Unite remains top of the class

Student accommodation developer Unite Group (UTG) outperformed the sluggish real estate market in its results for the previous calendar year by posting a 4 per cent increase in the value of its portfolio. This had the effect of nudging up its pre-tax profit at a time when many of its peers in the listed real estate investment trust (Reit) space are swinging to big losses.

There are good marks for Unite operationally as well. Rental income increased 15.6 per cent, or by 20 per cent when joint ventures are included, “underpinned by demographic growth, high application rates, and increasing international student numbers”. Put another way, there is a severe dearth of homes for students, which allows Unite to make money even when the wider property market is in a downturn.

The price is also attractive right now. Historically, Unite’s position as the biggest player in the high-growth student housing market has put it at a premium to net asset value (NAV). This remains true, but the current premium is much lower than it has been in recent years, indicating an opportunity for investors if Unite continues to thrive as the economy improves.

Maintaining its performance will be tough for Unite nonetheless. In order to meet the evident demand for student accommodation and to continue to grow at a rate to justify its premium to NAV, it will need to develop more housing. In a high interest rate environment, this will be more expensive – but it is still in a much better position than those Reits developing assets into markets with less obvious and immediate demand. Buy.

Last IC View: Buy, 28 Jul 2022, 1,115p