BARELY A week seems to go by these days without a student property business trying for an Initial Public Offering.
The latest is a company called Crosslane, currently doing the rounds and targeting a valuation of £100m. The marketing is fancy and you can see how the offer of Sky TV, unlimited wi-fi and swish living accommodation appeals to today’s youngsters when the alternative might be a cramped five bed terrace with rising damp.
Crosslane aims to give investors a chunky five per cent yield from day one (although it’s not clear whether this is covered by earnings and/or cash generation), not to be sniffed at in the current interest rate environment.
The co-founders of Crosslane are not new to the AIM market either.
Back in 2005, they floated a technology business called Hamsard which – after changing its name to Cantono and raising more than £10m – went into administration in 2009.
Technology was the “in” thing then, it’s student property now. Serial stock promoters always follow the money and that means investors should tread with caution.
The obvious question investors should ask is why they should pay net asset value (NAV) or even a premium to NAV for student accommodation shares when it is not unusual in the UK for quoted property companies to trade at a discount to NAV, sometimes 10 per cent or more.
Sure, student property can potentially help diversify a portfolio into a different asset class with low correlation with equities. But so might plenty of other property companies: Grainger, for example, is the UK’s largest quoted residential landlord with a portfolio of more than 7,000 properties rented out to all ages and society within the UK, not just students.
Its shares currently trade at around a 15 per cent discount to its NAV.
Although demand remains robust for further education and this supports the market for good quality student accommodation, UK population demographics are worth a look.
According to the 2011 census, the most up-to-date comprehensive data available, there is a near 20 per cent contraction in the age five-nine category versus the age 20-24 group.
Whilst around one in five students at UK universities are from overseas, a 20 per cent decline in the indigenous student population starting in about four to five years’ time could lead to around 15 per cent fewer students at UK universities from about 2020 or so unless either penetration rates of university education increase or the number of foreign students nearly doubles.
That will mean fewer students chasing digs and, under normal laws of economics, this should impact pricing as well as occupancy.
All of which brings us back to the thesis of this article that investors must not carried away just because an asset has performed well in recent years and is being heavily marketed as the latest thing.
It makes no sense that investors are willing to pay over the odds for an asset that is:
1. Less diversified;
2. Less developed;
3. Subject to some severe structural challenges over the next five to 10 years.
Investors can buy established, diversified property companies on far more attractive valuations.
This has all the hallmarks of being another stockmarket “fad”. Stockmarket history is littered with “fads” which quite often benefit no-one other than the promoters themselves.
The biggest in living memory is of course dot-com mania in the late 1990s/ early 2000s.
Although there were a handful of stocks that did live up to their promise, most didn’t and investors lost out as a result. Another “fad” was football clubs – both Leeds United and Sheffield United were at one stage quoted on AIM but neither had a happy ending for shareholders.