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Hi all, some random gossip/news.

There's a scary-sounding headline being circulated Friday in google/yahoo news etc., which I personally feel is misleading.

"Unite Group slumps on discounted share placing"

When I saw the headline I was like 'wtf! they've been buying back shares for months, why would Unite suddenly do a discounted placing without warning! wtf!'

But it's not a placing by Unite, it's a secondary placing by CPPIB, a shareholder that owned a huge amount (originally 20%, recently 14%, now 7%) of Unite since 2019. They sold half (7%) outside of the regular market by placing it with other institutions at roughly 4% discount to prevailing price, which cancelled out a big rally from Thursday. The price on Friday ended up around the level of the open on Thursday.

Unite did not issue new shares or get the funds from this.

It's net neutral I think.

There's a slight positive in that it shows institutions are currently willing to absorb a huge amount of Unite stock (7% all at once) from other institutions without moving the price much.

There's a slight positive in that it removes a kind of large 'overhang' of shares waiting to be sold some day from the market e.g. you can get a situation where the share price never appreciates much because everyone knows that the overhang will result in a huge selloff at some point. CPPIB was originally under a 12 month lockup 2019-2020 but they held the shares long term despite the end of the lockup period.

There's a slight negative in that when a shareholder does something like that, they sometimes place the remaining half in half a year's time or whatever.

There's a slight positive if you're a buyback believer and want the buyback to progress at the lowest possible prices for as long as possible.

Other news:

1) Buybacks proceeding at about 350k shares per day currently. At that rate, the company will buy itself back in less than 6 years if the price stays where it is. I continue to believe that as long as assets can be sold even within 10% of NAV, the share price will mechanically recover to >700p. And I will be surprised if Unite Group takes a hit of even 5% on asset sales; there's vast structural undersupply of PBSA but now no one can afford to build new stuff at current cost of land/debt/construction/regulations.

2) There's a Q2 trading update July 7th and half-year report July 28th. It's possible either of these dates might have info about the asset sale of up to 500m non-core assets along with news of any further continuation of the buyback. There should also be some news about cost-cutting, reservations, synergy savings with Empiric etc.

3) General gossip in PBSA / student accom world is that HMO (individual landlords) are a mess this year, people not following rules or bailing out of HMO houses when they realise the rules. Equally, bookings are running late in general, in past years there was a rush by students to get secure accom early, now it's more steady but later.

4) Re: energy costs, as far as I'm aware, Unite are 100% hedged for this year, and 70% for next year. Re: interest costs, as far as I'm aware, they're fully hedged for the next 4 years. They also have one of the lowest LTVs in the UK REIT sector at the moment.

5) Analyst upgrades by Kepler Cheuvreux (-> Buy, April) and UBS (-> Buy, coverage initiated, 585p target).

Please fact check anything above that is interesting to you, I've done my best to check these claims, but it's always possible I've made a mistake or misinterpreted something.

TRS


PS. I see two avenues for good returns going forward in the next 12 months.

a) share price recovers, leading to gain of (dividend) + (stabilisation/growth/new developments online) + (price gain)

b) share price flat, leading to gain of (dividend) + (stabilisation/growth/new developments online) + (buyback benefit)

The surprising thing is just how effective the buyback is at this price level. I think people are missing one of the easiest plays in the market right now because of narrative and sentiment.

Suppose you sell 400m of assets each year. Suppose you clear the associated debt rather than change your LTV. That's 292m cash left after debt repayment. You buy back stock at £5.00 ish. That's 58 million shares (for a company with 518m shares!). You lose the (net) earnings associated with those 400m assets. Assume they were yielding 6% after financing costs or whatever, that's 400x0.05 = 24m of income. You gain from the buyback of 58 million shares, to the tune of about £264 million (955p-500p)*58m.

And you can keep doing that trick as long as the price is low and as long as assets sell near NAV, or even 5, 10, 15, 20% less than NAV.

An annual 'income' of 264m from asset flip / stock buyback compares quite well against core operating profit (around £230m).

As long as prices stay this level, *and* as long as assets can be sold even remotely near NAV, Unite Group's effective 'income' from NAV gain and operations is effectively doubled from historical norms.

Even if you take a 5% or 10% hit on asset sales, it makes no difference, the maths is simple. There is no activity Unite can do that adds value to the company so efficiently as asset sales and share buybacks. In fact, if they are able to clear a full 500-600m of assets this year even at (NAV-10%) I will be laughing at my good fortune. (NAV-5%? NAV-1%?) even better!

Historical aside:

There's actually an interesting bit of history here, if you look at the US REIT sector around 1998-2000, they went very out of favour as everyone piled into tech, dotcoms etc (sound familiar?) - REITs in the US were on discounts of about 20-30% to NAV. However, individual REITs were able to sell their underlying assets to private buyers at nearly 100% of NAV. They then bought back their own shares with the cash raised.

It took about 18-24 months for the market to realise what was happening, but when they did, everyone piled back into REITs and they ended up trading at a premium to NAV even as the SP500/Nasdaq dotcom bubble collapsed. It set up a long term bull market for REITs.

Random thoughts

Even if you take a 5% or 10% hit on asset sales, it makes no difference, the maths is simple...

One thing to watch out for is the "institutional imperative". I saw this issue at Brookfield units a few years back.

For the long run success of the business, the best thing for them to do would be to sell the properties that offer the least business value now and in future. Maybe Leicester, Nottingham, especially overbuilt Sheffield. But those properties might be expected to sell at substantial discounts. Realized transactions at big discounts to book would look bad, but would be good.

Whereas what would make management look good and make people confident about the firm's situation would be to sell properties that they could realize at or very close to their IFRS carrying values, which would likely be the better ones with the better business futures. This would look good, but be bad. So--smart money will always bet on current management doing what's best for current management.

All that is another way of saying, never look at the size of a discount realized in recent sales and try to generalize that to the entire portfolio. (I'm not saying you would, that's just a health warning for a common trap). Management knows a lot of investors will do precisely this, so they will typically sell what causes the median investor to draw the conclusion that management wants them to draw. Goodhart's Law starts to appear: The more a metric becomes a target, the less meaningful it becomes as a metric.

Don't get me wrong. It certainly seems like there is a big margin of safety here. It's not as if anyone should be worried about their net asset value being below the current market price, and I have no particular reason to doubt any of their carrying values.

I think we all (management and potential investors both) should be aware of the risk that the target UK student population was in a bubble and may shrink a lot. Management make pleasant sounding noises about new PBSA units coming onto the market falling a lot, but it's still a positive number (even net of units going off the market) when perhaps what the industry needs is six years of net negative numbers. They phrase this as "New supply of PBSA is down 50% on pre-pandemic levels", but the emphasis here is "new" - total supply is high and still rising, and perhaps shouldn't be. I think this is an industry that could take another BIG leg down, for some time or even in some ways permanently. Perhaps. I don't think that would kill them, but there is a danger of mistaking a cycle for a trend. Past happy results may not be repeated.

Jim

> "One thing to watch out for is the "institutional imperative"

I agree one must always watch out for this, and I've seen what you described happening in front of me at a previous employer.

> "to sell properties that they could realize at or very close to their IFRS carrying values, which would likely be the better ones with the better business futures"

In formal company announcements, Unite have made clear that the goal this year is to market the stuff that's troubled or complicates management or financial predictability e.g. non-core (such as random properties/landbank they picked up over the years).

For example:

----

https://www.investegate.co.uk/announcement/rns/uni...

"£500 million of assets for disposal in the next 6-12 months (Unite share basis) - Advisers appointed to support acceleration of further asset disposals to reposition towards higher-quality portfolio aligned to the strongest universities"

----

https://markets.ft.com/data/announce/detail?dockey...

"A further c.£500 million of assets on a Unite share basis are being actively marketed or prepared for sale, including lower-growth assets, non-PBSA properties, development land and planned disposals from Empiric, which we expect to transact over the next 6-12 months.

Our planned disposals include a portfolio of c.7,000 beds in exit cities and lower-growth locations for which we have seen strong initial interest from investors, reflecting the portfolio's affordable rents and capital values significantly below replacement cost."

"The portfolio has a lower level of occupancy, nomination agreements and operating margins than the wider portfolio and would enhance the income visibility and growth prospects of the retained estate."

----

I want to highlight in that last quote - they are marketing *lower* occupancy properties, *lower* nomination agreements, *lower* margin properties, *lower* visibility on future income, *lower* growth.

----

I feel that is very unambigious.

I mean, any management can claim they will do (A) but then rush off to do (B) instead, but here, there is a lot of logic that supports selling the worst parts of the portfolio.

Those parts are the most rational thing for a motivated buying team to pick up - you can't do a turnaround / redevelop an asset that's already performing at 100% occupancy in an expensive area. Also, they are the parts where the rental yield instantly exceeds the cost of debt, even on day 1, they're producing positive cashflow, you're not relying on stuff like growth or contractual reversion or future supply/demand or whatever.

I would agree with you that 90%+ of the time in investing, when a company's management *need* to flog something to raise funds quick, selling quality assets is easier and generally looks much better in terms of sale price/NAV in the resulting company news announcement - rather than selling 'junk'.

However, in this case,

a) Unite don't 'need' to sell anything

b) Unite get multiple wins by selling off 'junk' or 'hassle', even if it's at a cyclically low point to sell it.

- reduces management overhead costs & hassle i.e. 'the customers that take up 90% of your time'

- increases the predicability of the remaining portfolio via university block-booking for years ahead - visibility and low volatility in earnings helps with things like borrowing

- the 45% NAV discount absolutely overwhelms the cyclical pain of current book value on the sale.

- these properties were generally (relatively) cheaper to build to begin with, i.e. when constructed, the yield on cost was higher than usual, and likely the sale yield will be close to cost of construction

- it allows them to avoid renewing debt at current expensive levels.

What's happening is a clever financial hack - it pays for a buyer to pick up these properties and put the effort into turning them around or redeveloping into other property types; and it also pays for Unite NOT to branch out in that business direction themselves, but rather, stick with what they're actually good at, with stuff that makes the business run smoothly and cheaply for shareholders and creditors.

It's a situation where the sum of the parts is potentially greater than the whole.

It's the low share price relative to NAV that enables the 'hack' to work so beneficially for both parties; the buyer gets a bargain property to redevelop or run; and Unite get to buy extreme bargain shares with the proceeds, they get lower earnings volatility, they get less need to renew debt at prevailing rates, they get lower management overheads. Win/Win.

Ironically, if Unite's share price was still high, they'd be forced to work their ass off turning around these properties themselves, instead of using the 45% NAV discount hack.

> I think we all (management and potential investors both) should be aware of the risk that the target UK student population was in a bubble and may shrink a lot

You might as well be talking about the 'part of the UK population that eats out is in decline' when discussing a London restaurant. It doesn't matter what happens at the UK level. What matters to any business is what happens where the business operates. Dollar General in the USA is not impacted if people in Spain stop going to one-euro stores.

If you own a restaurant in London which is reliably packed every night, you can sleep well even if every restaurant in Aberdeen goes bust.

> Management make pleasant sounding noises about new PBSA units coming onto the market falling a lot

*Everyone* makes noises about the structural lack of PBSA. The shortage is extreme, and it's a problem of feast and famine geographically. Excessive opportunistic builds in the areas that granted PBSA building licenses willy-nilly, and hilariously inadequate PBSA build in the places with unquenchable need, but limited ability to build.

> total supply is high and still rising, and perhaps shouldn't be

The issue is that 'the market' is not 1 market, it is 3 markets, with totally different characteristics, geography and operators.

There are places like Cambridge, London etc where demand overwhelmingly outstrips supply. 99% occupancy.

There are places roughly in a balance of supply and demand. 95% occupancy.

There are places where supply overwhelmingly outstrips demand. 80-85% occupancy.

Looking at 'totals' is extremely misleading. Unite don't operate everywhere, in the past, now, or in the future.

The problem with UK PBSA isn't that there is simple over-supply or under-supply at a national level. The problem is that there's both at the same time varying by local geography, and no national norm at all.

It was easy & attractive to build in certain places, and difficult in others. So the easy places now have structural over-supply, and the other places have structural under-supply. Looking at totals or averages nationally, either for PBSA or student totals, completely misrepresents the economic reality of what is happening.

Separately, yes there is always a question (like with DG & dollar stores, or BLND/LAND with office property) of whether a long-term downturn may prove to be structural and everywhere when you thought it would be cyclical or regional; or whether a cyclical downturn continues so long that a structural one takes over from it.

TBH I think the real problem is not so much about supply/demand of people who would like to rent at universities (as far as most Unite locations are concerned). But rather that the customers are exhausted, there is simply no more money in the student wallets left to pay for higher and higher rents. That shows up in both occupancy and LFL rental growth even at the best university markets. It's a consequence of the great LFL growth of e.g. a few years ago at 8%/year.

The *magic* of traded REITs is that if investors mark down the REIT share price *excessively* because of this or any other problem, relative to the reality of that problem or risk - e.g. a 25%+ discount to a realistically achievable NAV - then REIT managers can flip assets and exploit the share price to manufacture hyper-growth for a few years.

The *dangers* (IMHO) are these:

- if the REIT has high debt near the limits of covenants etc, and is priced with a discount, it can't raise new capital without brutal dilution if it ever needs cash in a hurry (e.g. go update these buildings to comply with a new building code or you can't rent them at all!). In which case, the issue is not about e.g. hacking the market with asset flips and buybacks, the issue is immediate survival. This does not apply here.

- if the REIT is too small, then 'shrinking to arb the two markets' doesn't work, because many overheads are fixed, and the REIT becomes less efficient as properties are sold even if shares are bought back at a discount. And the worsening efficiency / cost ratio can overwhelm the NAV gain bonus. Thankfully, this does not apply here; in fact, the opposite, as the management's idea is to reduce business complexity and overheads.

- if the REIT is externally managed (e.g. an external private management company looks after a property portfolio for fees, and gets paid per the scale of the portfolio), the problem is that notoriously they will do anything to avoid shrinking the total portfolio size, regardless of what benefits the shareholders, since shrinking reduces their own pay. In fact, this issue is so big that a) externally managed REITs tend to trade at e.g. 10% discount to NAV simply from that factor alone, even at the best of times b) externally managed REITs largely went the way of the dodo in the USA because of this problem - they're just 3% of the USA REIT market nowadays - back in the 1980s, it was 100%. Thankfully, Unite is internally managed.

- as you said at the top - if a management team flips the best assets from urgent need to do so, and what's left continues to deteriorate, the growth-hack boost from discounted buybacks may be overwhelmed by broader structural decay in what's left.

- potentially, if a REIT sells off a ton of assets and the share price recovers too quickly (or if they dilly-dally with cash), they may not be able to deploy the money into buybacks in a way that generates a win, and they have the frictional drag of lots of loose cash in the portfolio (bad for metrics/business efficiency). They may even be tempted to do something foolish with it. Actually there's an example in the UK of a REIT that raised a ton of money by issuing stock, held it waiting for opportunities, then never invested it as the market soared away from them. Whoops.

Obviously, it would be nicer if this Unite situation was arising in an era when student numbers everywhere were going up regardless of geography or anything else, or if student willingness and ability to borrow loans was going higher and higher.

But if that was the case, you wouldn't get the discount occurring in the first place. You wouldn't be seeing the share price back at lows from 15 years ago or whatever.

As with all value investing I feel the trick is deciding when "it's a bit bad, but certainly not *that* bad" applies to the share price vs business value - and whether there's any mechanism for either management or shareholders to arbitrage that gap between perception and reality, whether that's by patience & time, or by direct mathematical mechanics.

With REITs, it's *proven* that flipping assets near NAV, against a chunky share price discount to NAV, can be a tremendous way for managers to arb stockmarket-perception against propertymarket-reality, to the benefit of shareholders (and themselves).

In short; being aware of broad economic and social issues is good *except* when the real issues are regional and local. Being aware of the tendency of managers to sell the family silver and keep the junk is always useful, but here, there is a wide range of compelling reasons for management to intentionally sell the junk and keep the silver - and the 45% discount to traded NAV combined with a cyclical low on the underlying assets is the key factor that makes it rational for everyone involved, both buyers and seller.

As always, merely my humble personal opinion, and please check any claims I make before relying upon them.

TRS

Responding to this point separately:

> "I think we all (management and potential investors both) should be aware of the risk that the target UK student population was in a bubble and may shrink a lot."

Well, it's hard to point at anything in the market lately, any asset class or sector, that isn't in a bubble of some sort.

It's also hard to point at anything in the market at any time in history that is invulnerable to 'shrinking a lot, maybe'.

But in this case there are some numbers from which we can gauge the issues of bubbliness and maybeshrinkiness.

The UK as a whole experienced a drop of 1% in student numbers in 24/25, essentially all from decline in international students.

However, at the Russell Group universities (the 'high tariff' unis that Unite talks about and primarily works with), numbers are rising, even though they are rejecting about 1/3 of potential applicants - i.e. demand consistently exceeds supply of places by 50% at high-tariff universities and there is considerable room to grow intake.

Further, basic degrees aren't enough any more, the forecasts are for the number of people taking 2+ degrees to grow by 53% in the next 10 years. So there are actually three aspects to the issue of demand that need to be considered; one is the number of people; one is where they actually want to study; the last is the number of years they study.

https://www.russellgroup.ac.uk/news/response-new-h...

Current expectations are for bachelors intake of students at high-tariff universities to *grow* for the next few years, as the UK population bulge for university-age people gets bigger - you can see in the link below for 15-19 vs 20-24 and 10-14 vs 15-19.

In practice this probably means that low-tariff universities are likely to suffer later on (about 10 years in the future) from the predation by high-tariff universities, the demographic trend, and less appealing second degree options. You can read a negative report on the issues at the second link below.

https://www.populationpyramids.org/united-kingdom

https://www.hepi.ac.uk/reports/demographic-decline...

TRS

I previously mentioned that quite a few REITs in the US in the 1990s arbitraged 'property market reality' against 'stock market' opinion with success to raise their NAV and their share price. There's an example or two in the UK as well.

In 2017 British Land did a buyback into a 30% discount to NAV.

https://www.investorschronicle.co.uk/content/081b7...

https://uk.marketscreener.com/quote/stock/THE-BRIT...

In this case, British Land had sold off a 50% stake in a prestige building for greater than NAV price earlier in 2017 to raise cash. The day the buyback was launched, the price of BLND was 604p, forecast NAV for 2018 was around 900p.

Three months later, the price was 680p. Six months later, the price was 695p.

... notably, many years later, the price is now 402p :-)

The lesson to me seems to be that these situations are extremely tradeable as medium term (12-36 month) plays, but one should not get carried away with enthusiasm. As Jim notes, for the long term holder, structural decline or management cashing in the wrong things, should always be kept in mind as potential worries down the line in any stock including REITs.

As always I have checked facts to the best of my ability, please excuse any errors or inaccuracies you discover.

TRS

"I think we all (management and potential investors both) should be aware of the risk that the target UK student population was in a bubble and may shrink a lot."
...
Well, it's hard to point at anything in the market lately, any asset class or sector, that isn't in a bubble of some sort.

True enough, but there is a difference between a price bubble and a business bubble. It's the latter risk that concerns me here.

I think it's entirely conceivable that the total addressable market for UK student housing in the next 10-15 years could average only (say) 80% of its recent peak. i.e., the number of students who might even consider a place at one, even at the top universities. They have played in the bubble as much as anyone.

That's not a prediction, but it seems eminently possible as a risk to the investment thesis, for a variety of (to me) plausible reasons. Populist backlash, geopolitical friction, schools improving elsewhere in the world, price elasticity, facility closures due to budget crunches, and having strip mined the good name of the top UK universities by overexpanding into mediocrity. (if you consider the separate "industry" of ex-UK campuses, the top schools were the worst offenders in that regard)

Note, that's not to say UTG isn't perhaps a fine investment at current prices, but I like to look at the things that could go wrong. With LTV around merely 1/4 a debt crisis is unlikely, so a painfully shrinking industry seems to be among the biggest. The simplest view is to look at the size of the industry 20 years ago and search for unassailable reasons to believe it couldn't be that small again. I can't think of one, offhand.

I appreciate your figures that demand is high and if anything rising at the high tariff universities. That's good, but that's now. I think that could change.

There's an old rule of thumb never to invest in a concept restaurant chain, they always grow till they pop. It's a different industry, but perhaps not 100.00% different. The budgets got cut, and foreign students were the lever they reached for, then soaked, and soaked some more. Maybe that will work to plug the hole forever, and maybe it won't.

Jim

Hi Jim,

I can certainly imagine events that would diminish the UK student population by 20% or more, that have occurred within the last 150 years of history: WW1 conscription, WW2 conscription, Spanish flu (primarily 20-30 y/o).

Heck, you don't even need a problem with demand. Look at 2007, when Unite was a management company rather than a REIT. They got shredded by the GFC along with everyone else.

I can also think of things that would boost demand. The current trend, absent events, is trending to an increase. To foresee matters being 20% below today (currently 2 students needing accomodation, for every PBSA bed, and far worse at the high-tariff unis), for the years to come you also need to somehow explain away future reasonably-expected growth (number of students, length of study increasing) as well as adding in the degrowth you speculate.

Catastrophe might strike, somehow?......any company will have this problem. Heck entire countries can have this problem. Even the entire planet can unexpectedly see a drop of 20% to its economic wellbeing, more than 3 times in the last 150 years.

At least, thank goodness, Unite is operating primarily in places where demand consistently exceeds supply of spaces by a huge margin, going back for many decades.

If your argument is '... so don't put 100% of your money in this magic buyback machine thinking it's a perpetual motion engine' then fair enough, I 100% agree! That's pretty sensible.

But if the argument is simply 'well, I can imagine terrible possible futures, in theory...', why be in any stock at all? At some point you weigh the odds, play the odds appropriately, and let diversification manage the outcome.

Even Berkshire, many people's gold standard stock on this site, could be hit by multiple super-cat events and calamity in other areas of business. BRK dropped 50% 4 times in history and went nowhere for over a decade at a time, yet it wasn't even around for the really crazy stuff - the Great Depression, Spanish Flu, WW1 or WW2. Buffett took it over 20 years after WW2.

> "There's an old rule of thumb never to invest in a concept restaurant chain, they always grow till they pop... It's a different industry, but perhaps not 100.00% different."

There are perhaps tens of thousands of concept restaurant chains in the world at various stages of growth. From among all those tens of thousands, can you suggest just *one*,

A - with such a record of steady stable growth in the last 15 years, that it gets referred to as 'almost a bond' by market analysts for years

B - which pre-contracts its sale of food to each customer for a year at a time (or more)

C - which hedges energy & debt costs years ahead

D - which has cornered 10-15% of the eating-out market nationally, night after night

E - that can borrow almost as cheaply as the government for years at a time

F - where the stock is held by pension funds specifically as a counter-cyclical predictably dull growth asset.

I will be very interested to hear your suggestions.

The closest example I could think of is Greggs, or McDonalds, I'm not sure either would qualify as a 'concept restaurant' for most people, and they certainly don't score well on B or E.

> The budgets got cut, and foreign students were the lever they reached for

Who is 'they'? Is it possible you are conflating feelings about academia / British academia with Unite group as you write that part?

Unite Group does not operate everywhere, they operate generally at the places where finding university housing demand has been a local problem for *centuries*.

That's why they maintained 98% occupancy (vs around 90-95% for a typical REIT) for the last 15 years, and even now maintain it almost everywhere *except* the underperforming competitor they have taken over to turnaround, along with 2-3 towns where every PBSA builder got a little greedy and speculative.

Let me put it this way: in many of the locations Unite prefer to operate, the consistent, steady, growing demand for local student accommodation in those towns predates the existence of e.g. the USA or Canada by *centuries*.

TRS

> never to invest in a concept restaurant chain

https://finance.yahoo.com/markets/stocks/article/w...

While I 100% agree with you on that issue,

the timing of the post was perfect! :-)

TRS

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

the timing of the post was perfect! :-)

Indeed!

Oddly enough, the fact that lesser concept chains so often become ultimately doomed growth fads makes them poor long term investments on average, but excellent for trading. The only thing to remember is that you're going to get out when things start flattening, not expect business rebounds.

Jim

Hi Jim,

OK, I see what you were saying more clearly now, thank you for explaining your view in more detail.

I'll start by pointing out a few things.

1) Demand for student accommodation in an area is driven by a) number of students in that area, multiplied by b) number of years they study on average. So any argument that focuses on numbers but not on years (which has risen from typically 3 years to 4 years - 33% increase in the last 15 years or so), is missing the bulk of the demand issue.

2) Further, those 'extra years of study' tend to occur more at 'good' universities than 'mediocre' ones.

3) In the past, some international students were taking anything they could get, sometimes because demand was higher than supply, sometimes as a way to access a visa to move to the UK. This lead to low quality universities having more foreign students than usual. This is changing. Now these students are going to higher quality universities to try and get better value for money. So what is a catastrophic fall in demand in one category is the driver of trend / new demand in another.

4) PBSA is not one uniform kind of thing. It's not only about location or uni. You get 3 main types of PBSA.


-- TYPE A - Student hall replacement. Effectively, outsourcing of cheap student halls, built to modern standards. It's mostly used by domestic students, it's not high end luxury. Importantly, it's not pushing at the limits of what can be achieved with rent. Very importantly, it's often rented as a block to the university, with the university taking the hit if rooms can't be rented.

Unite does this mostly, particularly with long-established / high-tariff universities.

Other PBSA don't do as much of this.

It's a big reason why I'm open to investing in Unite but I wouldn't be open to investing in other PBSA.


-- TYPE B - Higher end flats, low margin. You can build nicer flats for richer students (often international) in places with relentless forever demand like London, but the margins aren't that good.

Unite does a bit of this. So do other PBSA.


-- TYPE C - Luxury international flats, high margin. Go somewhere mediocre with new demand, build luxury flats, make a fortune... briefly.

Unite hasn't really been involved in that game much. Whereas most other PBSA do this a lot.


OK, so where are problems occurring? Type C, almost exclusively.

And which category is least affected by 'bubble popping' / overexpansion that you describe? Type A.


So what I'm saying is, there are insurers, then there's Berkshire. There is PBSA, then there's Unite. It's a quality business, not because it builds premium products to sell to rich people exploiting peak demand for huge margin, but because it builds decent lower margin products for ordinary people, and offloads the sales risk and 'future demand' risk to universities in bulk wherever it can.

Going back to your previous post, I'd suggest Unite has more in common with one of those 'dark kitchens' you hear about that quietly supply UberEats from a modest building, under 20 different names, rather than a concept chain with top chefs and so on during an era of new concept chains.

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> I'm concerned that an admissions rise of ~18% in that stretch without a population increase simply may not last


Sure, but it's about "Aberdeen Luxury Chips" vs "London Sandwich Shop".

Some PBSA developers are new to the game and put stuff up anywhere that had juicy margins during high demand.

Unite, generally speaking, didn't. They're rather restrained/conservative/cautious by PBSA developer standards.

They're hardly building at all just now, even while demand creeps up.

90% of what they have today will do fine even if that admissions rise went into full reverse and never came back. The problem is the other 10%. That's why they're moving away from it, and it's why the market nuked the share price from 1200p+ down to 400p+

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> 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.

Again, I feel your argument is missing the point as far as Unite is concerned (though your point is fair for PBSA in general).

Unite generally prefer NOT to rent to 'people'. They prefer to rent to universities that have a) money b) good visibility for future numbers c) willingness to take on longer-term contracts in bulk d) decades-long track record of demand >> supply.


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> I personally think that the UK universities have substantially overexpanded just like a concept chain

I accept that this is what you personally think.

I agree with this issue of overexpansion at national level, though, I don't think we need to have 'concept chain' in there, because it muddies the issue since it's a quite different kind of business.

But for 'substantial', well, I keep coming back to, it's not about country, its about locations/universities/markets.

e.g. if 100000 students want to go to Cambridge, they were taking 40000 of them, now they take 50000, that's simply not an issue of substantial overexpansion unless you're an annoyed local non-student who just wanted to live and work there.

e.g. if 20000 students want to go to CrapUniversity, they were taking 20000 of them, demand suddenly increased to 30000, so they built out for 30000, that's a huge problem for overexpansion. Even worse if the local council wanted to free up regular housing, and allowed 30000 Luxury High End student houses to be built by every PBSA developer that asked nicely.

The issue is each local market and the character of supply & demand there.

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> and the Russell Group/high tariff crowd the most as shown by their rising "market share".

Absolutely not - if a restaurant has long lines queued outside the door every day of every year for 200 years, that wait for hours yet can't even be served, and they decide they'll serve a fraction more of them, so the line is a little shorter, that's not substantial overexpansion.

Russell group / high tariff are the LEAST affected by overexpansion, even if it has hurt their reputation a bit.

Because accepting 60% of your available demand instead of 50%, is sustainable even if demand drops. Whereas taking 100% of demand is not sustainable if demand drops.


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> 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.

I agree. I'm a former academic who's worked in several countries including the UK. It's very sad what has happened to the quality of education. On the other hand, it has happened in every other country too, so, relatively speaking I'm not sure the UK is any worse off. Compared to other countries, we're probably less affected by that problem than you might think.


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> 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

If by 'supply/demand' we're talking about supply/demand for student accom.

Supply/demand is still strongly in imbalance, with some places starved and others flooded.

Demand is rising in some places, and falling in others.

Supply is mostly frozen almost everywhere.

Supply continues to rise a little in places where demand is extremely strong and where demand forecasts well for the future, places where universities are willing to take the risk from the developer.

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If I might offer a different analogy. If you're cooking popcorn, the time to turn off the heat is when the you start to hear the corn popping in the pan. However, those bits of early popped corn sometimes get burnt.

In this analogy, Unite turned off the heat slightly too late. Most of the popcorn is tasty, however, a couple of pieces of corn have got burnt. (but thankfully, the resulting drop in share price has opened up a new business opportunity...)

Whereas: most other PBSA isn't publicly traded (so no discount on NAV), most other PBSA devs built high margin luxury flats in places with new/recent high demand (oops). Most other PBSA is in trouble, for reasons specific to themselves.

Unite is publicly traded, and they can use that to generate fantastic NAV/EPS growth in a way other PBSA can't (buybacks at huge discount).

It's like with banks. 2009 was a great time to buy banks. They had cut back a lot of foolish profit-chasing, went back to traditional lending, focused on the basics of making the business stable, and the price was low. Buy a traditionally sturdy bank in 2009, you did great afterwards.

Similarly, PBSA in 2022, the price was high, demand was furious, PBSA devs of all sorts were building to meet it. We're not in 2022, we're in 2026. Everyone is well aware of the international student issue. There is very little new building. UTG's share price dropped almost 2/3 from peak and it was the least bubbly / demand-chasing of all the PBSA developers. To me, it's like buying banks in 2009. Everyone was still thinking about 2007 and 2008 and extrapolating forwards, but actually 2009 was the best possible year to buy banks in recent history.

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> as a REIT the great bulk of their business is being a cash cow for currently owned assets.

Absolutely not! And that's the whole point of my threads on here.

As I've pointed out a few dozen times, 'share buybacks from asset sales' are such a profitable new business model for Unite just now, that the annual profit from doing that will actually *outweigh* the entire 'cash cow asset profit' of the entire regular business.

The market hasn't cottoned onto that yet, and is viewing the risk & business model as though Unite was trading at NAV.

That's not a small issue. In fact, it's pretty much the entire investment thesis.

Unite, I would say, has a new business model: buy back shares! It's a far better business model than renting student accommodation or developing new student accommodation. Thankfully, management seems to agree, which is why they've cancelled a lot of new dev, and are selling existing buildings.

Do a sum of parts analysis on this, and study the business value of the buybacks as one of the parts.

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> 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.

If we're talking about what UNIVERSITIES are selling, rather than PBSA or Unite...

As a former academic, I sometimes wonder if people realise what universities actually sell nowadays.

They sell a 3-4 year holiday with other young people who are otherwise staring at the grim path of decades of low wages and misery till their bodies are worn out.

They sell shared memories with people who might help you get a job later (your fellow students, your prof and their personal network).

They sell a 'social class experience' & status symbol for middle class families, like going skiing in Aspen for middle class Americans. And who knows, you might even learn something along the way, as a bonus!

Finally, they get the magical certificate that allows them to apply for jobs that require any degree (in the UK, employers are usually very flexible about which degree you have - any degree proves some intelligence and work ethic - in other countries like Germany, your degree might only help you in a chosen career).

As the saying goes, don't the degree get in the way of your education. This is why US universities for example, Australian universities, have spent a fortune on 'the student experience' instead of paying to hire good staff to teach excellent material. Look where universities spend their money, and you'll see what university actually is, rather than what it seems to be.

I see some doubts among young people I know about the usefulness of university.

I see some doubts about the cost, too, the debt.

Nonetheless, even the biggest doubters seem *extremely* keen to go.

It's a social experience, an opportunity for fun, growing up, and assortative mating.

The classes and exams and stuff are just the scenery in the background.

It's a bit like Unite, in a way. With price and NAV as they are (give or take some room for error), universities & student accommodation are just the scenery in the background. The real attraction is the potential for buybacks. That is a VERY compelling new business model they are (thankfully) seizing with both hands.

TRS

Apologies, typo/brainslip:

"TYPE C - Luxury international flats, high margin

should read something like,

"TYPE C - High margin luxury flats for students attending less prestigious universities, often marketed for international students."

Good grief, another one. Sorry.

"As the saying goes, don't let your degree get in the way of your education."

Found a random thread on reddit where someone says they messaged the company (with some fairly daft questions, but OK). It's from 3 months ago, so, March 2026.

https://old.reddit.com/r/ValueInvesting/comments/1...

"I have received the following reply by the firm:"

--

"Our investment is focused on the strongest markets and universities. We have increased our disposal target to £300-400m p.a. and are focused on exiting those assets where we have exposure to lower ranked universities with less demand for accommodation. Our assets were independently valued at the end of December and are priced inline with similar assets which we have sold over the last few years. However, the less certain operating environment, together with the increased quantum which we are selling may lead to softer pricing. Overall, when we receive an offer on an asset, we will assess whether it is best to retain the asset or reinvest the proceeds into higher returning activity."

--

"We have looked at international expansion in the past but it isn't a focus today. Our UK operating and development expertise wouldn't map onto laws and regulation in other countries and similarly we don't have relationships with any non-UK universities for nomination opportunities. When thinking about where to deploy marginal capital today, we see the most attractive relative returns in UK university joint ventures and share buy backs."

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"We have to pay out around 75% of our adjusted earnings under the REIT regime and many of our investors value the dividend. We see buybacks as a way to return additional capital to shareholders beyond the dividend. We have offered a scrip scheme in the past but have paused it given the price at which we would be issuing new shares under the scheme."

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