No. of Recommendations: 4
I will be very interested to hear your suggestions.I'm not making a comparison between the economics of the industries, only the similarity of the specific risk that concerns me: overexpansion.
The typical chain restaurant, with vanishingly few exceptions, overestimates the maximum profitable (or even feasible) market size and keeps expanding not merely until the incremental units are a bad idea, but also to the point that the expansion has risked the baseline level that would have been a good idea. They almost all go pop. Concept retailers are similar.
I personally think that the UK universities have substantially overexpanded just like a concept chain, and the Russell Group/high tariff crowd the most as shown by their rising "market share". And I think that the student housing industry then tagged along with that overexpansion and had its own little overenthusiasm. The ratio of the number of university acceptances to the UK 18 year old population has risen 1.0%/year in the last 15 years, and that's from a "high" baseline date from before the tuition cap change which caused a one-time drop. I'm concerned that an admissions rise of ~18% in that stretch without a population increase simply may not last, for any mix of the reasons I mentioned. And that if (or when) the number of student places, and therefore residence demand, falls back towards to its old levels, it will hurt the economics of the sector quite a lot, probably fatally for some players. When the weakest hands are desperate, the strong hands don't keep their pricing power: sometimes the worst enemy of a strong business is a weakened competitor. Plus, it's hard to build a new profitable place if it has to be accompanied by closing down two older ones.
One big issue is that the expansion of university capacity has, predictably and inevitably, resulted in some poor quality education here and there, which is emphatically NOT good for the just-like-Oxbridge "brand" being sold to gullible foreigners. It's hard to flunk a guy paying to keep the lights on.
Some random comments, though not the source of my concerns
https://www.reddit.com/r/AskAcademiaUK/comments/1h...As you note, the supply and demand are both rising at the moment. But that is precisely what worries me: the bubble is still getting bigger, not normalizing. Just more overcapacity for a demand that may change for the worse.
There are many merits to both the industry and Unite Group as investments. This is just one risk among many possible risks, and it may not come to pass. But it's the one that gives me most concern in this case. I don't think that the student population will shrink because the young'uns march off to war, I think it's because there won't be as high a fraction of people wanting to buy what they're selling, domestic and foreign.
Put more simply, as a REIT the great bulk of their business is being a cash cow for currently owned assets. I fear occupancy rates may fall on trend over the next 15 years, and the income of those assets may fall. This can be mitigated with some fancy footwork, buying and selling here and there, but the tail wind of a bubble industry may turn into a head wind.
Jim
