Unite Group plc (LON:UTG) Unite Students, the UK’s leading owner, manager and developer of student accommodation, has announced an update on current trading and quarterly property valuations for the Unite UK Student Accommodation Fund and the London Student Accommodation Joint Venture as at 30 June 2022.
Current trading
2022/23 reservations
We have continued to make good progress in sales during Q2, with strong demand from both UK and international students. Across the Group’s entire property portfolio, 90% of rooms are now sold for the 2022/23 academic year, ahead of pre-pandemic reservation levels (2021/22: 81%, 2020/21: 80%, 2019/20: 89%). We have also seen positive progress in pricing, particularly in the second half of the sales cycle as concerns around the impact of the Omicron Covid-19 variant have eased. This progress has been driven by inflation-linked rental uplifts for our multi-year nomination agreements and the strength of demand for direct-let beds.
Given the strong sales performance to date, we are increasingly confident in delivering occupancy of 97% for the 2022/23 academic year and achieving rental growth at or just above the top end of our guidance of 3.0-3.5%.
We continue to monitor Covid-19 cases, travel restrictions for international students and the potential for further lockdowns, particularly in China. There are no Covid restrictions on UK Higher Education and Government guidance emphasises that universities should prioritise delivery of face-to-face teaching. Demand also remains strong from international students across multiple markets and we expect that international students will be able to travel to the UK for the start of the 2022/23 academic year in September, consistent with our experience for the 2021/22 academic year.
Cost inflation
As previously guided, we are well protected but not immune from the impacts of inflation on our cost base. We have a high degree of visibility over our two largest costs, staff and utilities, which together account for around 60% of our combined operating costs and overheads. Our utility costs are fully hedged through 2022 and 2023 and for a substantial portion of 2024. In addition, a recently completed review of our operating model, will deliver further efficiencies, which partially mitigate wider cost pressures.
The Company also benefits from growing recurring income through asset management fees from USAF and LSAV, linked to NOI and NAV, which offset around two thirds of the Group’s share of overheads.
Financing costs
We have limited near-term refinancing requirements with less than 10% of see-though debt maturing before late 2024. Interest rates are fixed or capped for 85% of our existing investment debt and we have forward hedged £300 million of future debt issuance, at rates meaningfully below prevailing market levels. As a result of rising interest rates on the variable portion of our debt, our see-through borrowing cost has increased to 3.3% at the end of H1 (December 2021: 3.0%).
Quarterly fund valuations
At 30 June 2022, USAF’s property portfolio was independently valued at £2,967 million, a 3.5% increase on a like-for-like basis during the quarter. The valuation increase in USAF is driven by rental growth of 0.8% and a 13 basis point reduction in property yields. The portfolio comprises 29,042 beds in 71 properties across 19 university towns and cities in the UK. The average value per bed is approximately £102,000.
LSAV’s investment portfolio was independently valued at £1,942 million, a 4.0% increase on a like-for-like basis during the quarter. The valuation increase in LSAV is driven by rental growth of 1.1% and a 12 basis point reduction in property yields. LSAV’s investment portfolio comprises 9,716 beds across 14 properties in London and Aston Student Village in Birmingham. The average value per bed is approximately £200,000.
The USAF and LSAV portfolios are now valued at weighted average yields of 4.9% and 3.9% respectively. Valuation growth in the quarter reflects the continued strong demand for high quality student accommodation assets from institutional investors, including the acquisition of Student Roost by GIC and Greystar announced in May. As a result, we also expect the valuations of our wholly owned portfolio for 30 June 2022 to reflect yield compression of approximately 10-15 basis points over the first half.
USAF unit acquisition
During the second quarter, Unite increased its investment in USAF through the acquisition of £141 million of units through participation in an equity raise and acquisition of existing units in the secondary market. In aggregate, the purchases, which were priced in-line with USAF’s March 2022 NAV, increase Unite’s USAF ownership to 28.2% on a pro-forma basis (31 December 2021: 22.0%). This investment equates to an increase in Unite’s see-through GAV of £184 million at an effective property yield of 5.1%.
The acquisitions increase Unite’s exposure to USAF’s high-quality portfolio in strong regional markets. It also substantially redeploys the proceeds from the disposals announced earlier in the year at attractive risk-adjusted returns.
The proceeds of the USAF equity issue, which in aggregate amount to £78 million, will be deployed into asset management opportunities and sustainability projects across the portfolio, to deliver uplifts in NOI through increased rental income and lower utility costs. Recent examples of asset management initiatives include the major refurbishment of 1,000 USAF beds in Manchester, which are due to complete this September.
Joe Lister, Unite Students Chief Financial Officer, commented:
“We continue to make good progress with bookings for the 2022/23 academic year with reservations now ahead of pre-pandemic levels, demonstrating the strength of student demand. This momentum underpins our confidence in a return to full occupancy for the 2022/23 academic year and rental growth at or just above the top end of our guidance of 3.0-3.5%. We are well protected against inflationary pressures through annual re-pricing of our income and cost hedging but, like others, are not immune from the impact of rising costs and interest rates. We continue to see significant investor demand for student accommodation, reflecting the sector’s positive outlook, as demonstrated by valuation increases for USAF and LSAV in the quarter.”
