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QD view – co-living la vida loca

Here it is, the first potential investment trust launch of 2022. And it is certainly an interesting one. Gravis Capital Management made an intention to float announcement this week for GCP Co-Living REIT, looking to raise £300m.

The new trust will acquire three assets that are transferring out of the Co-living Group. This is the entity, you may recall, that fell into administration last year due to the effects of the pandemic on occupancy levels, causing issues for one of Gravis’s other trusts – GCP Asset Backed Income (GABI), which had provided a loan to the group.

GABI, along with its co-lenders and an operator, formed a syndicate to fund an acquisition vehicle to take control of six of the Co-living Group’s assets, with the intention of selling the assets and recouping as much value as possible.

It has since sold two, with a third (in the US) in the process of being sold direct from the administrators. That leaves three assets, all located in London, two operational and one development site.

If launched, GCP Co-Living REIT will purchase these three assets for £425m. It may seem a convenient outcome for Gravis and GABI, but what will potential investors of the new REIT be getting?

Co-living

The fact that these assets formed part of a group that previously fell into administration would naturally cause some alarm bells to ring. But the nascent co-living does seem to have some strong fundamentals behind it.

These properties are often targeted at 20-something professionals and are residential towers with studio apartments, that are full of communal spaces such as gyms, working spaces and a library included in the rent paid by tenants.

The occupancy of the two operational assets – in Canary Wharf and Old Oak, west London – is now back up to 95%, suggesting that demand for this type of residential accommodation is there.

I am not the target audience for this product by any stretch of the imagination but if I look back on my living arrangements when I was fresh out of university and in my first job, this presents a far more amenable option than the often-grim house share.

These schemes seem to be a natural transition for students that have become accustomed to the high-quality, purpose-built student accommodation on offer at most universities. Why would they, as I did, suffer a house share with three strangers and a scummy landlord?

Couple this with the headwinds facing the buy-to-let and house in multiple occupancy (HMO) sectors, which have seen an 11% decline in London between 2017 and 2020 due to a change in tax policy, and the supply-demand dynamics look good. With rents increasing and homeownership in London out of reach for most people in their 20s (and beyond!), co-living provides a more affordable solution.

Gravis says that pre-pandemic, these assets had experienced rental uplifts of between 3% and 4% per annum, ahead of inflation.

Performance targets

If successful, the trust also fills a hole in Gravis’s business following the sale of GCP Student Living (DIGS) last year for just under £1bn. DIGS’s manager Nick Barker will lead the new entity and investors will hope he can bring similar success as at DIGS, which saw total shareholder return of 14% per annum since its launch in 2013.

The new fund will target an initial dividend yield of 4%, which will rise to 5% once the third asset is developed. Including dividends, the company will target an annual NAV total return of 8%. A prospectus for the initial public offer (IPO) will be published later this month, which we will flag.

The jury is still out on the nascent co-living sector, but there does seem to be strong characteristics in its favour and the manager has proven pedigree in the residential sector. We hope it gets off the ground.

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