No. of Recommendations: 4
Hi Jim,
OK, I see what you were saying more clearly now, thank you for explaining your view in more detail.
I'll start by pointing out a few things.
1) Demand for student accommodation in an area is driven by a) number of students in that area, multiplied by b) number of years they study on average. So any argument that focuses on numbers but not on years (which has risen from typically 3 years to 4 years - 33% increase in the last 15 years or so), is missing the bulk of the demand issue.
2) Further, those 'extra years of study' tend to occur more at 'good' universities than 'mediocre' ones.
3) In the past, some international students were taking anything they could get, sometimes because demand was higher than supply, sometimes as a way to access a visa to move to the UK. This lead to low quality universities having more foreign students than usual. This is changing. Now these students are going to higher quality universities to try and get better value for money. So what is a catastrophic fall in demand in one category is the driver of trend / new demand in another.
4) PBSA is not one uniform kind of thing. It's not only about location or uni. You get 3 main types of PBSA.
-- TYPE A - Student hall replacement. Effectively, outsourcing of cheap student halls, built to modern standards. It's mostly used by domestic students, it's not high end luxury. Importantly, it's not pushing at the limits of what can be achieved with rent. Very importantly, it's often rented as a block to the university, with the university taking the hit if rooms can't be rented.
Unite does this mostly, particularly with long-established / high-tariff universities.
Other PBSA don't do as much of this.
It's a big reason why I'm open to investing in Unite but I wouldn't be open to investing in other PBSA.
-- TYPE B - Higher end flats, low margin. You can build nicer flats for richer students (often international) in places with relentless forever demand like London, but the margins aren't that good.
Unite does a bit of this. So do other PBSA.
-- TYPE C - Luxury international flats, high margin. Go somewhere mediocre with new demand, build luxury flats, make a fortune... briefly.
Unite hasn't really been involved in that game much. Whereas most other PBSA do this a lot.
OK, so where are problems occurring? Type C, almost exclusively.
And which category is least affected by 'bubble popping' / overexpansion that you describe? Type A.
So what I'm saying is, there are insurers, then there's Berkshire. There is PBSA, then there's Unite. It's a quality business, not because it builds premium products to sell to rich people exploiting peak demand for huge margin, but because it builds decent lower margin products for ordinary people, and offloads the sales risk and 'future demand' risk to universities in bulk wherever it can.
Going back to your previous post, I'd suggest Unite has more in common with one of those 'dark kitchens' you hear about that quietly supply UberEats from a modest building, under 20 different names, rather than a concept chain with top chefs and so on during an era of new concept chains.
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> I'm concerned that an admissions rise of ~18% in that stretch without a population increase simply may not last
Sure, but it's about "Aberdeen Luxury Chips" vs "London Sandwich Shop".
Some PBSA developers are new to the game and put stuff up anywhere that had juicy margins during high demand.
Unite, generally speaking, didn't. They're rather restrained/conservative/cautious by PBSA developer standards.
They're hardly building at all just now, even while demand creeps up.
90% of what they have today will do fine even if that admissions rise went into full reverse and never came back. The problem is the other 10%. That's why they're moving away from it, and it's why the market nuked the share price from 1200p+ down to 400p+
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> I think it's because there won't be as high a fraction of people wanting to buy what they're selling, domestic and foreign.
Again, I feel your argument is missing the point as far as Unite is concerned (though your point is fair for PBSA in general).
Unite generally prefer NOT to rent to 'people'. They prefer to rent to universities that have a) money b) good visibility for future numbers c) willingness to take on longer-term contracts in bulk d) decades-long track record of demand >> supply.
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> I personally think that the UK universities have substantially overexpanded just like a concept chain
I accept that this is what you personally think.
I agree with this issue of overexpansion at national level, though, I don't think we need to have 'concept chain' in there, because it muddies the issue since it's a quite different kind of business.
But for 'substantial', well, I keep coming back to, it's not about country, its about locations/universities/markets.
e.g. if 100000 students want to go to Cambridge, they were taking 40000 of them, now they take 50000, that's simply not an issue of substantial overexpansion unless you're an annoyed local non-student who just wanted to live and work there.
e.g. if 20000 students want to go to CrapUniversity, they were taking 20000 of them, demand suddenly increased to 30000, so they built out for 30000, that's a huge problem for overexpansion. Even worse if the local council wanted to free up regular housing, and allowed 30000 Luxury High End student houses to be built by every PBSA developer that asked nicely.
The issue is each local market and the character of supply & demand there.
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> and the Russell Group/high tariff crowd the most as shown by their rising "market share".
Absolutely not - if a restaurant has long lines queued outside the door every day of every year for 200 years, that wait for hours yet can't even be served, and they decide they'll serve a fraction more of them, so the line is a little shorter, that's not substantial overexpansion.
Russell group / high tariff are the LEAST affected by overexpansion, even if it has hurt their reputation a bit.
Because accepting 60% of your available demand instead of 50%, is sustainable even if demand drops. Whereas taking 100% of demand is not sustainable if demand drops.
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> One big issue is that the expansion of university capacity has, predictably and inevitably, resulted in some poor quality education here and there, which is emphatically NOT good for the just-like-Oxbridge "brand" being sold to gullible foreigners.
I agree. I'm a former academic who's worked in several countries including the UK. It's very sad what has happened to the quality of education. On the other hand, it has happened in every other country too, so, relatively speaking I'm not sure the UK is any worse off. Compared to other countries, we're probably less affected by that problem than you might think.
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> As you note, the supply and demand are both rising at the moment. But that is precisely what worries me: the bubble is still getting bigger
If by 'supply/demand' we're talking about supply/demand for student accom.
Supply/demand is still strongly in imbalance, with some places starved and others flooded.
Demand is rising in some places, and falling in others.
Supply is mostly frozen almost everywhere.
Supply continues to rise a little in places where demand is extremely strong and where demand forecasts well for the future, places where universities are willing to take the risk from the developer.
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If I might offer a different analogy. If you're cooking popcorn, the time to turn off the heat is when the you start to hear the corn popping in the pan. However, those bits of early popped corn sometimes get burnt.
In this analogy, Unite turned off the heat slightly too late. Most of the popcorn is tasty, however, a couple of pieces of corn have got burnt. (but thankfully, the resulting drop in share price has opened up a new business opportunity...)
Whereas: most other PBSA isn't publicly traded (so no discount on NAV), most other PBSA devs built high margin luxury flats in places with new/recent high demand (oops). Most other PBSA is in trouble, for reasons specific to themselves.
Unite is publicly traded, and they can use that to generate fantastic NAV/EPS growth in a way other PBSA can't (buybacks at huge discount).
It's like with banks. 2009 was a great time to buy banks. They had cut back a lot of foolish profit-chasing, went back to traditional lending, focused on the basics of making the business stable, and the price was low. Buy a traditionally sturdy bank in 2009, you did great afterwards.
Similarly, PBSA in 2022, the price was high, demand was furious, PBSA devs of all sorts were building to meet it. We're not in 2022, we're in 2026. Everyone is well aware of the international student issue. There is very little new building. UTG's share price dropped almost 2/3 from peak and it was the least bubbly / demand-chasing of all the PBSA developers. To me, it's like buying banks in 2009. Everyone was still thinking about 2007 and 2008 and extrapolating forwards, but actually 2009 was the best possible year to buy banks in recent history.
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> as a REIT the great bulk of their business is being a cash cow for currently owned assets.
Absolutely not! And that's the whole point of my threads on here.
As I've pointed out a few dozen times, 'share buybacks from asset sales' are such a profitable new business model for Unite just now, that the annual profit from doing that will actually *outweigh* the entire 'cash cow asset profit' of the entire regular business.
The market hasn't cottoned onto that yet, and is viewing the risk & business model as though Unite was trading at NAV.
That's not a small issue. In fact, it's pretty much the entire investment thesis.
Unite, I would say, has a new business model: buy back shares! It's a far better business model than renting student accommodation or developing new student accommodation. Thankfully, management seems to agree, which is why they've cancelled a lot of new dev, and are selling existing buildings.
Do a sum of parts analysis on this, and study the business value of the buybacks as one of the parts.
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> I think it's because there won't be as high a fraction of people wanting to buy what they're selling, domestic and foreign.
If we're talking about what UNIVERSITIES are selling, rather than PBSA or Unite...
As a former academic, I sometimes wonder if people realise what universities actually sell nowadays.
They sell a 3-4 year holiday with other young people who are otherwise staring at the grim path of decades of low wages and misery till their bodies are worn out.
They sell shared memories with people who might help you get a job later (your fellow students, your prof and their personal network).
They sell a 'social class experience' & status symbol for middle class families, like going skiing in Aspen for middle class Americans. And who knows, you might even learn something along the way, as a bonus!
Finally, they get the magical certificate that allows them to apply for jobs that require any degree (in the UK, employers are usually very flexible about which degree you have - any degree proves some intelligence and work ethic - in other countries like Germany, your degree might only help you in a chosen career).
As the saying goes, don't the degree get in the way of your education. This is why US universities for example, Australian universities, have spent a fortune on 'the student experience' instead of paying to hire good staff to teach excellent material. Look where universities spend their money, and you'll see what university actually is, rather than what it seems to be.
I see some doubts among young people I know about the usefulness of university.
I see some doubts about the cost, too, the debt.
Nonetheless, even the biggest doubters seem *extremely* keen to go.
It's a social experience, an opportunity for fun, growing up, and assortative mating.
The classes and exams and stuff are just the scenery in the background.
It's a bit like Unite, in a way. With price and NAV as they are (give or take some room for error), universities & student accommodation are just the scenery in the background. The real attraction is the potential for buybacks. That is a VERY compelling new business model they are (thankfully) seizing with both hands.
TRS
