Unite Group PLC (LSE:UTG) and Empiric Student Property PLC both saw their price targets hiked by analysts at RBC Capital in an upbeat note on the UK student accommodation sector.
The RBC analysts said: "The rising demand-supply imbalance for UK student accommodation and continued double-digit rent growth in the wider private rented sector (PRS) lead us to raise our mid-term market rent growth estimates by c.100bp on average."
As a result, they said, earnings per share (EPS) estimates for Unite and Empiric increase by around 4% on average, and their price targets rise by about 7% to 1,100p and 96p, respectively.
They noted that recent anecdotal evidence highlights the extent to which availability of UK student accommodation has continued to deteriorate. Examples include instances of students queueing overnight to secure a rental, universities offering cash incentives for students to give up accommodation, students being housed in separate towns to their campus, and universities advising unhoused students to suspend their university place.
The analysts said: "We believe supply issues are unlikely to be solved mid-term as funding costs rise, real estate investment declines, the economy weakens and new HMO supply is deterred by regulations and local restrictions."
They pointed out that Unite announced like-for-like year-on-year rent growth of 4.5% for academic year 2022/23 (AY2023/24), while Empiric sees rents growth of 5.2%, versus private asking rent growth of 11.2% in the third quarter of 2022, according to Rightmove's Rental Trends Tracker.
The RBC analysts said: "Our analysis suggests the gap in rent growth between the two landlords and rents in the PRS is the largest in recent history, raising scope for higher rent growth from next year. We believe market rent growth upwards of 6% for AY2023/24 is achievable without reputational impacts and while retaining close to full occupancy. Lfl rent growth guidance is 4-5% at Unite and >5% at Empiric."
Having already factored Unite's and Empiric’s 2023 guidance into their previous estimates, they now believe rent growth mid-term can be comfortably above the minimum like-for-like rent growth indicated by management.
The analysts said they have increased their mid-term market rent growth estimates by around 100 basis points (bp) per annum on average for both Unite and Empiric, and lowered their average long-term vacancy rates by about 50bp to 1.5%-2% on average.
"We forecast higher rent growth at Empiric due to its 100% direct-let exposure, enabling it to reset rents every year without caps. Our EPS
estimates for Unite and Empiric increase by c.4% on average and our price targets increase by 7%, implying c.7% and c.20% total return potential respectively," they said.
The RBC analysts concluded: "We believe Unite's relatively attractive room pricing leaves it well positioned to maintain close to full occupancy and deliver higher rent growth. Its valuation on a 5.0% 2023E earnings yield looks undemanding to us at a spread to the UK REIT sector that is in line with historical levels, despite a much more positive earnings outlook."
The analysts reiterated an 'Outperform' rating on Unite and a 'Sector Perform' rating for Empiric.