Except that we are not actually comparing the hale and heartiness of students versus the grumpiness of the sick; nor even asking whether it would be better to invest in education or healthcare. This week's proposition is which to choose as the better high-yield investment, property for students' accommodation or property for GPs' surgeries, the front line in the UK's fight against sickness, where about 1.3m people show up every day.
I ask the question because there is too much cash in the Bearbull Income Portfolio following the completion of last month's takeover of Latchways. There is also a concentration of high-yield candidates in the property sector. Hence the table below, which provides basic details and points of comparison between students' accommodation specialist Empiric Student Property (ESP) and healthcare-property provider Primary Health Properties (PHP). Also there - because it exploits another property niche to generate the income to fuel a high-yield share - is Picton Property Income (PCTN), which specialises in digging out commercial properties that would benefit from a bit of TLC.
Property income plays
| Company | Code | Share price (p) | NAV (p) | Div Yield (%) | P'folio yield (%) | Occupancy rate (%) | Ave unexpired lease term (yrs) | LTV ratio (%) |
|---|---|---|---|---|---|---|---|---|
| Empiric Student Property | ESP | 110 | 103 | 5.5 | 6.1 | 100 | see text | 26 |
| Primary Health Properties | PHP | 111 | 85 | 4.6 | 5.6 | 100 | 15.1 | 63 |
| Picton Property Income | PCTN | 70 | 73 | 4.6 | 5.9 | 95 | 6.2 | 30 |
It is interesting that two companies in the same line - Empiric and PHP are both property investors who do some developing - can be so different. That's because every year Empiric needs to renew pretty well all its tenancies as one intake of students is replaced by the next. That presents opportunities as well as threats - the opportunity to raise rents every year (they rose 3.3 per cent on average for the current year), but the threat that occupancy rates will drop. Growing competition could make that threat real, but, worse, the number of overseas students could fall. That would be a big blow since Empiric's niche within a niche is to accommodate older and mostly overseas students - almost 70 per cent of its 4,500 tenants are from abroad. Such students want better accommodation than the average 18-year-old, so they will pay more and they pay upfront.
By contrast, PHP is underpinned by a £60m rent roll on a £1bn property portfolio where the average lease has 15 years to run. In addition, the government - via the NHS - pays the rent where PHP's tenant is a GP practice; that's two-thirds of its tenancies and the NHS itself is the tenant in another fifth. What that adds up to is a security of income that's hard to match within the property sector. This helps explain why PHP's shares trade at a 30 per cent premium to net asset value while Empiric's are at a small discount.
True, such a fat premium may sit uncomfortably with the point that PHP's property portfolio is specialist, so alternative uses may be hard to find. By contrast, Empiric's town-centre space could easily be converted into flats, hotels or even offices, if the need arose. That said - and despite the pressure on the public purse - PHP operates in a sweet spot as the landlord to GPs, the demand for whose services must inexorably rise in line with the ageing of the UK's population. So the inflexibility of its portfolio may not matter much.
If flexibility is the thing, Picton may be the candidate. Picton's managers make a virtue out of hedging the company's risks over a broad spread of properties and doing whatever it takes to add value to its secondary sites. Thus its £540m portfolio takes in 57 sites where 40 per cent of its 400 tenants are industrial users, 32 per cent are in office space and 28 per cent are in retail. The geographical bias, however, is firmly towards south-east England where, including Greater London, 61 per cent of its portfolio is located. The success of this approach is measured by the rising occupancy rate in Picton's portfolio, which has risen from 88 per cent to 95 per cent in the past two years. This has helped push NAV per share ahead by 40 per cent in that period, to 69p.
Picton - like the other two - is a real estate investment trust, so it must distribute almost all its net income, and it distributes dividends quarterly. However, it's unclear why I would prefer Picton's shares to PHP's given that the dividend yield on both is 4.6 per cent and there is no expectation that Picton's payout should rise faster.
Indeed, of the three, PHP may be the class act since it comes the closest to having barriers against competitors thanks to a longstanding relationship with the NHS. Even so, I struggle to see why its merits are so marvellous that I should give up the extra percentage point of income that Empiric's shares offer - 5.5 per cent, against 4.6 per cent for PHP (see table). Sure, Empiric is in a competitive market, but it too operates against a favourable big picture and its shares could provide useful diversification for the Bearbull income fund. A moment to back the students, I reckon.
