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QD view – Another property takeover?

Yet more news of a potential takeover of a listed property company came to the fore this week, as private equity groups continue to circle the discounted real estate sector.

Due to COVID uncertainty, many property companies have been trading at discounts to net asset value (NAV) for many months now. Despite the successful rollout of the vaccine and the government’s change in rhetoric in “learning to live with the disease”, discounts have persisted.

Of course, deep uncertainty remains (especially with cases rapidly increasing), which makes the latest potential takeover even more intriguing.

GCP Student Living (DIGS) confirmed that it was in discussions with a consortium of bidders for the company following press speculation. It has received a number of proposals from a consortium of investors including Scape Living and funds advised by private equity giant Blackstone.

DIGS’ share price shot up on the news, and at close of play on Thursday was up 14.7% in the week – wiping out its discount of 5.5% and moving it to an 8.3% premium.

The student accommodation sector has been one of the hardest hit during COVID as a large portion of students moved to online learning. This is borne out in DIGS’ recent performance figures. Occupancy this academic year (2020/21) is 68% and it expects to book between 55% and 60% of budgeted total income of £60.1m.

What is more relevant to the consortium is the potential for DIGS to return to full occupancy. It is betting that this is likely in the next couple of years and is hoping to pick up the shares at a tidy discount to future value.

The board of DIGS has stated it expects to see a “material increase” in the valuation of its £1.06bn portfolio when its quarterly valuation report for 30 June 2021 comes through. Its independent valuers, Knight Frank, have made adjustments to the assumed level of income generated by the portfolio as a result of the pandemic throughout the period. But these adjustments have been easing in recent months as the success of the vaccine programme lifts the prospects of in-person teaching returning.

One would expect those adjustments to ease further for the upcoming valuation, given the progress made since March and the government’s determination to live with COVID.

What is less obvious is the future impact on international students. DIGS had a high percentage of international occupants prior to COVID (73% in 2019/20) owing to its London-focused portfolio.

Encouragingly, UCAS applications for 2021/22 from non-EU international student is up 17%, with Chinese applicants up 21%. Whether these students are willing to travel to the UK (especially as COVID cases could be up to 100,000 a day by September) for in-person teaching over remote learning remains to be seen.

A shortfall in take-up by international students should be met by demand from UK students. UCAS applications from UK students for the 2021/22 academic year are up 11%. However, Unite (UTG – the largest listed student accommodation company) says that UK students pay, on average, 20% less annual rent than international students.

The consortium are clearly backing the future of the student accommodation sector. All eyes will be on DIGS’ NAV announcement in the next few weeks and whether the valuer has the same confidence. We’ll be watching with interest to see if a bid materialises and at what level.

QD view – Another property takeover?

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