There is going to be a scramble for university places this September, due to tuition fees possibly tripling to £9,000 per year in 2012. Already 604,705 applications have been submitted. Mature students are keen to get in before the deadline and tens of thousands of sixth formers are abandoning plans for a gap year. All told, 2011 is shaping up to be another record year for university intakes, which could push already-stretched accommodation to breaking point.
This is where Unite fits in. It is Britain’s largest developer and landlord of student property, providing 39,739 beds across 131 properties. These are either provided directly, or via joint ventures. The sites generate an average yield of 6.6%.
Most are located in London or other student hotbeds, such as Sheffield, Liverpool, Leeds, Bristol and Manchester. The company also owns a property pipeline valued at £138m. When this is complete in 2013/2014, it should add 4,070 more beds.
During the recession, commercial property fared badly as asset prices and rental yields collapsed. Yet thanks to the counter-cyclical nature of higher education in 2010, the firm’s net asset value (NAV) leapt 11% from 265p to 295p. Rental rates also nudged up 3.1% and occupancy levels held steady at 97%. The positive trend is continuing too. Reservations are already at 62%, reflecting the higher demand for September entries. The board has also indicated that the dividend will be re-instated this year. Rental growth of 3%-4% and lower net debt of £335m (representing a loan-to-value ratio of 53%) have both helped. However, leverage still needs to be watched, given that interest cover is only 1.6 times.
Unite Group (LSE: UTG), rated a BUY by Numis Securities
The strategy of retaining more direct ownership in its properties, alongside deepening its presence in the capital, looks attractive. That is because London has some key attractions that distinguish it from the wider British market.
First, it has a full-time student population (266,000) that is larger than the next five towns combined. It has an incredibly low supply ratio – universities can only provide 36% of their housing needs, compared to a national average of 65%. And it has a well-funded international pupil base who wish to live in good-quality, affordable rooms.
The aim is eventually for London to contribute 50% of Unite’s portfolio, up from 38% today. Rents are being positioned around 20% below the market average of £150 per week. Although there is growing financial pressure on British students, 46% of Unite’s customer base is international. Another 45% comes from the most affluent part of British society.
Profits would be hit by a decline in foreign students, rents or property values. And a jump in tenant defaults or vacancies can’t be ruled out. But Unite looks well placed to benefit from a shortage of good student property. It will also get a boost in 2012 from renting out 3,600 rooms for eight weeks during the Olympics next summer.
I rate the stock on a 10% discount to NAV, or 265p per share. Numis Securities has a price target of 310p.
Recommendation: BUY at 202p