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 September 2023.
Highlights
· 99.7% occupancy for the 2023/24 academic year (2022/23: 97.9%)
· Rental growth of 7.3% for the 2023/24 academic year
· Property values broadly stable in Q3 (USAF: +0.2%, LSAV -0.2%)
Richard Smith, Unite Students Chief Executive Officer, commented:
“We have delivered record occupancy and strong rental growth for the 2023/24 academic year, with increasing demand from both students and universities reflecting the growing attractiveness of our fixed-priced, all-inclusive offer. The strong letting performance increases our confidence in delivering at least 5% rental growth for the 2024/25 sales cycle and supports our property valuations as the market adjusts to an environment of higher interest rates.
“The UK is increasingly short of suitable student accommodation as HMO landlords continue to leave the market at pace. As the leading provider of PBSA, we have a crucial role to play and are uniquely positioned to address this supply need. We continue to work closely with universities to ensure students have access to high quality, affordable accommodation.”
Current trading
2023/24 lettings performance
Entering the final stages of the 2023/24 academic year letting cycle, the Group has let 99.7% of beds across its portfolio (2022/23: 97.9%). Demand has been strong across all the Group’s markets, where the supply of purpose-built student accommodation is unable to meet demand as traditional HMO landlords leave the sector. This has resulted in rental growth of 7.3% for the 2023/24 academic year (2022/23: 3.5%). Rental growth from nominations agreements has exceeded direct-let tenancies as university partners increasingly recognise the value our accommodation provides and are willing to agree increased rental levels on single year deals and new multi-year agreements.
The ongoing strength of student demand, together with the shortage of new PBSA supply and a retreating HMO sector supports at least 5% rental growth in the 2024/25 academic year sales cycle. We are mindful of the cost of living crisis and remain focussed on offering value-for-money accommodation, while also delivering sustainable rental growth to mitigate rising operating costs and support our significant ongoing investment into our properties.
Funding update
During the quarter, Moody’s Investors Service upgraded the Group’s unsecured credit rating to Baa1 (previously: Baa2), reflecting the positive impact of the Group’s £300 million capital raise and commitment to a reduced c.30% LTV target and net debt: EBITDA of 6-7x.
Development pipeline update
We recently announced an option agreement for a new 800 bed development scheme at Central Quay, Glasgow, increasing our total pipeline to 5,600 beds. Morriss House in Nottingham reached practical completion in August and is fully let for the 2023/24 academic year. We are making good progress at Lower Parliament Street in Nottingham which will open in September 2024 and work has started on-site at our two 2025 deliveries, Temple Quarter in Bristol and Abbey Lane in Edinburgh. The planning process for Meridian Square in Stratford is also progressing in line with expectations with approval targeted in Q4 2023.
Building safety
We have not identified any Reinforced Autoclaved Aerated Concrete (RAAC) in any our buildings. A limited number of additional surveys are ongoing but given an average age of 12 years for our portfolio, should any RAAC be found, we do not anticipate any material issues.
In line with Government regulations, we continue to progress with cladding remediation across the estate and will complete 15 projects during 2023. The expected cost of remediation projects in 2023 is £80 million (Unite share: £41 million), which was fully provided for at 31 December 2022. We continue to prioritise projects based on our external risk assessments and, having completed detailed surveys, expect to maintain our run-rate of 10-15 projects in 2024. Expected future spend is in-line with previous guidance for an average of c.£500 per bed per annum (net of recoveries through claims) over the next 3-5 years.
To date, we have successfully made claims against the original build contractors for a total of £30 million (Unite share: £24 million) representing 80% of the costs on those projects. This supports our view that 50-75% of costs will ultimately be recoverable, although no provision has been made for future recoveries in our balance sheet. While positive legal precedents are being established on a case-by-case basis, it is taking longer than anticipated to settle these disputes, meaning we anticipate a greater level of net spend in the earlier years of the remediation programme.
Quarterly fund valuations
At 30 September 2023, USAF’s property portfolio was independently valued at £2,929 million, a 0.2% increase on a like-for-like basis during the quarter. The valuation increase in USAF is driven by quarterly rental growth of 1.9% and a 9 basis point increase in property yields. The portfolio comprises 27,922 beds in 71 properties across 19 university towns and cities in the UK.
LSAV’s investment portfolio was independently valued at £1,936 million, a 0.2% decline on a like-for-like basis during the quarter. The valuation decrease in LSAV is driven by quarterly rental growth of 2.0% and a 9 basis point increase in property yields. LSAV’s investment portfolio comprises 9,716 beds across 14 properties in London and Aston Student Village in Birmingham.
The USAF and LSAV portfolios are now valued at weighted average yields of 5.2% and 4.3% respectively.
Unite Students is the UK’s largest owner, manager and developer of purpose-built student accommodation (PBSA) serving the country’s world-leading higher education sector. We provide homes to 70,000 students across 157 properties in 23 leading university towns and cities. We currently partner with over 60 universities across the UK.
