.4 billion net asset value.
Workspace shares have fallen about 20% year-to-date as the company, now led by CEO Charlie Green, prioritizes rent increases and service expansion over a rapid asset sale.
Current market conditions hinder large portfolio sales, with Workspace targeting £200 million in disposals by end of next year and another £100 million possible, prioritizing refurbishment and debt reduction.

Saba challenge and strategic options

As reported by Financial Times, Saba Capital has built a roughly 25 per cent stake in Workspace and is seeking to replace the real estate investment trust’s entire board at a meeting in July. The hedge fund argues that the company’s shares trade at an unusually large discount to the net value of its assets and says a sale of the group’s £2.4 billion portfolio would allow cash to be returned to shareholders.

Workspace is pursuing a different route. The company appointed Charlie Green as chief executive in February, and he set out plans this month to lift rents by improving and expanding services, although investors have so far shown limited confidence in either management’s strategy or Saba’s campaign, with the shares down about a fifth this year.

Any rapid wind-down remains difficult in current market conditions. Saba had initially proposed selling the whole portfolio within a year before moderating that expectation, reflecting the challenge of exiting assets in a market where demand and liquidity remain uneven.

Property market conditions weigh on valuation

Real estate investment trusts have come under pressure as higher interest rates have pushed down valuations, in a pattern that resembles the effect of rising yields on bonds. Workspace’s yield stands at 7 per cent, about triple its 2019 level, while commercial property faces additional strain from working-from-home trends that curb expectations for future rent growth and depress underlying asset values.

Workspace’s portfolio may be harder to sell quickly than prime central assets. Its buildings mainly cater to small businesses seeking flexible short-term leases and are concentrated around the fringes of major business districts, with several sites described as character properties such as converted factories and Victorian-era buildings, some of which are protected from redevelopment.

Management is already disposing of some properties on a smaller scale, targeting £200 million of sales by the end of next year and potentially another £100 million after that, with proceeds intended for refurbishment and debt reduction. A smaller allocation to share buybacks could also help reduce the discount to net asset value and weaken Saba’s argument, even if it does not remove the broader valuation debate.

In our earlier coverage of UK boards pushing back against approaches they say fail to reflect underlying asset value, we looked at how companies such as Segro and easyJet argued that persistent market discounts were distorting takeover pricing. We also noted that while holding out can help force better terms, it raises execution risk if management cannot deliver comparable value as sentiment around the UK valuation discount evolves.

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