More people are going to university and there aren’t enough beds for them all. Unite, Britain’s biggest student landlord, has been talking up how it stands to benefit from this supply-demand imbalance for a while now, yet investors are cautious about taking the bait. Greater evidence that the group can deliver on its dizzying potential is needed to push the shares on from here.
Pulling in punters clearly isn’t an issue. On Tuesday, Unite revealed its accommodation is full, despite the average rent for one of its rooms rising by 7.4 per cent. That was enough to offset rising wages, utility bills and other costs. In 2023, adjusted earnings climbed 13 per cent to £184 million.
The outlook is equally encouraging. Four-fifths of rooms are already reserved for the next academic year and rent is expected to increase by at least another 6 per cent. Management is confident that margins will widen, amid continuing price pressures, and forecasts a return on equity of between 10 and 12 per cent this year.
This all feeds into the demand exceeding supply narrative. The quantity of student accommodation is diminishing while the number of people going to university surges.
Regulatory reforms and higher interest rates have pushed many private landlords away and universities are generally refraining from building new halls. Demand, meanwhile, is being bolstered by people overseas wanting to get a prestigious UK degree, and by demographics. By 2030, there will be 16 per cent more 18-year-olds in the country.
Unite, with its scale and unrivalled close ties to universities, is best placed to meet the deepening housing shortage and is making moves to capitalise. The group, armed with greater financial headroom after raising £300 million from investors in July last year, has a record £1.3 billion development pipeline. Student housing is being built in supply-constrained markets and near top universities. If these investments pay off, earnings and the value of its property portfolio should rise considerably.
The FTSE 250 constituent is sitting on a golden opportunity, yet its share price tells a different story. Unite’s current market valuation is almost bang in line with the value of its assets less borrowings. It’s unusual for the group to trade at a discount to forward book value. Normally it fetches a fat premium.
The student landlord’s growth potential, coupled with expectations that interest rates have peaked, makes that valuation look tempting. However, you can also understand why investors are cautious and prefer sitting on the sidelines.
People mainly invest in real estate investment trusts for income, and the dividend currently on offer is underwhelming. A yield of about 3.7 per cent isn’t going to swing it. You can get a better return on an easy-access savings account.
Interest rates aren’t expected to be cut for a while yet either, nor return to being constantly pegged close to 0 per cent. The days of minimal inflation, ultra-cheap borrowing costs and maybe even soaring property prices might be behind us.
A key challenge for Unite is ensuring rents are affordable without squeezing profits too much. Inflation erodes earnings and cost pressures persist. Elevated building costs are one major issue. Another is energy prices. Unite pays tenants’ bills and hedges put in place before the war in Ukraine are expiring.
Students need somewhere to live and Unite is one of the only options they have. There are limits, however, to how much it can milk this situation.
If rents keep rising to cover expenses and satisfy investors, foreign students might consider studying elsewhere and domestic students may opt to continue living with their parents. The risk that the government intervenes with price caps or that teenagers lose interest in getting degrees also cannot be entirely dismissed.
These are worst-case scenarios and may seem far-fetched. But investors should explore all angles before pulling the trigger.
Advice Hold
Why The potential is huge but hesitancy is understandable
Abrdn
Investors have grown accustomed to Abrdn disappointing. It’s no secret the group is in a mess and that its core business of flogging actively managed funds is in decline. The share price has fallen dramatically to reflect that.
At this point, investors are more forgiving and glass-half-full thinking. Stephen Bird, chief executive, is trying to reverse Abrdn’s fortunes by axing jobs and funds, and expanding in other areas such as mass market investing services. Some of those moves are starting to pay off.
In 2023, adjusted operating profit tumbled less than anticipated. Greater-than-expected cost savings, coupled with solid growth from Interactive Investor and an improved financial advice portal, softened the blow of another challenging trading period and gave investors something to cheer. The increasingly bloated-looking dividend was maintained, too.
• Abrdn axes one in ten jobs in drive to save £150m
Bird claims Abrdn is “better positioned for future growth”. That may be true, but don’t expect the group to do a Rolls-Royce.
Profits were inflated by a series of one-offs, including interest earned on customer balances. And convincing clients to entrust their capital with its fund managers again will be tough. Despite great efforts to diversify its income stream, asset management remains the main breadwinner.
One of the ugliest figures from the full-year results was £13.9 billion of net outflows. That’s hard to sugarcoat.
In Abrdn’s defence, Asia and emerging markets, the group’s speciality, have been particularly out of favour lately. But that doesn’t necessarily mean investors will be rushing back into its arms when market conditions change.
Only 42 per cent of Abrdn’s funds outperformed their benchmark over the past three years. Lousy track records stick in this competitive market. No wonder many of the group’s big clients are continuing to switch to cheaper passive strategies.
David McCann, analyst at Numis, reckons the only reason to hold the stock “would be if one were to assume that the status quo could meaningfully change and more radical action, such as a break-up of the group, were to happen”. At present, that seems unlikely.
Advice Avoid
Why The outlook remains bleak
