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Unite making more beds

Unite provides purpose-built student accommodation, and demand heavily outweighs supply
March 2, 2017

There is a chronic shortage of purpose-built student accommodation in the UK, and Unite (UTG) has been steadily building its portfolio of managed beds to 49,000. There is plenty of room for further growth because of the 1.8m students in the UK only 550,000 live in purpose-built digs or on a university campus.

IC TIP: Buy at 632.5p
Tip style
Growth
Risk rating
Low
Timescale
Long Term
Bull points
  • Record reservation levels
  • Strong earnings visibility
  • Solid rental growth
  • Reit status boosting the dividend
Bear points
  • Uncertainty over foreign student numbers
  • Strong competition for land

There's also plenty of demand from students and Unite's occupancy has averaged 98 per cent over the past five years, while rents have grown annually by 3.5 per cent on average. The UK is the second most popular location for international students, attracted by 18 of the world's top 100 universities and 47 of Europe's top 200 universities. Applicant numbers in 2016 reached a record 725,000, but only 540,000 of these found a place. And while early applications in January this year were down by around 5 per cent, the surplus of applicants over places is likely to remain significant. That excess demand means that Unite achieved like-for-like rental growth of 3.8 per cent in 2016 and expects to see increases of between 3 per cent and 3.5 per cent this year.

 

 

Unite works closely with the major universities, and 58 per cent of rental income is generated through nomination agreements. This is where a university guarantees to fill the building built by Unite at a prescribed rent. There is an annual rental uplift and existing agreements on average have six years to run. This creates significant earnings visibility and, of the five schemes completed in 2016, over 70 per cent of the beds were let to universities using nomination agreements, with an average duration of 10 years.

UNITE (UTG)
ORD PRICE:632.5pMARKET VALUE:£1.4bn
TOUCH:632-633p12M HIGH:668pLOW: 542p
FWD DIVIDEND YIELD:4.1%DEVELOPMENT PROP:£185m
DISCOUNT TO FWD NAV:14%
INVESTMENT PROP:£1.75bnNET DEBT:53%

Year to 31 DecNet asset value (p)*Net operating income (£m)Earnings per share (p)*Dividend per share (p)
20144347717.011.2
201557911623.115.5
201664611627.718.0
2017*68013931.523.6
2018*73814834.225.7
% change+6+6+15+15

Normal market size: 3,000

Matched bargain trading

Beta: 0.41

*Peel Hunt forecasts, adjusted NAV and EPS figures

Reservations for the 2017-18 academic year currently stand at 75 per cent, a record for this time of year and up from 67 per cent a year earlier, and there is a significant development pipeline. Unite is currently avoiding London because high land prices mean return on investment would fall short of its hurdle rate of 7 per cent. In the regions though, the 2018 and 2019 pipeline continues to grow, with eight schemes which are expected to deliver around 4,800 beds in addition to ongoing projects in the current year. All in all, the development portfolio of 7,500 beds with a development yield of 8.4 per cent, along with rental growth, could add 15p-20p to earnings over the next few years; equivalent to 60-75 per cent of current earnings.

In its latest deal, Unite is to acquire a site in Manchester city centre, which, subject to planning consent, will provide a home for around 450 students. The whole development will cost around £41m, funded internally, with a targeted yield of around 8 per cent. Unite generally builds accommodation close to the universities it works with, and has to compete with other developers looking for a space to build houses or offices. In a novel departure, though, it has spent £221m on its first on-campus property, the 3,100-bed Aston Student Village.

There is some concern that overseas student numbers could be affected by the referendum result, but only 6 per cent of all students within Unite's total bed count come from countries within the EU. And demand from elsewhere should be stimulated by sterling's fall since the referendum.

At the start of this year Unite became a real estate investment trust (REIT), and the most immediate benefit was that the group's investment properties are exempt from tax, thus releasing a net £27.3m deferred tax provision.