Times have changed from the days when students lived like something out of The Young Ones. What's more, since the cap on overseas student numbers has been removed, demand for modern, purpose-built accommodation has risen sharply. It's no surprise then that investment in the UK's student housing market has risen from under £500m in 2010 to £3.8bn in the first half of 2015. And it's expected to top £5.7bn by the end of this year.
- Strong demand for student accommodation
- Shares trade below net asset value
- Attractive dividend yield
- Negligible net debt
- Expanding supply could depress rental growth
- Risk of cap on student numbers
New ventures have emerged to meet this demand. Real estate investment trust (Reit) Empiric Student Property (ESP) was floated on the London Stock Exchange in June 2014 and has now raised £312m which it is investing in students' accommodation. At the start of the 2015-16 academic year, its portfolio comprised 4,820 beds in 51 buildings in 25 cities. Of these, 36 are fully operational and 15 are forward funded or in development. This puts Empiric in a strong position to meet its target of a portfolio of 10,000 beds within five years.
Crucially, a majority of these properties are outside the expensive London area, which accounts for just 16 per cent of the UK's student population. The company focuses on midsized properties in locations that attract limited competitors, and, because of their smaller size, tend to be within walking distance of their university. Recent completions ready for the current academic year include five properties in Exeter, Portsmouth, Glasgow, Huddersfield and Southampton. These - plus a sixth property in Newcastle due to become operational before the end of 2015 - will add 531 beds to the portfolio. Another 970 beds should come be ready by September 2016, then a further 897 by September 2017.
| EMPIRIC STUDENT PROPERTY (ESP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 110p | MARKET VALUE: | £424m | |
| TOUCH: | 109-110p | 12-MONTH HIGH: | 111p | LOW: 101.5p |
| FORWARD DIVIDEND YIELD: | 5.7% | TRADING PROPERTIES: | nil | |
| DISCOUNT TO FORECAST NAV: | 15% | NET DEBT: | See text | |
| INVESTMENT PROPERTIES: | £248m | |||
| Year to 30 Jun | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2015 | 103 | 0.2 | 0.08 | 4.00 |
| 2016* | 112 | 13.8 | 4.61 | 6.00 |
| 2017* | 129 | 19.9 | 6.53 | 6.25 |
| % change | +15 | +44 | +42 | +4 |
Normal market size: 3,000 Matched bargain trading Beta : -0.1 *Jefferies estimates | ||||
At the start of the current academic year the gross annualised rent from the operating portfolio was £23.3m, up from £18.4m at the June year-end. Most is collected upfront, given the high proportion of international student customers who tend to pay their year's rent in advance. Strong demand means that rents can be increased, and the average rent-review increase for 2015-16 was 3.25 per cent.
Group finances look in good shape, too, with £85m of bank debt secured by charges on assets with a fair value of £187m. On top of this, Empiric has just raised £86m via a share offer, leaving it with no net debt. As a Reit, Empiric pays out 90 per cent of tax-exempt profits in dividends. These are paid quarterly, and the company is targeting a yield of 6 per cent on the 100p flotation price.
The downside looks fairly limited, but at some point there remains the risk that supply will catch up with demand and this could put pressure on rents. There is also the risk that overseas student numbers could again be restricted.
