As students (or more likely their parents) struggle to find £6,000 to £7,000 to pay university accommodation providers for the academic year ahead, a stock market filing gives us an insight as to who is really pocketing huge profits from this business.
A little-known Reit (real estate investment trust) called GCP Student Living issued its results on Wednesday. The company owns student accommodation blocks across the south of England, including the giant new Circus Street development in Brighton, which opens this month and charges students at the University of Brighton £7,800 a year for a 40-week tenancy. It is also building another 555-bed block in the city for next year’s student arrivals.
GCP is an object lesson in how to cash in on students. Its profits for the year to the end of June 2019 soared 51% to £92.7m, helped by yet another year of rising student rents. GCP was the first Reit invested solely in student living when it came to the market in 2013, and since then has given its investors a juicy return of 12.9% a year, or double the return on the FTSE All-Share index over the same period. It boasts how it has managed to increase rents charged to students every year since it began operating.
Its market capitalisation has soared to £671m as it has added new blocks, including one in Shoreditch, east London, where the annual rent charged to students in its “windowseat studios” is an extraordinary £26,775 a year. Just as startling is the fact that GCP reported full occupancy for the 2018-19 academic year, even at these fancy rents.
Where do the profits go? The Reit is a quoted stock market vehicle, so the dividends are paid to its shareholders, the largest of which is Merian Global Investors, itself backed by US private equity group, TA Associates.
GCP is itself managed by Gravis Capital Management, a Mayfair investment group that also invests in “social infrastructure” such as schools, prisons and court buildings, aiming to give its shareholders “radically steady returns”.
There is nothing intrinsically wrong with Mayfair investors stumping up cash to build student accommodation and maximising the profits from doing so. Indeed, GCP is hardly alone in cashing in on the boom, with property consultants CBRE suggesting that investors across the UK earned returns of more than 12% last year from student halls.
But when did it become the purpose of education to provide such high “radically steady returns” for Reit investors and private equity groups?
It is worth noting that the yield on the 10-year gilt has fallen below 0.5%. Put another way, that means the government can borrow money at that interest rate for 10 years – money it could use to build university accommodation, schools and court buildings. Instead, we prefer to build our social infrastructure using private investors’ cash that demands returns of 10% or more a year. We are all poorer for it.
Osborne deserves credit on annuities
Few chancellor’s budgets or spending reviews are truly memorable. A £200m bung here or there may earn the odd headline on the day but are usually of little long-term consequence.
But as gilt yields sink further and further, it is worth raising a cheer to the decision by George Osborne to abandon the compulsory purchase of annuities – an annual income from your pension savings – in his 2015 budget speech.
It was not even a spending or tax-raising measure, simply a change in the rules on pensions, but it has had a more far-reaching impact than almost any other recent government financial intervention.
If compulsory annuitisation was still in place today – and thank heaven, it’s not – anybody retiring would be facing a catastrophic financial future. The decline in gilt yields has forced annuity rates on offer from the big insurance companies to fresh lows, down an extra 14% so far this year. According to Hargreaves Lansdown, if you manage to save £100,000, you’ll get a pension of just £4,654 a year, £759 down on last year’s measly figure.
Before pension freedom, annuity sales were running at about 350,000 a year. Today sales have steadied at about 80,000 policies a year, but while some people still buy a “bedrock” annuity to cover essential costs, even these sales must now be at risk.
Aviva, a big annuity provider, is down from a year high of 498p to around 350p, while Legal & General is down from 291p to 225p. These are big conglomerates with many income streams apart from annuity sales, but while gilt yields remain under pressure, so will these insurers.