Get into bed with Unite

Unite currently manages 46,000 beds, up 3,000 from a year earlier, and there is a longer-term secured pipeline of 6,800 bed spaces. And beds are in short supply, and are expected to remain so for some time to come, so Unite has had little trouble in pushing through rental increases. Like-for-like growth was 3.8 per cent in 2015, up from 3.3 per cent the previous year. Similar rental growth is expected in the coming year. Strong demand has also brought with it considerable earnings visibility. Occupancy for the current academic year stands at 99 per cent, with 67 per cent already secured for the following year. Student numbers have also been swollen by removal of the cap on overseas student numbers, and these now account for more than a third of all accommodated students.

There's more good news for income-hungry investors because Unite is planning to convert to a real-estate investment trust (Reit) over the next 12 months. The move is being made now because the group has used up most of the tax benefits associated with the capital allowances and historic losses accumulated during its first 10 years in business. Converting to Reit status will exempt the group from paying corporation tax, but will also require a dividend payout equivalent to 90 per cent of after-tax earnings. Good news indeed for shareholders, and analysts at Liberum are forecasting a 60 per cent increase in dividends between 2015 and 2018, to 24p, which is equivalent to a 4 per cent prospective yield.

Financing the development pipeline is expected to continue to push net debt higher in the current financial year, but as a result of rising property values the loan-to-value ratio fell from 43 per cent in 2014 to 35 per cent last year, a level that the group intends to maintain going forward. Gains in the valuation of the property portfolio have continued into this year. At the quarterly update on 31 March, the London Student Accommodation Joint Venture (LSAV), which Unite shares evenly with the Government of Singapore Investment Corporation (GIC) Real Estate Ltd, delivered a valuation uplift of 1.5 per cent, while the Unite UK Student Accommodation Fund (USAF), an open-ended, non-listed real-estate fund in which Unite has a 21 per cent stake, saw its valuation lifted by 2.8 per cent.

Inevitably, increased demand is likely to stimulate greater competition, and Unite will also face higher construction costs, and over time increased maintenance costs on older units. However, the anticipated yield on cost of the secured pipeline is expected to remain pretty attractive at 8.5 per cent. On top of this, growth in strong city centre locations is likely to be limited by the practical constraints of the planning environment, and Unite reckons that a new supply run rate of around 30,000 will be half the expected annual increase in the number of students, which bodes well for rental income growth.

Earnings visibility is also enhanced by the fact that nearly 60 per cent of all beds are let out through agreements with universities, with higher-quality accommodation helping to foster longer-term and more robust partnerships. However, the proportion of beds managed in this way is not expected to rise much in the coming years, so that Unite can have sufficient beds available for students who wish to book directly - the advantage there being that Unite can charge higher rents.