On Wednesday, Goldman Sachs initiated coverage on Unite Group (LON:UTG:LN) shares, a leading UK-based purpose-built student accommodation (PBSA) landlord, with a Buy rating and a 12-month price target of GBP 11.69. The new price target suggests approximately a 47% upside from the current levels, compared to the average 32% upside for the sector covered by Goldman Sachs.
The investment firm’s positive outlook on Unite Group is based on several key factors. Firstly, the company boasts a strategically well-positioned portfolio, with 92% of its properties located in cities with Russell Group universities and 92% of its portfolio having an EPC rating between A and B. This high-quality portfolio is reflected in a strong occupancy rate of 97.5% for the academic year 2024/2025 and robust like-for-like rental growth of 8.2%.
Goldman Sachs also notes favorable supply and demand dynamics in the student housing market. Corporate PBSA currently meets only about 25% of this demand, up 12 percentage points since 2014, and there is potential for further market share gains.
With new supply remaining limited and an estimated shortfall of approximately 620,000 beds in the UK by 2025, Unite Group is well-positioned to capitalize on these conditions. CBRE (NYSE:CBRE) forecasts that only about 50,000 beds will be delivered over the next five years, which is unlikely to meet the rising demand.
In addition to the strong market fundamentals, Unite Group is also recognized for its value-accretive investment opportunities and a supportive balance sheet. The company plans to add around 7,900 beds at a total development cost of about £1.4 billion, which is expected to generate an additional £115.9 million in rent, representing 43% of the current passing rent of approximately £270 million.
Following a £450 million equity raise in July 2024, Unite Group’s pro-forma loan-to-value (LTV) ratio stands at a comfortable 18%, providing substantial headroom for growth through capital expenditures.
Goldman Sachs’ initiation of coverage on Unite Group with a Buy rating and a substantial price target reflects the firm’s confidence in the company’s ability to continue growing and delivering value to its shareholders amidst favorable market conditions.
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