Empiric Student Property or Unite – which is the best buy?

Student accommodation in Britain is in a mess that is not going to be sorted out in a hurry, but that is welcome news for the two quoted companies in the sector, Unite Group and Empiric Student Property.

The chaos was brought home to thousands of families last month when A-level results were released and suddenly they had to find a bed for a son or daughter heading to university in the next few weeks. They are in good company. Ucas, the universities and colleges admission service, says 316,850 UK 18-year-olds applied to university or college this year, plus 115,730 international students, both categories up 0.7 per cent on last year.

Of the expected three million total student population this academic year, more than a million will commute from home, maybe not as much fun as moving away from Mum and Dad, but a lot cheaper. A similar number will stay in university halls of residence, houses in multiple occupation (HMOs) or their own properties. That leaves around 750,000 in the privately financed, purpose-built student accommodation that is Unite and Empiric’s bread and butter. Joe Lister, Unite’s chief executive, said: “There is an acute and growing shortage of student homes, which is amplified by a shrinking private rental sector and depressed levels of new [purpose-built] development.”

The dynamics are shifting in their favour. Universities’ finances are increasingly stretched too far to expand their residential estates. As many as 150,000 HMO landlords are withdrawing from the market because of stringent planning and licensing requirements, and the threat of higher capital gains tax and rental income tax in next month’s Budget. So students are being temporarily housed in hotels, or even tents, and many are settling for digs in towns miles from their campus. Manchester students are living 35 miles away in Liverpool and some of their Bristol counterparts are living in Wales.

The picture is different for purpose-built accommodation providers. This summer Unite, the biggest, raised £450 million to buy and build more space, and the sector should benefit from the government’s promise to sweep away house-building obstacles. Unite is planning a 500-bed tower in Bristol city centre.

According to the estate agent Knight Frank, fewer than 17,500 new purpose-built beds are likely to come on stream this academic year, as building costs soar to £100,000 a room. Excess demand is driving up rents, by 10 per cent last year and an estimated 7 per cent next year. In big cities that can add up to £230 a week for an ensuite room. However, there are an estimated 160,000 rooms in the pipeline, with a fifth under construction and another half with full planning permission. The investment group CBRE estimates that £2.1 billion has been sunk into the sector this year, three times the equivalent 2023 figure.

The purpose-built market is fragmented, creating scope for consolidation. Between Unite in top spot and Empiric in seventh there are several big foreign players, led by the US-based Blackstone, one of the world’s biggest private equity firms, its compatriot Greystar and Singapore’s GIC: the former operates under the IQ Students brand, while the latter duo owns Student Roost. Next is the Singapore-owned Mapletree. Then comes Equitix, owned by the Guernsey-registered Tetragon Financial Group, which is listed on Amsterdam’s Euronext exchange. Another significant provider is Global Student Accommodation, owned by Dot Group and run by Nicholas Porter, Unite’s founder and now a competitor.

Not surprisingly, given the environment, Unite and Empiric have released solid half-year results in the past few weeks. Unite’s adjusted earnings rose from £110.2 million to £125.3 million, taking earnings per share from 27.5p to 28.7p. Net tangible assets increased nearly 5 per cent. The interim dividend rose from 11.8p to 12.4p, suggesting that 2023’s 35.4p total payout should grow, maybe to 37p.

Lister added: “Unite has a crucial role to play in partnering with universities to deliver new supply of high-quality, affordable accommodation where the need is greatest, which also frees up local family homes in the process. Our development pipeline has grown to a record £1.5 billion for delivery into the strongest markets, including our first university joint venture with Newcastle University.”

Unlike Empiric, Unite is a big player in London with more than 12,500 beds. While Lister expects above average rental growth in the imminent and following academic years, a short-term emphasis on investment has led him to predict earnings not taking off until 2026. Earnings per share of 50p look realistic by then, to produce a 40p dividend for a 19 price-earnings ratio and a 4.2 per cent yield.

Empiric’s half-year results appeared more subdued, showing revenue up from £41.3 million to £42.4 million, but that was suppressed by disposals and properties out of use because they were being refurbished. Like-for-like growth was a healthier 10.5 per cent. Earnings per share were just a touch higher at 2.4p, enabling a 7.7 per cent dividend increase to 1.75p. The gross margin rose 50 basis points, from 71.7 per cent to 72.2 per cent, thanks partly to non-core disposals, but that should settle at 70 per cent for the full year, a touch over Unite’s.

Peel Hunt, Empiric’s house broker, predicts net rent will rise from £59.7 million to £70.5 million in the next two years, taking adjusted earnings from £26.8 million to £35.4 million. That should take earnings per share to 5.9p and the annual dividend to 5p, for 2026, translating into a prospective 16.3 p/e ratio and 5.2 per cent yield then.

Duncan Garrood, Empiric’s chief executive, said: “Student demand for high-quality accommodation aligned to the UK’s best universities has remained strong, with further rental growth captured for the 2024-25 lettings cycle across our portfolio. As our operational platform matures, so has the consistency of our customer service, driving an improving net promoter score and record rate of customer satisfaction. With the non-core disposal programme now materially complete, along with our ongoing refurbishment programme, we have been actively seeking to grow the portfolio.”

Both firms have a substantial institutional following on the share register, though Unite’s fan club is more international. Its biggest investors are the Canada Pension Plan Investment Board, Norway’s Norges Bank Investment Management and the Dutch APG Asset Management, with 28 per cent between them.

ADVICE Buy Empiric, hold Unite

WHY Empiric’s earnings are beginning to grow now, while Unite’s may need a couple of years before lift-off