Good morning, everyone, and welcome to our full-year results presentation and strategy update. I'm Lawrence Hutchings, Chief Executive, and I'm joined today by our CFO, Dave Benson, who many of you know. We also have members of our team in the audience, including our senior team, who will help with Q&A at the end of the presentation. It's great to see so many familiar faces in the audience. Thank you for coming along, and the same to the people who are joining us today on our webcast. It's been a challenging and rewarding period. That said, I'm pleased to be here, and importantly, not on crutches this time. Turning to the agenda, I have a few slides as an overview, and then we'll go through the highlights of our full year 2024-2025. Dave will take us through the detail of the results. I will then return to share my thoughts and insights on the business and our strategy.
Let's go back a couple more. You seem to have a clicker problem. It's okay. We'll get there. Excellent.
We've delivered a solid performance in full year 2024-2025, acknowledging the declines in occupancy. As mentioned in our Q4 trading and financial statements, we expect occupancy to decline further this year before it stabilizes. We have undertaken a significant amount of research on the flex and SME markets in the U.K., and I'm confident that the market is there to support a rebuilding of occupancy. Of course, this won't happen overnight. Our strategy will address this and embed a new focus on operational excellence to fix our backyard, accelerate income and growth, and deliver scale over time. I believe Workspace has an exciting future and the right strategy, but more on that later. Do you want—
Yeah, it's just not working.
It's not working. Brilliant. It's been a robust year with a challenging macroeconomic backdrop and increasing competition. We have delivered GBP 66.8 million in adjusted profit, which is on consensus, and a 1.2% increase on last year. This has enabled us to pay a fully covered dividend of GBP 0.284, an increase of 1.4%. As you know, our occupancy declined to 83% on an adjusted basis, and we will see the full impact of that this financial year. We'll be detailing our plan to stabilize and rebuild our income later in this presentation. I will now ask Dave to take us through the financial detail.
Thanks, Lawrence, and good morning, everybody. As Lawrence mentioned, overall, it's been a solid performance in the context of macroeconomic and competitive headwinds. In terms of customer activity, as the top two charts on this slide show, we saw softer demand for much of the year, particularly in the third quarter, which was impacted by concern around the U.K. budget. Rates of conversion from inquiries to deals have, however, been at historic highs, and an improvement in trading conditions, combined with the early impact of strategic actions that we've taken, resulted in a strong improvement in Q4. As highlighted in our quarterly trading updates and at the half-year, we have, however, seen a drop in occupancy due to a higher-than-usual number of customer vacations, particularly larger customers.
Demand for our core product, however, remains good, and we continue to see improved pricing, with our average rent per sq ft growing just under 5% over the last 12 months. Pricing growth was a little weaker in the fourth quarter, reflecting selective price reductions and promotions, which helped drive the strong pickup in demand that we saw in that final quarter. Turning to the income statement, underlying rental income increased GBP 2.3 million to GBP 135.5 million, reflecting the increase in average rent per sq ft achieved over the last year. Net rental income was down 3.2% to GBP 122.1 million following the disposals made over the last year, but this was offset by the corresponding saving in interest costs and lower admin expenses, resulting in adjusted underlying earnings per share up 1.2% to GBP 34.50.
Based on our trading profit performance and confidence in the longer-term prospects of the company, the board is recommending a final dividend of GBP 0.19, taking the full-year dividend to GBP 0.284. On the balance sheet, and notwithstanding a decrease in the property valuation, which I'll come back to, we've maintained our capital discipline, with trading profit fully covering dividends and the proceeds from property disposals exceeding capital expenditure, resulting in net debt down to GBP 820 million and NTA per share of GBP 7.74. Looking at the property valuation, overall, we saw an underlying decrease of 2.4% in the year, reflecting lower occupancy. This slide sets out the valuation movements by property category. On the left-hand side, you can see the valuation at 31st of March, and on the right-hand side, you can see the movements in the year.
In the first row is the like-for-like portfolio, which accounts for around three-quarters of the overall value. As you can see, the like-for-like valuation was down 1.6%, with a 10 basis point yield movement reflecting lower occupancy, particularly—sorry, partly offset by a 1% overall increase in ERV per sq ft. Following a strong recovery from COVID, ERV growth in the year returned to a lower level of annual increase, although we have continued to see relatively stronger growth in ERVs for smaller spaces. Valuation movements in the non-like-for-like categories were largely driven by market yield movements, with more pronounced yield expansion in Southeast offices and with refurbishments also impacted by increases in build costs and lower residential values. Turning to debt, we continue to maintain a wide range of facilities, with a spread of maturities, largely fixed interest rates and significant headroom.
Over the past 12 months, we have successfully refinanced GBP 355 million of bank facilities, extending the maturities until 2028 and 2029, and put in place an additional GBP 80 million term loan to proactively increase available headroom in advance of repaying GBP 80 million of private placement loans in August this year. The facilities have the option to extend their maturities by up to two years, as well as increase facility amounts subject to lender consent. This gives us significant flexibility, with no additional refinancing required before 2027. Our focus on capital recycling has reduced our net debt and improved our debt metrics. At the end of March, we had GBP 260 million of cash and undrawn facilities, with loan-to-value down to 34%, interest cover of 3.8 times, and our net debt to EBITDA down to 8.1 times. Looking forwards, macroeconomic uncertainty continues to impact sentiment.
As previously announced, earnings this year will be impacted by a number of factors, including a lower opening rent roll, continued pressure on occupancy from further large unit vacations, additional costs, including an increase in the living wage and higher National Insurance contributions, and an increase in the cost of debt following the repayment of the GBP 80 million of private placement loans. We have planned capital expenditure of around GBP 50-60 million, focused on high-return asset management opportunities on buildings where we have conviction, which will be offset by proceeds from further property disposals. I'll now hand back to Lawrence to talk you through our strategy.
Thank you, Dave. The macro environment remains challenging, and in some of our markets, supply has increased. Additionally, we've identified that we need to sharpen up operationally. We have developed a strategy that will take forward the best elements of our 40 years of history and experience, providing space for London's SMEs. This will position the business to be a clear market leader. Coming in as new CEO provides the opportunity to question every element of our business model and franchise. It's very helpful to start with a blank sheet of paper. I sought out insights from people across the industry, many of you in the audience today, our competition, our customers, and our team members. I had a number of questions. First and foremost, are we in the right market? Is there enough growth and opportunity in London? Are the SMEs still our target customer?
Is the flexible space market the right place to be? Secondly, what needs to change organizationally? This speaks to structure, culture, and our processes and systems to ensure we are capable of winning on the ground once more. Assuming we're in the right market, is our product up to scratch for our target SME? Do we have the right real estate? Are we allocating capital into the locations, buildings, and areas that align with the needs of our customers? Finally, what opportunities exist for the business to scale over the longer term? How do we capitalize on the growing and fragmented SME and flex markets? The answers to these questions give us confidence in the strategy we have developed to deliver an income-led business focused on dividend growth. The starting point was research. We did not want to mark our own homework.
We enlisted the help of three leading data and research firms: The Data City, Beauhurst, and global advisory firm OC&C, who have recent experience in the U.K. flex sector. Is London the right geography for Workspace? We are all aware of the increased levels of competition, and I had heard feedback about diversification opportunities that may exist in the regions. We had our own foray into the Southeast in recent years, as you're aware. However, the research was categoric. The capital is still the growth engine of U.K. SMEs. As this graph shows, the number of London SMEs has grown by 3.4% annually over the last 14 years. Importantly, that is twice the rate of the rest of the U.K. Despite lower growth over the past few years, the research gives us confidence in the future, which I'll come to.
Turning to our target customer by size, shown here in the bright blue circles, the number of these businesses, their formation, is growing strongly. Our smaller target customers, shown by the 1-9 circle, while slightly lower growth, provide an opportunity for us to access early-stage exciting companies as they grow and then look to scale. There is more for us to do in this market, and I'll touch on that later. The third important factor is aligning ourselves to the SMEs within each industry who have the best growth potential. Our researchers confirm that these are the makers, creators, and innovators, as shown on the slide. Mapping this against our existing customer base, we know that 55% of our customers today are, in fact, creators and innovators, versus 25% for the wider market.
We have numerous examples of these customers who have grown or scaled with us over time, including Wild, who creates sustainable bathroom products. They're a phenomenal growth story and have just been acquired by Unilever. Importantly, they're looking to scale with us once again in our portfolio and most likely at Kennington. The researchers also indicated that these creators and innovators are best positioned to benefit from the long-term structural trends in our economy. Turning to supply, we looked at our competition in detail, appreciating this is a new and somewhat opaque market, so reliable data is very hard to obtain. Flex is a growth sector, and there have been distinct periods of change in the last 10 years. After a period of contraction post-COVID, the market has grown again and become more fragmented, with new, smaller, and more nimble capital-light operators who are mostly office-focused in central CBD locations.
This is where we expect to see the largest increases in supply. In a more competitive market where demand has slowed, differentiation is essential. What differentiates Workspace? Our scale, which provides us economies, our ownership, which affords us higher margins, our locations and character buildings, our studios and workspaces, and our inherent appeal to creators and innovators. This chart is one of the most interesting from my perspective. Of the 440,000 SMEs in London, 210,000 are in our target employee size band. 70,000 are in our current postcodes. Of that, 25,000-35,000 are in our creators and innovators sweet spot. This compares to our current customer base of 4,000. In other words, we have a 12% market share and a potential customer base with over 25,000 SMEs in our sweet spot target market.
Clearly, this suggests there is a compelling opportunity for Workspace right here in London. All of this answers my earlier question. Yes, we are in the right market. London, creative and innovative, scale up SMEs. The market is there. We just need to be better at winning on the ground. Moving from research to our business, there are two key elements to our model. One is our operating platform. Forty years, 63 locations. We generate over 8,000 inquiries a year, 6,000 viewings, and over 1,200 deals in a year. This provides us significant scale, but more importantly, momentum. Our platform drives the returns of our GBP 2.4 billion investment in real estate. I'm often asked, "Are you an OpCo or a PropCo?" The answer is our job is to be great at both, and there are plenty of examples of that globally.
Our strategy addresses the work we are doing on the operational side with a sharper focus on portfolio management and capital allocation. We are crystal clear on how we improve our operating performance to drive better income-led returns from our real estate. This is our plan of action, our new strategic approach: fix, accelerate, and scale. It ensures that we are agile and can adapt to our fast-changing market. The strategic actions all start now. In fact, they started six months ago, and they deliver results over different time periods. In the short term, we are focused on fixing our backyard. Whilst it will not happen overnight, we have confidence in our ability to rebuild occupancy, earnings, and dividend growth. Concurrently, we have undertaken a wholesale review of our portfolio against a set of operational and investment criteria that guides capital allocation and recycling to accelerate that growth.
We have an ambition to scale the business, not for the sake of scale, but because we believe there are creative opportunities in the fragmented flex market where we can leverage our portfolio and platform to deliver further income and capital growth. In order to deliver on this strategy and become a clear market leader, we need to embed operational excellence throughout the organization. This underpins our strategy and will position the business for longer-term growth. What do we mean by operational excellence? We need to do things better, faster, and for less, to think and act more like our SME customers. We've done a ground-up root and branch review of every aspect of the organization. We've identified what we need to do to win on the ground. We need to be more efficient as a business.
We need to improve our product, and we need to deliver a seamless customer experience. How do we deliver? I'm pleased to say we have already started. We've been enacting changes since January this year. By taking elements of our emerging strategy and applying them to our operational business, we have confirmed that small changes multiplied by the sheer volume of our platform and activity equal something significant. There are three main areas that we're focusing on to drive this change: structure, culture, and systems. We're moving towards a flatter structure, so we're able to move information faster, up, and across the business. We're rebalancing the business by streamlining our support functions to create a leaner, nimble organization and to put more people on the ground on our front line where it matters. This will save almost GBP 2 million in annualized efficiencies.
By creating a culture of empowerment, we will give those people on the ground the tools and accountability they need to meet our high standards of customer service and retention objectives. In terms of systems, we are bringing our three main systems: property management, finance, and CRM under one umbrella, and launching an upgraded CRM later this year, along with a new customer portal that will enhance engagement with customers. We are using AI to deliver more targeted and efficient marketing, enhance space planning, and optimize our sales process. When we get this right, we will have significant operational leverage, meaning economies of scale and, importantly, impact on the bottom line, our earnings. Organizational change takes time to embed. However, we have commenced the journey, and we are starting to see results. What does operational excellence look like for our customers?
We've built a very clear picture of the criteria that are essential to creating a successful workspace building or product: a combination of our buildings, our amenity, and our services. From location, size, access to transport, and the surrounding SME demographics in any given London borough, to the building services or amenity, and then through to the soft services and the communities within these buildings that we curate. The approach provides clarity and a roadmap for every aspect of our business and, importantly, for our team members. The criteria has helped establish the areas we need to improve in our operational business to support a recovery in retention and customer acquisition, which takes me on to the next slide. Let's dig into the fix. We have three areas of focus that we're going to expand on in the next few slides. Firstly, customer retention.
Leasing and customer acquisition, our demand engine. Central to both is our product or customer proposition, i.e., our buildings and the services we provide. Looking first at retention, reducing churn of our existing customers and defending our income is critical, especially in a competitive market where the cost of customer acquisition has increased. Previously, a customer leaving was an opportunity to drive pricing. In today's market, that is not the case. We need to do everything we can to retain customers. What are we doing differently? We're improving our product. We're better leveraging and incentivizing our teams. We're enhancing our customer experience, and we're building an ecosystem of services that add value to customers and make them stickier. Focusing on customer acquisition.
In an increasingly competitive market, we need to be better at differentiating Workspace and be clearer about who, where, for those creative and innovative businesses so that our offer stands out from the crowd. You may have seen our first-ever TV campaign, which went live recently. Almost 60% of our inquiries come direct through our website. By increasing the number of inquiries through marketing and social media campaigns, this feeds directly into viewings and then down to conversion of deals. Put another way, with 600-900 inquiries a month, if we converted everyone, we would not have an occupancy challenge today. Enhanced data, insight, and reporting is making the sales process more efficient. We have changed how we incentivize our sales team to drive better conversion outcomes. We are implementing more targeted marketing plans aimed at both larger and smaller businesses.
The sales and leasing teams have ambitious targets for large space lettings, and they're engaged with larger companies directly through events, social media, and direct mail, as well as using subscription databases to target upcoming lease renewals. For smaller businesses, we've created the Workspace Launchpad offer, providing ready-to-go spaces on even more flexible terms for early-stage scale-up businesses. Onto our product. We're very conscious that a lot of this is theory. I can already hear people asking, "How do you know it's going to work on the ground?" We're starting from a great place. We own fantastic real estate. This is one of the things that attracted me to Workspace. Quite a few of the buildings are very close to where I live. Reviewing our assets compared to the competition, there are areas where we need to bring our product back up to scratch.
I'm not talking about major refurbishments that are CapEx-intensive, rather high-touch and first-impression areas in our buildings where standards had slipped, prompting some negative customer feedback. We have selected two of what I call our high-conviction buildings: Vox and the Leather Market. They are classic Workspace properties, characterful buildings steeped in history. They appeal to our creators and innovators. Both had some vacancy, meaning we are able to measure the impact of the changes that we have made. Importantly, we did the work in a matter of weeks by changing our approach to procurement and with modest CapEx. It is all designed to capture the imagination of our existing customers and the prospects, our incoming SMEs, on their viewings. Remember, these are emotional decisions for our SME business owners.
The changes that we are making here at Vox and the Leather Market respond directly to what our customers are telling us. We see a real opportunity to improve the experience that our SME customers have in these buildings. We believe by improving that experience that we'll improve our retention and attract more SME customers to our buildings. It is really about driving occupancy in the business.
The key areas we are focusing on in this project have been driven by the customer insight data. We've really focused on high-touch areas such as front-of-house, breakout spaces, external areas like terraces, corridors, and bathrooms.
The design focus for this project was to look at quick wins. Those things include furniture, lighting, getting the acoustics right, dealing with floors, using color and art in corridors and on walls. These are the spaces that have the biggest impact for Workspace customers.
A part of this project that I'm really proud of is that we've reflected the history of the building within the design. At the Leather Market, a former tannery, we've brought in elements that reflect that history.
We've really sort of dived into the whole leather-making process. We've been using leather tools in the graphics. We've been using the stitching motif in leather all around the building.
I love all the interiors. I love the styling, all the choices in furniture.
With the reception for Vox, we've made some significant changes to the lighting and the acoustics, which together will really make the space a much more pleasant place to work.
I love it. It's so colorful, and it's bright, and it's inviting.
I think it just looks so much more fun now. I think the theme of it being an old Marmite factory is really tied in, which I like, with all the hops everywhere and the new meeting room names. I really love that.
The exterior seating area is going to be a fantastic new addition to the space that they have now, with lots of different seating styles and using the space in a different way.
I think my favorite part is probably the courtyard. I think I'm very excited to kind of relax in here during the summer.
This project is about creating an environment that people are proud to belong to and that allows our SME customers to attract and retain the best staff. Making sure those senses of arrival and those places where people meet within the buildings, that those are as compelling.
We've shown how we're enhancing the product for our customers, but we're also working to enhance the experience for them. We understand what's important to our customers. More than half agree that being in a Workspace building helps them connect with other businesses, which in turn helps them grow. However, there is room to improve that. At the two properties we've just seen, Leather Market and Vox, we're piloting a new team structure that puts more people on the ground who are responsible for fostering that community, making connections, and facilitating networking, which supports business growth and advocacy. This all comes back to our short-term goal as a better customer experience and sense of community enhances retention, which supports occupancy. In addition, we've identified, through our research, further enhancements to our product by creating scalable value-add services that will help drive the success of our customers and their scale-up ambitions. As always, we are driven by customer insight.
We interviewed customers to understand the key challenges facing their businesses, and we've piloted two propositions that complement our core offering and will help differentiate Workspace from competitors: the Skills Accelerator, where we provide expert-led training workshops for customers to upskill their teams at affordable prices on topics such as generative AI. Then the Workspace Navigator, which gives exclusive access for early-stage businesses to a range of services and support provided by Workspace's partner network. Once these pilots are complete, we will embed the offers in the new My Workspace customer portal and then roll them out across the portfolio. To bring all that together, we have the platform and infrastructure, which has been tested and fine-tuned to drive both retention and new customer acquisition. In addition to all the levers I've run through to rebuild occupancy, we will continue to be pragmatic on pricing.
As tension returns, we are never far from a mark-to-market opportunity given the structure of our leases. Relying on rate is not the only lever. We have the blueprint through the pilot projects to improve and differentiate our product and enhance our customer experience. Where does fix take us? I've been fascinated by our income model since joining. We have four main drivers of income growth when we get our operational platform humming at its peak. With lower occupancy, we have an inherent opportunity through our focus on leasing and retention, as I've set out, to return to our long-run average, which is closer to 90%. This represents approximately GBP 10 million in income. We can also deliver growth through ancillary income. Our meeting rooms, basements, and car parks all have scope to improve income.
Our leasing model, typically two-year terms with a fixed 5% increase at the end of year one, followed by a mark-to-market at expiry, provides access to our reversion. This incentivizes us to create tension in the supply-demand economic on a building-by-building basis. By subdividing larger spaces into our sweet spot, 300-1,200 sq ft studios, it provides a considerable uplift in income that exceeds our hurdle rates of return on the capital that we require. We will also increase the rate of recycling, specifically of our low-yielding and ex-growth assets in mature markets, which are typically below our marginal cost of debt, providing a further uplift in income. When we get our operational platform right, this creates considerable scope for, importantly, income generation and growth.
Planning for the medium term now, we have done a forensic review of our portfolio, analyzing asset by asset according to our property lifecycle model. We are adopting a new, more clinical approach to capital recycling to accelerate income growth over the medium term. Understanding the lifecycle of our assets from an operational standpoint is key. We have conducted a detailed review of our portfolio, mapping each building against our portfolio lifecycle, which you can see here on this chart. There are four stages, depending on factors such as occupancy, pricing growth, CapEx requirements, and adherence to our brilliant basic standards. The first is incubation, and it is either for nascent properties in the early stages of letting up, for example, Leroy House in Islington, or nascent SME locations. Maturing for assets where occupancy is increasing and rents are growing as a result.
Performance, buildings that have sustainable income growth and are delivering returns that exceed our cost of capital. Finally, properties at the reposition stage of the cycle either require more significant CapEx to boost performance or are targets for capital recycling. This guides our business on where we need to invest to maintain our income and maximize our income growth opportunity. Our lifecycle exercise and our workspace criteria has helped us categorize each asset as high conviction, conviction, or low conviction. We have factored in CapEx required to bring the assets in line with our criteria, and the forecast returns over a one, three, and five-year horizon against our hurdle rates or marginal cost.
The high conviction assets meet our criteria and, in some cases, may require a light refresh, like the two that you saw on the video, subject to their occupancy metrics and the competition profile in the immediate area. These are our pilot projects. Conviction meets the physical and real estate criteria. However, investment in amenity and presentation is required to meet our high operational standards. Last, low conviction. We will recycle these assets. What's interesting for me is that the high conviction assets are our best-performing buildings by occupancy over the last three years, as evidenced in this slide. Occupancy levels are well above our portfolio average of 83%, which tells me when we get it right, we can deliver performance and create tension, which drives income growth.
Interestingly, when you look at the income growth that we've managed to achieve out of these high conviction buildings, it is also impressive. Where we get our real estate and operational strategy right, we are capable of producing strong income-led returns. We will continue to be responsible stewards of capital, and we are going to be more clinical on capital recycling. Archer Street in Soho on the slide, which we sold in March, is a great example. A character building, as you can see in this photo, and in a great creative and SME location in Soho. However, at 20,000 sq ft, its size does not allow us to create the amenity that our customers want, the amenity that enables us to drive income growth. We exit and recycle the capital into higher return opportunities.
Our portfolio lifecycle exercise has identified a disposal pipeline of around GBP 200 million of low conviction assets to be executed over the next 24 months. Proceeds from disposals will be recycled to fund investment in CapEx at our conviction and high conviction properties, maintain prudent levels of gearing, and enable investment in new emerging SME locations. More on this in a moment. What does Accelerate achieve? We take our GBP 2.3 billion of real estate, and we invest in subdivision, enhancing amenity, and the presentation experience. As we have just said, we recycle assets that are either in mature SME markets or do not fit our unique workspace criteria to fund CapEx and selectively invest in new growth areas and, of course, lower leverage. Knowing where and when to invest, sell, and acquire is clearly critical. We are going to be laser-focused, dispassionate, and disciplined to deliver income growth.
Once we've embedded operational excellence, we have the platform and foundations to facilitate and unlock the benefits of scale. We are doing the work today to lay the groundwork for the future. As you'd expect, we won't go into specifics, but we see three areas of potential future growth. First, our experience and on-site alongside our research means we have a huge amount of knowledge on the SME map of London and its real estate. We have identified emerging and high-growth SME locations. The SME map of London is constantly shifting. Secondly, we're excited about the opportunities that increased specialization in the flex market presents. We are well-positioned to provide space to some of these specialist clusters and operators and are actively exploring this opportunity now.
Finally, with operational excellence and a seamless operating platform, we'll be able to support, with limited growth in our cost base, a significant increase in our footprint across London. This could include growing through acquisitions and/or leveraging our platform with selected partners. I mentioned earlier the ever-moving SME map of London. No one is better placed with our 63 locations, 4,000 customers, and 40-year history to grasp the significant opportunity to identify and take advantage of emerging, higher-yielding, and growth areas. I often say in the office, "Where is the Bermondsey of tomorrow?" The blue dots indicate where our London assets are today. We've identified, through our research, potential growth areas based on their SME populations, the intensity of the local competition, and, importantly, the proximity to transport links.
This is Workspace returning to its origins by entering new urban locations in London ripe for regeneration and will drive both income growth and capital growth over the medium to longer term. We have set out a plan that will fix, accelerate, and scale the business over the long term. It is an evolution in what we do and a revolution in how we do it, and we are moving at pace. We have the assets, customer proposition, platform, scale, experience, ambition, and now the strategy to deliver a compelling equity-led story, sorry, income-led equity story. Before I move to Q&A, I've taken you through this strategy, and by taking you through this strategy, it reminds me of all the reasons why I took this job. Workspace is a great business, and I saw the opportunity to build on its legacy.
Like many businesses, it needs a reset, and that's why I'm excited and determined to deliver on this plan, to take Workspace to where we truly believe it belongs as a clear market leader. This is our intent and my commitment. There's a real sense of enthusiasm from the team, and we are energized by the challenge as we set out on this journey. I'm sure some of you have questions. We'll go to the room first and then those on the webcast. Thank you.
Excellent. Denise, got one over here. Take the first question from Denise. Thank you.
Morning, Denise Newton from Stifel. Just on your capital recycling, obviously, you mentioned the timeframe for the disposals is about 24 months. Your sort of annual run rate of CapEx is maybe GBP 40 million-GBP 50 million. Have you already identified opportunities to deploy that effectively excess capital relatively earlier than you might do normally?
We have identified some opportunities. I think they are two very good questions. You will note that we sold GBP 100 million worth of non-core assets last year, so the run rate is consistent. H2 was heavier than H1, Dave, was it not? As we moved in and started to make some important decisions about assets that perhaps we had been sitting on the fence on for a while, if that makes sense. The run rate we feel comfortable with effectively based on what we have achieved in the last year. The CapEx is a very interesting question.
If we look at the CapEx for this year, just over half of it is committed to projects, large projects like the extension of the Biscuit Factory, for example, which is absorbing quite a bit of our CapEx. From our standpoint, we can accommodate that run rate of CapEx to deliver the refresh to the buildings. I think the advantage of having an excess of disposals over CapEx requirements is we may be able to accelerate that, Denise, even further, if that makes sense. We mentioned the sources of proceeds. You are first to invest back into our buildings. Driving occupancy is critical. That is fundamentally the cheapest growth we have in the business. We own the buildings already, as you would appreciate. The space is sitting there. We have the operational platform that can deliver once we have made these changes, and we have made a lot of them already.
We've got more to come. The second use of capital is to look at, can we put a flag in some of the new Bermondseys effectively and start to unlock the next era of growth for Workspace?
Callum Marley from Kolytics. I've got three if I can. We've seen very strong rent growth in 2025. How are you thinking about recalibrating the balance between rent growth and occupancy going into 2026? And do you have a sense of maybe how price elastic your different-sized customers are?
Yeah, that's two good questions, I think, just to pick up, make sure there's not three.
In terms of let's deal with price elasticity first, because that leads into the other—all of our research indicates that when we get the offer right, which is our core product, so the building, and we understand where that location, what the locational and property characteristics are effectively, character buildings in locations where there's a high level of SMEs and that SME population is growing, where we've got very strong access to transport is clearly important. Where we get those building services right, so the amenity fundamentally, so cafés, breakout areas, and the presentation is right, and where we get the services that we wrap around that offer that help our SMEs scale and grow, we create a connection effectively to our buildings and to our business that becomes quite sticky.
That allows a degree of price elasticity, if that makes sense, because these businesses are not property businesses fundamentally, as you'd appreciate. The, I call it, brain damage involved in moving effectively takes time out of those SMEs' core focus, which is scaling that business effectively, as you'd appreciate. They do not approach moving lightly, if that makes sense. There has to be a real reason, and that is why we have got this focus on product. If we get that product right fundamentally for our customers, then we create customers who are fundamentally more loyal, and therefore pricing is not the primary consideration, if that makes sense, and that gives us some elasticity. I am not suggesting for a moment that we have enormous amounts of elasticity. I have mentioned this presentation.
We live in a more competitive environment fundamentally, and we're in a situation where, due to numerous factors, that SME formation has slowed a little. It's still growing, but it's slowed. In an environment where we've got slower growth and business formation and scale-up and more competition, clearly we need to be a little more focused to win market share. We believe we can win market share in that environment. The second question was, I believe, the relationship between rate or rent and occupancy. There are people in this room who are in our senior team who have been in the business for a long period of time, and they've worked through the GFC, and they've worked through COVID, and their experience and insights are incredibly valuable.
The history of the business is that there are two levers, rent and growth and occupancy fundamentally, and that when occupancy effectively starts to fall, we just let the rent lever off slightly and then rebuild occupancy and pull that rent lever back. I think we're in exactly that situation today, to be frank with you, and we have been using those levers. To paint a very clear picture, I put a chart with five buildings or six buildings up, and occupancy is over 90%. When we're over 90%, we've got tension. As Dave highlighted, we have been driving rents, and we've seen an increase in ERVs. Where we've got occupancy that's in the sort of mid-80s and lower effectively, and we have a series of buildings in that position, we're starting to lose tension.
Our customers know because they live in those environments, as you'd appreciate. They know there's less people there. In that case, we let rate come off, build occupancy, and then bring rate back effectively. It is a very dynamic business. We sit in a trading meeting every Monday morning for an hour, and we review the 200 inquiries we've had the week before, where they're from, what type of businesses, how many have been generated by us, how many by our brokers, the majority by us on our website. We then talk about how many viewings we've got booked for the next week. We talk about how many deals we did, how many notices we've got to leave our platform. It is that dynamic, if that makes sense, and if that helps and answers your question.
Yes, just a second one.
Earlier in the year, the half-year presentation, you said that the direct impact from the budget on both Workspace and SMEs will be limited. Is it fair to assume, with the benefit of hindsight, that the actual impact was a lot greater than what you originally anticipated? Could you share any areas where that might have differed from your original assumptions?
Yeah, good question. I think if we're referring to the budget and the NI changes, which I suspect is what you're referring to, we did a lot of work on that. I might hand over to Dave because Dave did quite a bit of work on the impact of NI on our customers. Dave?
Yeah, that's fine.
What we said was that the direct impact, taking National Insurance, for instance, if you're a five-person business in London, SMEs, service-based, actually the net cost of the NI change is pretty limited on your business. Your customers may well be international businesses or larger corporates, etc., and the impact on them is more significant. If they are exposed to sectors such as with high people costs, then they will feel the impact much more. I think that we said the direct impact was limited, but the concern, and I think this was always the case, that the concern that that generated about what the wider economic condition, trading conditions might be, that is the challenge that we're seeing, particularly in the third quarter.
Just picking up the sort of hindsight comment from the half-year, and hopefully we've made it clear, we're not standing here trying to attribute responsibility for the decline in occupancy to what's happened in the macro. Budget and decisions have been taken around the balance between tax and business growth. What I can say and what I've learned over the last seven to eight months, our SME customers tend to react a little earlier to uncertainty, if that makes sense. In the wider economy, we've seen a slowdown in business investment. As you'd appreciate, in an SME context, a decision to invest is to scale up effectively. As you'd appreciate, we have noticed that process has slowed, and that often decision to scale up is taking more space or moving from one location to another.
That is an opportunity that hits our website effectively, comes into our demand funnel. We convert 20% of the deals that come in, of the inquiries that come in. That does have an impact, and we have seen it. What we want to say very clearly is that there is enormous opportunity for us in London. We have 4,000 customers, 25,000-35,000 available market. Yes, we appreciate what is happening in the wider picture. However, in the macro, we have work to do in terms of improving how we operate, and we have sufficient available market to deliver a recovery in our earnings and led by improving occupancy and getting occupancy back to the long-run average. I just wanted to be clear on that point. We appreciate it is going to take some time. We appreciate that.
If you put the GBP 10 million, I think we did GBP 40 million with the new deals last year. You put that GBP 10 million in lease up effectively into context, but it's very achievable.
Thank you.
Hi, Bjorn Zietsman from Panmure Liberum . A few questions for me, please. You mentioned some non-property related CapEx, specifically like upgrading the CRM systems. What percentage of CapEx or amounts are you attributing to for those purposes?
It's pretty small. It's single-digit millions. Yeah, a couple of percent.
You mentioned that previously losing a customer was an opportunity to increase price. Is that because you believe reversion has peaked or embedded reversion is now in decline? Or do you think that's more because the customer acquisition cost is now quite high?
I think answering that question, I think both.
I've said that cost of customer acquisition will have heads our marketing team and that includes lead generation effectively, new business. It's a fact. It is costing more fundamentally for lead generation. We use all the website tool optimization that we can get effectively, as you'd appreciate. That's a duopoly. I don't want to say any more about that, but as you would appreciate, those costs have gone up. In a market that's more competitive, where demand has come back a little, it's still positive, but it's come back a little. As you would appreciate those competitive pressures, we live in a competitive environment. That competition profile changes building to building. If we take this building where we are within a stone's throw in a circumference of this building, there's Uncommon, for WeWork times two industries, etc., and yet we do very well in this environment.
We're not concerned about competing, but the reality of the situation is it is far more cost-effective for us to retain an existing customer than go and secure a new one. That's the reality. By the time you factor in, there is some level of vacancy. We've lost the rent. We've picked up a business rate liability. We've got service charge liabilities. As you appreciate, that dynamic means that the focus of the business has shifted to retention. Effectively, we haven't forgotten about new business, but there's a lot more emphasis on retention. In terms of ERV, and that's another thing that's fascinated me about this business, is if I—and we actually have a chart in the appendices if you pick up a copy. What it basically does is has our buildings and the low point in rent, effectively, the band of the low point.
Let's take an example like Metal Box in Southwark. The low point in rent might be GBP 50. The high point in rent is like GBP 120. The ERV is at GBP 80 fundamentally. As you'd appreciate, there are two things we can do there. If we can't grow that 120, how many of the 50s can we get up to the 80, if that makes sense? It's quite a nuanced and different approach to what you'd have in a traditional piece of long-lease real estate, if that makes sense.
Finally, a question just on occupancy. You say you expect it to get worse before it gets better. Is that because you can pinpoint certain leases or assets that might get worse? If so, how much worse do you think it might get?
Yeah, we've sought to be transparent about what we know today effectively. What we know is, as you've just mentioned, our standard lease provides for six-month notice. The majority of our customers are on a six-month notice. At a point in time, we're holding a stock of notices effectively. The vast majority of them go through with that notice. In some cases, minority of cases, we're able to convince them to stay, but the majority of them go. We've made some assumptions about the stock of initial notices that we see. We call them initials, the stock of initials that we have in hand today. We've made a series of assumptions about the leasing run rate, if that makes sense. Sitting between those two is existing customers who are either contracting or expanding, and there's always a lot of that going on.
SMEs are very dynamic constituencies, you would appreciate. We support that, and we actively support it. Even if it's intra-lease, we support it, if that makes sense. Someone might be nine months into a two-year lease, and something's happened in their business. They've secured a new customer. Of course, we'll rip that document up, find them a new space in that building or a nearby one or somewhere else. There's a myriad of examples of that. As you appreciate, what we've seen is the volatility. We had some volatility in the people leaving the platform early last year. That has stabilized on the back of all the work that we've done. We've managed to get that under what we call control back to long-term averages. What we're now seeing is some volatility in the leasing line.
For example, Q3, last quarter of calendar, was one of the toughest leasing quarters that we've seen in a long time. That was across the market. Q4, we had one of the best leasing quarters we've had in a long time. When I say a long time, 10 years. Now in Q4, we put some of the initiatives that I've outlined in strategy in place that helped us. Once again, we also spoke to our competitors and the stakeholders in the market. The market had a better Q1 this year, our Q4, than it did Q3. I think there's a little bit of market factor and certainly a degree of the responses that we'd already put in place, which was testing elements of strategy, bringing that forward and seeing how that worked effectively. Things like incentivizing our leasing team in a different way.
Things like incentivizing the flex brokers in a different way. It's about 30-40% of our business. Things like doing a little bit more price stunting on our website, for example. That was on selected units in selected buildings, but it had an impact, drove traffic to the website. We have levers fundamentally, but as you'd appreciate, the volatility in those lines makes it very difficult, getting back to your question, for us to say with absolute certainty, we think it's going to be 81 or it's going to be 82 or it's going to be 80. It will be lower. We feel reasonably certain that it will be lower based on what we can see. That's the transparency we're providing to the market.
Morning. It's Adam Shapton from Green Street. I have three questions. How much income is associated with the GBP 200 million of low-conviction assets that you've identified?
They're typically lower yielding, aren't they, Dave? Below our marginal cost.
Yeah, I mean, broadly, it's probably about 5%-6% yield on those.
Okay, that's a sort of top-line price yield. Just talking about sort of sources and uses of capital, to an earlier question, you talked about what you might do with the sort of excess from disposals and then the CapEx run rate. You also mentioned lower leverage or leverage reduction in the slides. I mean, it's a good thing to say, but is that likely to be material? Are you talking about reducing net debt over the next two years? Because if we leave LTV aside, because who knows what happens to the V, I guess ICR and debt EBITDA are likely to worsen. Where do you see the net debt trajectory in the next two to three years?
I think, Dave, we have already been lowering, reducing net debt, as you have seen, but I will let Dave answer that question.
I was going to say exactly that. I mean, over the last couple of years, we have been making significant disposals, and we are saying we continue to make significant disposals. We have also been investing CapEx, both in larger schemes, but also in smaller value-add opportunities. The net has allowed us to reduce net debt. I think over the next couple of years, we would expect to see something similar.
Yeah. Okay.
We are not standing here saying we are going to go out overnight and do a wholesale reduction of leverage. What we are saying is we are going to look, once again, dispassionately and clinically, as we sell these assets, what is the best use of those proceeds fundamentally? Where do we get the highest margin? We know with the assets that we have already sold in this last year, the average yield of those was 5.2%. We have just refinanced our revolver at 6.5%. There is a pretty compelling argument, as you would appreciate, in the absence of having something better fundamentally, as you appreciate. We are going to manage those sources and uses very, very, very carefully. We have our eye on leverage.
Sure. Just the last one. You talked about cost of customer acquisition increasing. Sounds like in a sort of structural manner on the marketing side. The discounts that you've been offering on the website, sort of there's a 20% discount, I think, earlier in the year, and then it's first month free, I think, is that there at the moment? Yeah. You mentioned that's generated a lot of interest. Is that included in your customer acquisition cost analysis, or do you think it was?
Yeah, it is included in our cost of customer acquisition. Any incentive we're providing. The thing I've found fascinating with my retail background is, once again, we've got customers and we've got a product fundamentally. The principles are largely similar. Will is in the front row, as I said, who's responsible for all of that. If you take the 20% off promotion that you referred to earlier, that was one of the things we put in place not long after I joined to stimulate.
That was one of the strategy price levers. What was fascinating is that promotion actually, we made a big deal on the website. Our competitors were doing similar things, to be frank with you, but we needed to differentiate. We were not doing the same thing, but we needed to differentiate. We had a different idea. We provided the 20% discount. It was on specific units in specific buildings. It might have been a unit that had very impaired natural light, for example, or there was a configuration issue, or it was up a few stairs from a lift landing. Accessibility was challenged in some way, or in a geography where we know we have had some challenges fundamentally. We were very specific about units. Will, I am just trying to remember, in the end, how many deals did we do on that 20% promotion? It was low, was it not?
Yeah, it was not. It was not a huge volume. What it did do is it got a lot of people into the website, and it moved people through the journey. Obviously, when we do viewings, we show people one space in one building. We will often try and show them others. A lot of customers that came in on a viewing for a promo site or a promo space actually ended up converting in a different space. As a means of driving conversion and bringing that forward, it worked very effectively.
I liken it to the sale rail in the store and the sticker on the window. Effectively, we have all had that experience. We have gone in. The sale rail is not what I want, but while I am there, and as you appreciate, if someone has gone to the trouble of going through our website, speaking to one of our sales representatives, they are there to take space, yes? Getting back to the point that was made earlier about price elasticity, what they want is a home for their business so that they can scale and grow effectively. Pricing is an important measure. It is driving demand. As we mentioned in that funnel, effectively, it is largely mathematical. As I mentioned, we put 100 in, we get 20 deals out. Putting more demand into that funnel, which is something Will has been doing a great job of, and we are experimenting constantly. If one thing works, great. If it does not, we can change it immediately on the website, which is a huge advantage.
Sorry, just one follow-up on that. Speaking to other flex providers, admittedly, maybe with a slightly different product to you, it seems like rent frees have settled out at 8-10% in central London. I think traditionally, you would not have offered any rent frees. We talked about this temporary offer. As things stabilize, do you assume that you will go back to no rent frees, or should we assume that that will be?
The majority of our deals still do not have incentives in them, to be frank with you, getting back to this price elasticity. These are people who are driven, and they are in a hurry often because the nature of those businesses, they are very dynamic. They do not have property directors working for them. They do not have advisors. There are no real estate agents advising them. It might be an opportunity for the people on the webcast, I do not know.
Therefore, you do not have the same level of sophistication around properties if that makes sense. They are, like all of us, they see a promotion, and it is in something that they want. Naturally, it does trigger something. We do acknowledge that, and that is another reason why we are saying these London growth areas and where our properties are located are typically where there is less competition. Where we are in markets where there is a lot of competition, we are feeling, there is no question, the impact of some of the price measures that our competitors are in. We will meet those. We are going to be pragmatic. We need to build occupancy to rebuild tension. We have many markets where we do not have competitors. That is our focus. That is one of our considerations when we are looking at investing.
What does the competitive profile look like? It works both ways. I think this is important mentioning. I mentioned Mayor Street and Hackney earlier, not far from where I live. If you go back three years or four years ago, there were four competitors in Mayor Street: Second Home, WeWork, Nettle Building, and ourselves. Today, there are two. We have been a net beneficiary of contraction and competition in those markets. We are actually at a point where potentially there is a growth opportunity there. Hackney is a very good SME market. I think it is important to stress, yes, we are seeing competition, but that is increasingly these central areas, as we mentioned. Areas like that, we have seen contraction, and we are a net beneficiary of that contraction. We think there is going to be some more contraction in some of those areas.
As you appreciate, we mentioned we're in a very, very good position to compete. Our margins, we think, have doubled or tripled because we own the buildings compared to someone who's got a traditional capital-light, liability-heavy model, which in London is still the majority of the competitors. They're not operating agreements like a hotel. They're signing leases. Their margins, as we think, are half to a third of our margins. We're in a very strong position. We'd rather than fight on price, invest in product. Because owning the real estate, we get a return on the investment in the product.
Good morning. Neil Green from JP Morgan. Hi, Neil. Just one question on the accelerate element of the strategy, please. Is it possible to get an idea of the range of returns you underwrite on these high-conviction versus conviction versus low-conviction assets, please?
If you look at the history, the high-conviction buildings have delivered double digits. Clearly, the conviction buildings at various stages of the life cycle have also delivered similar levels of return. I think in the world that we are in today, effectively, naturally, we are going to be that it is more competitive, and there has been a little more uncertainty, which is affecting some SME behaviors. We have not nailed down to what they clearly need to exceed our cost of capital. There is no question, as you would appreciate. We are very confident that the conviction buildings with investment and the high-conviction buildings can deliver very, very solid income growth. Our assets start from a good place. We are not talking about yields in the threes and fours as you would appreciate.
We believe we can deliver a compelling income-led and income-growth equity story when we get the configuration of our portfolio and our operations right. Thank you. We are going to need questions off the webcast, Clare.
Yeah, I have three questions. From Venci at Kempen, you have highlighted that you have introduced a ready-to-go product for very early-stage businesses. We have seen U.K. peers show strong performance for fully managed space on a larger scale. Is this also something you have considered?
I think from our perspective, we have seen a market opportunity at the smaller end. As you know, we provide an all-studio or all-workspace model. We do not provide hot desking. Traditionally, we have been in the five people to 100 people market. We have seen an opportunity in that smaller. We have seen good demand in the sort of 300 sq ft suite market or studio market. We would like to approach that.
We believe there's less competition there, and that market's attractive to us. It's a logical extension or adjacent market to what we already do. When we talk about larger spaces, we have larger customers fundamentally. That is where we're seeing more competition. That is why we've seen it's been one of the drivers with large units vacating. I think that market will remain competitive in the short to medium term. We would rather focus on a market where there is less competition that speaks to our sweet spot effectively. The great thing about these smaller startup businesses is we have a history of these people scaling with us. That is an opportunity. They take more and more space. They stay with us for a long period of time. Our average customer, I think, is with us five years, for example.
Second question is from Paul May at Barclays. What gives you confidence that you can recycle capital out of the GBP 200 million worth of assets that you've mentioned were lower yielding? Who's buying these assets as buyers will also face the higher marginal cost of capital?
As I say, we've sold GBP 100 million of these assets already. Typically, they're assets that have lower occupancy. The yields we're talking about are initial yields fundamentally, as you would appreciate. Someone sees an opportunity that we don't see. The buildings don't fit our criteria. Often, the types of users, alternate users are a very, very large part of who we're selling these buildings to. Whether they're being sold for residential conversion, whether it's an educational use, whether it's an owner-occupier, effectively, we're talking about small lot sizes.
If you take GBP 200 million over the number of buildings we're talking about, you're sort of GBP 8-10 million, a lot effectively. You'd appreciate that is a sector of the market which is seeing liquidity at the moment. A lot of high net worths and those sorts of people can access these buildings. Lots of owner-occupiers, as we mentioned, educational uses, research, etc. What we're clear on is we don't like selling to competitors, as you'd appreciate. We're very, very clear on that. We've got a lot of control over that, and we're confident we can execute. In fact, Richard, our Investment Director, is in the room. I can see him nodding profusely. Hopefully, that answers Paul's question.
Thank you. Another question on capital recycling from Justin Bell at Deutsche Numis. He's picked up on some comments made at Sirius's results earlier in the week where the CEO said that they were keen to engage on some of our assets. What's your perspective on these comments? Is capital recycling a short or medium-term goal?
I was half wondering that Andrew was going to pop in today. I'd have to tell him that this is not one of the buildings we want to sell. Andrew, I know Andrew well. We like Andrew a lot, and we admire what he's done with that business. The short answer is we're dispassionate about who we sell these businesses to, as I said, and we'll continue to be so. We recently sold Archer Street, which I showed on the slides, was to Ian Hawkesworth. He bought that building.
Certainly, we're engaged with Andrew at the end of the day, who's going to give us effectively the best price on that disposal. That's going to drive our decision-making. We have interest in some of those properties already, but we don't have a problem engaging with Andrew. Any other questions from the webcast? No. Any other questions from the room? It just leads me to close. I just want, once again, to thank everybody for attending today's presentation. I appreciate it's been longer than normal. I appreciate your focus and attention. I really appreciate the questions. My last thank you is to our team back in Kennington and across our 63 properties. They do a phenomenal job day in, day out. I want to appreciate that.
I want to thank them and show our appreciation for all their hard work and for the work that is gone in behind the results from last year and the work that is going in already in terms of delivering against our strategy. We are asking people to do a bit more. We appreciate it. Thank you very much. Thank you for your time.