02 October 2017

Blog: Unite Group - The Young Ones are Growing Up

by Scott Fulton & Rebecca Jamieson | 28 September 2017

It is tempting, when asked to write a blog on a visit to a British University to recant tales of excess at “peak” freshers’ week (which now seems to last a fortnight). Tempting but inaccurate. The Unite Group Capital Markets Day (CMD) took place on the campus of Aston University in glorious downtown Birmingham. At 10.30am, students appeared to be rushing to lectures looking eager and, it must be said, not suffering from a big night out. To our eyes, there was plenty of evidence that under grads were taking their studies seriously, keen to get value for the cost of a higher education.

Appropriately, the session began with an overview of the Higher Education Landscape and a review of the implications for the sector of Brexit by Dr. Diana Beech, Director of Policy and Advocacy at the Higher Education Policy Institute (HEPI).

To Dr Beech, the outlook seemed bright for the sector and in turn for Unite. In addition to UK Student demand outstripping university places, it transpires that EU students only account for 0.1% of University income which can be more than compensated by international students, who also bring with them around a £2bn contribution to the UK economy.

Vice Chancellor of Aston University, Professor Alex Cameron, followed up with an equally upbeat assessment of his own institution’s prospects, noting that Aston had graduated the first apprenticeship degree students this summer. Neatly segueing into the Unite team’s message, Professor Cameron highlighted the importance of quality accommodation at the right price for his students, a factor in Aston’s choice of Unite as a partner in the Aston Student Village (ASV), the venue for the presentations.

In terms of Unite’s own trading, the Group released a statement to the London Stock Exchange to coincide with the CMD. Richard Smith, CEO, highlighted that Unite’s 49,000 bed portfolio is now 99.0% let for the current academic year. With 60.0% of this portfolio let under nomination agreements (longer term, “block” contracts) directly to the relevant Universities, the Group now expects annual rental growth to emerge at the mid to upper end of its long term 3.0% to 3.5% guidance.

Long term development remains one of the key factors in Unite’s continued growth. Having delivered 2,100 beds in 2017 (to date), the Group has a pipeline of 6,500 to produce by 2020. Critically, these are likely to come through via nomination agreements with Universities which share Unite’s view of service quality and capital returns.

The transition to further long term agreements with Universities comes at a time when these institutions are seeking to extend their guaranteed accommodation provision to second and third year students, together with an increasing number of post-grad tenants. It was also highlighted that several Universities, including Aston, were offering guaranteed accommodation to students coming through clearing.

Unite’s ability to supply and manage large estates may be central to its continued gain in market share. Universities are under pressure to make more of their embedded capital and one of the key sources could be the transfer of existing accommodation into private ownership. As the Group highlighted, there are 300,000 University-owned beds in the UK. Components of this estate could be released to companies such as Unite to extract capital, maintain affordable rents and to secure investment in the accommodation itself.

Stock transfer is just one of three routes which the Group has utilised and continues to explore with Universities. Off-campus and on-campus development also offer opportunities. In total, Unite is currently negotiating 8 deals across this spectrum (3 each in stock transfer and on-campus with a further 2 for off-campus) comprising of between 6,000 and 8,000 beds. The Group highlighted that through its management of the relevant estates, it can improve initial development or acquisition yields from mid to high single digit returns.

Unite can secure these agreements and compete effectively for others due in no small part to its investment in its PRISM platform. This single operating structure provides the Group with critical market data and supports its active management of the estate. This platform has already delivered 25bps to 30bps in overhead efficiencies, equivalent to c. £5.0m of savings. PRISM’s ability to manage scale is likely to be a key factor in Unite’s challenge for further larger, long term contracts. It was highlighted that it played a key role in the acquisition of ASV.

Within the specific student accommodation sub-sector, Unite’s share price has outperformed its peers over the last 12 months and has outpaced the wider UK real estate sector on the same basis. Consensus forecasts for the Group have narrowed in the last 3 months towards the top end of the range as Unite’s own guidance has crystalized. Despite this, the implied valuation (on either price to NAV or dividend yield) looks appealing in the context of expected growth.

All in all, the outlook seems positive and the day flowed very smoothly…if only the journey back out of Birmingham had gone quite as effortlessly. With a plethora of one way systems and a slightly vague sat-nav, it was tempting to stay and ask for directions to the Union bar. Tempting, but on this evidence, equally inaccurate. We suspect that there would be more lift in the Library.