David Lawson 2002
A white-hot furnace bubbles unattended in the corner. One of the country’s leading glassblowers is taking a break to banter with Harry Platt about how strange it is to be up on the top floor rather than bedded on solid ground.
‘But the building can take it,’ says Platt, obviously proud at the way a centuries-old block that was once the centre of London’s leather trade can still cope with industrial uses. The chief executive of Workspace Group has little patience with conventional definitions of obsolescence. To him, modern trends like raised floors and air-conditioning are the real worries, as they restrict change and wear out. Strong buildings and big spaces can generally be recycled.
Across the street an ancient warehouse sits forlorn and seemingly abandoned. Others imagine clearance and a glossy replacement: Platt just wants to get inside and clean it up. ‘I’ve had my eye on that one for 10 years,’ he says. ‘I’ll get it one day.’
Ken Livingstone, would whoop at such sentiments. London’s mayor is pushing through a development plan which hinges on regeneration – particularly in the huge swathes east of Tower Bridge which are Platt’s main stamping ground. Most developers recoil from poor buildings and hives of small tenants. Platt believes they are guilty of a ‘fundamental misinterpretation of risk’.
Fine sentiments, often heard from politicians and planners. But Workspace has the ultimate proof: it makes an enviable amount of money. Last year the firm turned in its fifth straight year of growth in profits and earnings per share, unleashing a flood of adulation from City analysts more used to simpering over glistening office blocks and mega-sheds. Net assets rose 15%, putting the single-digit growth of big name landlords to shame. Pre-tax profits rose more than 20% to £11.5m and returns exceeded 17% compared with the IPD benchmark of 7%.
Not bad for a firm created less than a decade ago as a dump for a ragbag of old industrial sites when the Greater London Council was wound up. But Platt is not surprised. ‘People underestimate the strength and importance of the small firms that make up this market,’ he says.
Even now, there are mutterings that a potential recession will scythe through his seething mass of low-grade tenants. ‘Rubbish,’ is the tart response. ‘We could lose every tenant in a blink. They are all on three-month breaks. But we won’t. In the Nineties recession we hardly felt a thing.’
Strength lies in diversity. Workspace has replaced demolition of buildings with an attack on the barriers between industry, distribution and services. Down the hall from the glassblower is an actor who has set up a business devising staff training dramas. In the yard outside a fork-lift truck shifts boxes into a printshop, carefully avoiding the fleet of vans waiting to carry off high-value knitware to a top fashion retailer.
The driver takes even more care to avoid a snazzy Lotus belonging to one of the many ‘consultants’ dotted around the renovated buildings. This is a ‘business centre’ in a truer sense than any of the serviced office clusters that have sprouted around UK cities.
Platt is quick to insist he has not abandoned heavier trades like metal-bashers and box shifters. Workspace still has plenty of those in more traditional-looking small estates dotted around the city. But there is no hierarchy of worth in his eyes, with Lotus-owners at the top and Cortina-fixers at the bottom. ‘They are all small businesses,’ he says
These are the enduring lifeblood of the economy, he says, returning to his favourite theme that investors misinterpret the risks involved. – particularly urban areas where Workspace in concentrated. They are not hovering on the breadline, forever threatening to do a moonlight flit. The gleaming Lotus and designer woollies in the Leatherworks, one of the firm’s landmark refurbishments, is an obvious sign of new wealth invading city centres but resilience runs through the spectrum.
The firm has a churn rate of around 25% ‘but that is natural and welcome,’ he says. More than half the leavers move to other Workspace property - and leave space for newcomers. Occupation rates run consistently at more than 90%, which is a full house when you consider the constant tweaking and renovation going on.
Workspace would prosper if it stood still tomorrow, as growth comes mainly from persistent annual rental growth. The fact that occupation rates run so high shows that small firms can handle the increases. Again, Platt sees this as an obvious strength missed by investors concentrating on the top of the market.
The average tenant occupies around 1300 sq ft and pays less than £10,000 a year, which weighs a lot less than the millions that burden top firms during hard times. And if the economy dived, Workspace has a huge protective cushion. It needs only 60% occupancy to break even.
Upside, on the other hand, lies in the between current and potential capital values, says Merrill Lynch analyst Robert Fowlds. The inner city locations are ripe for alternative uses which merit huge premiums on the current capital value of £728/sq ft. While Platt has no intention of replacing his small firms with yuppie flats, he accepts that opportunities have been missed in the past.
‘We are not developers but we are taking on partners to create mixed schemes involving homes,’ he says.
Some blue-blooded names need no persuasion from analysts that the formula is viable. Half the shares are held by top institutions who see a proxy for earnings from the kind of property they would fend away from their direct holdings with a very long bargepole. Even the legendary dealer Jack Petchey piled in a few years ago, helping sparking a takeover threat by selling on to Birkby, a similar operator based in the North.
‘We never even got chance to talk to them before they were taken over themselves by Mentmore,’ says Platt, who obviously did not relish passing on control. The boot is now on the other foot as Workspace eyes Spacia, the Railtrack subsidiary thrown into limbo by its parent’s bankruptcy. The opportunity to take over one of few rivals in this market appeared to slip away in the summer with the announcement that Spacia had been sold. But this was apparently just a switch of part of the firm between Railtrack companies.
Adding 22m sq ft of railway arches and associated property would double the size of Workspace overnight and probably cost around £400m. But it won’t happen any time soon, according to Platt, as the politicians and administrators ‘still have a mountain to climb’. In the meantime, there is plenty to do. Fowlds figures that a new banking facility arranged last year has provided capacity to spend up to £150m without passing the hat around shareholders. Platt would not contemplate begging, anyway. ‘We haven’t had to ask for equity since 1994, and I don’t see us doing it any time soon,’ he says.
Raising debt is no problem when rents keep rising – up 8% last year – and merely buying property creates a jump in valuation. Broker Credit Lyonnais expects compound NAV growth of 13% over two years. Platt spent £60m on stock last year and expects to lay out another £50m in 2002, aiming to double the size of the company with the new resources.
He is always looking for more space and has around 100 buildings in his files at any one time. ‘This kind of property can take years to acquire, as it is rarely available in large chunks from property companies,’ he says. The search has widened beyond the old east London heartland but remains firmly within the M25. The only outside holding, a Midlands portfolio, was sold last year for £42m.
This search has also extended beyond industrial property. Quality Court, a 24,000 sq ft office building in WC2 was acquired for £4.2m last year to provide managed suites. But again Platt does not see this as a step change. He points out that a sophisticated service linking the centre to a digital computer network is available right across the portfolio. While many top landlords have retreated from promises to ‘wire up’ buildings, almost 2m sq ft on 21 Workspace estates will be provided with broadband telecommunication links this year. This is not just altruism: within a few years the company will be pulling in commission and profit-sharing fees. It also aims to expand provision of other services like insurance and cheap power.
As the economy moves towards greater reliance on smaller firms, Platt sees no shortage of opportunities for growing Workspace to rival some of the top property companies. ‘London and the south-east has something like 440,000 small businesses. We have a mere 3,000 or so tenants. Even if we doubled in size, we would barely scratch the surface,’ he says.