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QD view – More property companies in crosshairs of private equity

The bumper spell of merger and acquisition (M&A) activity in the UK listed real estate sector has some way to play out yet, with several companies still looking like attractive targets.

The share prices of many property companies have yet to return to pre-pandemic days – perhaps understandably when rent collection rates are still below an acceptable late-90% mark and uncertainty remains – leaving them trading on wide discounts to net asset value (NAV).

This is creating a bit of a feeding frenzy among private equity groups. So far this year RDI REIT, St Modwen Properties, Sigma Capital and GCP Student Living have agreed takeover offers, while Drum Income Plus REIT has been approached by Custodian REIT regarding a merger.

Price mismatch

There is clearly a mismatch in pricing between the public and private markets. This is perhaps caused by some short-sightedness with regards to the pandemic.

Take GCP Student Living as a perfect example. It was trading at an 8.9% discount on the day before news broke that it was in the crosshairs of private buyers. The student accommodation sector has felt the brunt of the pandemic, firstly when universities closed to in-person teaching and currently with travel restrictions casting doubt on international student numbers. This was priced in by the public market in its valuation of the company, creating a huge opportunity for long-term private investors.

St Modwen’s takeover, by US private equity giant Blackstone, was another clear case of a price mismatch between public and private markets. Blackstone’s offer of 542p per share in May was a 37% premium to its average share price over six months and also a 24% premium to its November 2020 NAV. This indicates that St Modwen’s model was misunderstood by public investors. It had a large logistics landbank totalling 19m square foot that would see its logistics portfolio grow to over £1bn in value. Blackstone will now provide it with the capital to grow that the public equity market wasn’t willing to provide.

Future targets

The share price of Empiric Student Property is up 16% since the news of the offer for GCP Student Living broke. It is still trading on a 4.3% discount to NAV, though, and may pique the interest of private investors, especially as the long-term prospects of the student living sector endure.

Applications to UK universities continue to rise (4% this year), with applicants from both UK students (up 7%) and non-EU students (up 14%). Furthermore, the Office for National Statistics estimates the number of UK 18-year-olds to grow 25% by 2030 adding almost one million more over the decade.

Other acquisition targets centre around London. The impact of international travel restrictions on tourist numbers has weighed on the performance of Capital & Counties (which owns Covent Garden in London’s West End). Subsequently, it is trading on a discount of 11.2%. An investor with a long-term view on London should be rubbing their hands together with glee. The current share price offers an incredibly attractive entry point to a portfolio that would otherwise take decades to put together.

London office developers, too, could be a happy hunting ground for private investors. Share prices have been impacted by the uncertainty that working from home has put on the future of offices. Helical looks the most attractive, trading on a 9.7% discount to NAV. It holds new-build, quality offices in strong locations that should prevail even if demand for space subsides.

QD view – More property companies in crosshairs of private equity

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