Unite can weather the cuts

The highest-profile victim of last year's furore over university tuition fees was Nick Clegg, the Liberal Democrat leader. But the storm was also painful for shareholders in Unite, the country's largest provider of student accommodation. Unite's shares lost 35 per cent of their value as investors fretted about the impact of funding cuts on students' ability to pay for housing. So they now trade at a gaping 34 per cent discount to their forecast net asset value (NAV) at the year-end (adjusted for various accounting quirks). That looks too steep, given the decent outlook for student finances.

Yes, students will have to pay far more to go to university. But the pain will only come when their wages are high enough to trigger debt repayments - campus life itself will remain cocooned from the fees. And there's little evidence that higher education is price-sensitive. There were 160,000 more university applications than places in 2010, despite two hugely-hyped fee increases under the previous government.

Investors can also take comfort in Unite's position at the privileged and international end of the student spectrum. The company says 45 per cent of its customers are 'wealthy achievers' and a similar proportion come from overseas - though some of these may be affected by the government's cap on immigration. Still, management claims that only 5 per cent of Unite's tenant base is 'at risk'.

Moreover, the supply of student housing is tight. Student numbers have rocketed over the past two decades, while universities have been reluctant to fund developments. Private landlords have done a patchy job of mopping up the balance, so there is an imbalance between demand and supply in most university towns.

That may be why rental growth is more visible in student accommodation than in most sectors - demand is fairly constant and leases only last a year. Unite's like-for-like rental growth for the current academic year was 3.1 per cent and it's reasonable to expect a similar increase next year - its properties were already 62 per cent pre-booked at the end of February.

Rental growth is crucial because Unite has only recently started to make an operating profit (that is, ignoring development profits and changes in property values). Last year, recurring rental income was £4.1m, up from just £0.6m in 2009, mostly thanks to rental growth combined with flat overheads. Any growth from here should further boost profits. Analysts at broker Matrix expect rental profits of £8.9m this year, between a quarter and a half of which management has promised to pay out as a re-instated dividend.

One reason Unite has struggled to make profits is its Modular Solutions business, which manufactures pre-fab rooms in a factory. Without the critical mass of orders necessary for profitability, it lost £4.8m last year. Management expects those losses to narrow this year after a stronger second half and may sell its stake. But Modular will still restrain group profits this year and possibly next. Otherwise Unite's development activity is positive, with 1,277 beds due for delivery this year in London, Reading, Manchester and Glasgow. Based on current valuations, these and other projects due for completion in 2012-14 should boost NAV by £69m (43p per share).