No. of Recommendations: 3
I had a look at these two U.K. student accommodation REITs today. Quite mediocre investment opportunities but enjoyable learning about them. Empiric would have been a great buy back when Jim suggested UK REITs earlier this year…
Let me know your thoughts.
I haven’t looked at the higher yields on the ones Jim bought. What’s the reason for that situation?
Unite Group PLC (UTG.L) is the market leader in UK student accommodation. The London listed company, has REIT status and therefore does not pay corporation tax on rental income.
There is currently a chronic shortage of student accommodation in the UK, due to increasing demand from overseas students, encouraged by universities seeking the higher fees that are earned from international students. On the supply side, increased regulation and taxation has pushed smaller landlords out of the market. This combined with higher development costs and planning challenges, has made new student housing developments less attractive. The rising demand, in the face of stagnant supply, has resulted in a 27% increase in rent prices over the past six years. The chronic situation, is expected to continue for many years to come, by all market commentators with no radical changes on the horizon.
Owning property, with some leverage, in times of inflation and low interest rates is likely to out perform cash. With cash loosing it’s purchasing power over time. Some economists believe ‘financial repression’ (inflation and forced low interest rates), is the most likely political response to an unsustainable and mounting Government debt crisis.
Unite have strong ties to the UK’s leading universities with various joint venture property projects, which are likely to result in very long term relationships.
Unite Group PLC recently made an offer for it’s smaller rival: Emprici Student Property PLC (ESP.L). The cash (28%) and Unite shares (72%) offer, values Empiric at £713m and is currently (12th June 2025) 2.7% below Empiric’s market cap. The deal looks likely to proceed, with talks and an opening of it’s book to due diligence under way. Under UK takeover rules, Unite has until 3rd July 2025 to announce a firm intention to make an offer, or walk away. The potential acquisition is at a discount to Empiric’s book value, making the cash element attractive to Unite shareholders. Both companies are trading at similar price to book discounts, so the equity element is not so significant.
Some key financial metrics of each firm are shown below.
Unite (Empiric)
Market capitalisation: £4.1 Billion (£695 Million)
Beds: 68,000 (7,700)
Market cap to bed ratio: £60,521 (£90,208)
Dividend yield: 4.43% (3.59%)
Payout ratio: 80% (88%)
Earnings yield: 5.2% (4%)
Debt to property assets LTV: 24% (27%)
Interest cover: 6.2 (2.3)
Debt to maturity 3.8 years: (2.3 years)
Average cost of debt: 3.6% (4.5%)
Price to Book ratio: 86% (87%)
Investment Case
This is not a hugely attractive investment but is perhaps significantly more attractive than holding cash in the UK, with a higher cash return yield and more importantly a dividend that would increase with inflation, plus further expansion growth from the reinvestment of the capital not paid out. Management of Unite state that it’s return on capital is 10%. There is also the possibility of increasing leverage, from the current low levels and locking in longer term lower interest rates, if interest rates continue to fall.
Risks
Any change in demand or supply that negatively effects occupancy rates such as: government immigration policy effect on foreign students (1). Demand for university places from UK students could decline due to financial pressure and lack of government funding (2). Inflow of capital from private equity into building out new developments and eventual over supply (3). Increased conversion of unused office space to student accommodation. Increased remote learning.
Any dramatic increase in leverage, followed by higher interest rates or falling property values.
Health & Safety responsibility to young people in densely populated buildings.
Project risk of major construction projects.
Acquisition risk of not easily integrating the culture and systems and processes.
1. Management say foreign student numbers are up 14% in past year as the Labour government are pro foreign students.
2. This has already happened, with UK students funded by student loans since 1990 and no decline in interest to date.
3. This has already happened with Lone Star Funds £212m in 2023; KKR 544 bed deal in 2025; Goldman Sachs $140 million in 2024. There have been a combination of PE buying existing units and building new capacity.
Conclusion
Probably better than cash for a UK investor like me and not much risk and should do well in an inflationary environment. Less attractive to international investors, as unknowable foreign exchange rates can easily wipe out yield and cause gains or losses unrelated to the business but could still server as a part of a wider fx diversification strategy.
