GCP Student Living defies Brexit gloom with 15% return

Continued demand from overseas students sees specialist real estate investment trust buck decline in broader commercial property market in year to June.

GCP Student Living (DIGS), the London-focused student accommodation real estate investment trust (Reit), has bucked the decline in the broader commercial property market with a 14.8% total shareholder return in the year to June.

Delivering a strong set of annual results, the £670 million specialist property company this week reported 11% growth in net asset value (NAV) underpinned by strong demand and a shortage of supply.

‘The company’s investments continue to benefit from yield compression arising from competitive market demand for student accommodation assets,’ said chairman Robert Peto.

‘This has been reflected in the upward valuation of the company’s portfolio and a concomitant rise in its NAV during the year,’ he said. The rise in property values was underlined by the net initial yield of the portfolio slipping to 4.54% from 5.04% a year ago.

GCP Student Living’s performance stood out in a UK Reit sector wracked by Brexit uncertainty and high street woes where shareholder returns fell by 6% on average in the 12 months to 30 June.

The latest advance also lifts the trust’s annualised shareholder returns including dividends since launch six years ago to 12.9%, beating its 8-10% annual target and more doubling the return on the FTSE All-Share index.

In the Association of Investment Companies’ UK Residential sector it is the only one of five trusts to have made a positive return, the others mostly being social housing funds hit by regulatory concerns.

Although the quarterly dividends backing GCP’s 3.8% yield rose 3.4% to 6.15p per share, they were only 85% covered by adjusted earnings of 5.23p per share. However, that was an improvement from last year when dividend cover was only 67%.

The increase in dividend cover follows the opening a year ago of Scape Bloomsbury, a 432-bed block in central London generating around £9 million in rental income.

The company expects to return to full dividend cover when its entire portfolio is fully operational. It ended the year with 11 properties and 4,116 beds fully let and with student rental growth of 4.4% but but has two properties under development in Brighton where it has recently diversified.

The first of these, Brighton Circus Street has 450 beds and is due to open for the new academic year and the second, Scape Brighton, is a 555-bed project scheduled to complete next year.

It is also committed to buying a 412-bed asset near its existing property in Mile End which it expects to acquire from developer Scape by the end of the year.

GCP Student Living largely caters for overseas students who can afford its high quality accommodation. Nick Barker, director of fund manager, Gravis Capital Management, said Brexit had not hit demand from its preferred customer base, with data from the Universities and Colleges Admissions Service (UCAS) showing a 4.4% increase in international students accepted on to full-time courses in 2018/19.

Non-EU student numbers rose 4.9% year on year while EU students increased by 3.8% to a level above that before the 2016 EU referendum, he said.

Barker said the government’s immigration policy set out in March showed it wanted to increase overseas student numbers by 30% by 2030, and generate more income from them. ‘The review also highlights a reduction in fees from £9,000 to £7,500 and an extension to the loan repayment period from 30 years to 40 years,’ he said.

‘We believe there may a resultant increase to domestic student numbers and/or greater levels of spending available for such students to spend on accommodation,’ Barker added.

The ongoing ‘structural undersupply’ in London where planning restrictions and limited land mean there is an estimated shortage of 35,000 student beds is a problem though, hence the company’s recent shift in focus to Brighton.

Analysts at Jefferies lifted their price target for the trust to 180p from 170p and maintained their ‘buy’ rating saying they did not see a significant risk from Brexit in London.

‘However, in the medium term wth continued demand at even lower yields, GCP could be priced out of further expansion in the capital by buyers with lower costs of capital. We expect to see continued strong organic growth from GCP’s portfolio but to expand further may require further geographical dilution,’ said analysts Andrew Gill and Mike Prew in a note to investors.

GCP Student Living shares stand at 162p, a 5.7% premium over their estimated net asset value of 153.3p, according to Morningstar data.

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