GCP Student Living 22 October 2019
Disclaimer
Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
GCP Student Living (DIGS) owns a portfolio of student accommodation buildings located in areas of high demand and low supply – London, Brighton and Bristol. It aims to provide capital returns and dividends that can grow in line with or above inflation, although the majority of its income is not directly index-linked.
Returns to date have validated the thesis that high quality, modern accommodation would lead to capital gains and income growth, with the capital values of the portfolio being substantially written up and the accommodation running at 100% occupancy over the past three years. NAV total returns have been substantially ahead of the average real estate investment trust (REIT) and the FTSE index, as we discuss in the Performance section.
The dividend has grown each year, and the last annual payout of 6.15p amounts to a yield of 3.5% at current share price levels. We discuss the levels of cover in the Dividend section. The trust has traded on a significant premium for much of its life, which reduces the yield for those buying now.
The company, which is a REIT, owns 11 properties, with agreements signed to purchase a further two. There is debt secured against individual assets (see Gearing section).
Relative to other property REITs, DIGS is expensive, but the prime locations of its properties and low levels of supply relative to demand should ensure that its portfolio outperforms in any downturn.
The question for investors is whether a 3.5% yield is enough to tempt them in, even if the manager succeeds in growing the dividend in line with inflation. The other companies in the space – Unite and Empiric – have much less of a premium focus, which perhaps increases the risks and exposes investors more to the vagaries of student demand. DIGS’ portfolio, on the other hand, serves the large number of prestigious (and less prestigious) colleges in London which are sought after by overseas students, as well as the under-supplied Brighton market.
Brexit does not seem to have caused any disruption to demand, and 70% of the company’s portfolio is occupied by non-EU students, which gives some comfort in that it is unlikely to cause problems in the future, either. As such, the trust offers a defensive income stream with the potential to grow along with inflation.
| bull | bear |
| Supply and demand dynamics support property values | Future demand depends on UK education remaining internationally desired |
| Student accommodation is not subject to the same Brexit and retail issues as commercial property | Yield has been compressed to relatively unattractive levels, and the dividend is currently uncovered |
| The prospects of dividend growth provide some inflation protection | The portfolio is concentrated so problems with individual properties could be significant |
