Investing in property companies like Empiric Student Property Plc and Unite Group Plc may seem like a promising venture, with enticing discounts, solid yields, and optimistic growth prospects. However, a closer look reveals cracks in the facade. Despite rosy forecasts, a decline in domestic and international student applications challenges the assumed demand. With changing economic and geopolitical landscapes, the road to projected student numbers appears uncertain, potentially impacting both universities and housing providers. Yet, amidst uncertainty, opportunities arise for repurposing properties to meet the burgeoning demand from a growing retiree population.
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By Merryn Somerset Webb
 Want to invest in a property company trading at a 28% discount to its net asset value, operating in a market with virtually guaranteed growth, offering a 4.1% yield and rated a “buy” by all the analysts who follow it? ___STEADY_PAYWALL___ You could look at Empiric Student Property Plc. At its annual meeting this week, its chief executive officer announced that its rooms were full, its rents growing strongly (up 10.5% last year and expected to rise 6% this year) and its business “poised for growth.” Or consider Unite Group Plc, which has a similar business model, catering to university students in need of living quarters, and similar results.
In a world of young people keen for en-suite bathrooms and chill-out zones alongside their degree, it seems pretty safe doesn’t it? It might not be.
There’s a crack in the investment case. The virtually guaranteed growth in demand isn’t such a sure thing. Last year, the UK University College and Admission System, or UCAS, announced that the UK was on a “journey to a million” undergraduate applications by 2026, up from around 560,000 last year. The Unite website offered some pretty optimistic forecasts too: another 220,000 UK students alone by 2030. Looking back, that made sense. In 2022, undergraduate applications were up 4% from 2019 (the pre-pandemic year it makes sense for comparison); 37.5% of all UK 18-year-olds were in some kind of higher education course and Chinese, Indian and Nigerian students were pouring into British colleges. At the same time, the idea that more UK 18-year-olds would go to university seemed like a demographic given. There were 715,000 of them in 2020. There will be 893,000 in 2030. One million undergraduates by 2026? Easy.Â
Beyond the forecasts, though, the actual numbers tell a different story. The 1 million number assumes a 24% rise in domestic students and a 35% rise in international students. And this, as the Office for Students (OfS) noted in a report this month, is “just not credible.” To January 2023, the number of UK applicants to English providers fell 3.1%. To January this year, it fell another 0.9%. Worse, the proportion of UK 18-year-olds entering higher education dropped in 2023 – to 35.8% from 37.5% just a year earlier.
Meantime, the number of overseas students applying to UK institutions has been plummeting to levels “significantly lower than both historic and forecast levels,” says the OfS: An average decline in entrants of over 40% compared with last year. There’s a lot going on here. For foreign students there is currency, geopolitics, changing visa rules; domestic economies (the Nigerian economy is in no condition to support rising numbers of UK-bound students, for example) and, of course, competition.
For UK students, there is the cost-of-living crisis, the fall in the real value of student loans (by 11% in the last three years) and the realization that not all degrees are worth the bother. Whatever the explanation, the direction of travel seems clear: The journey to 1 million seems less likely now. That’s bad news for universities and very bad news for the less prestigious universities (which are more likely to host foreign students): An 11% decline in student numbers would put 75% of UK universities into deficit, says the OfS.Â
And it’s not exactly good news for housing providers either. Purpose-built student housing also needs relatively affluent students and, it seems, foreign ones. International students make up around 24% of the UK total. But they make up around 50% of Empiric’s tenants, for example. None of this means that Empiric and Unite aren’t still reasonable  places to put your money. They might be. But both have seen their share prices rise a good 10% since their lows of last year; neither are particularly cheap (forward price-earnings ratios of 20 times), and though both are firmly focusing on the quality end of the UK university sector, an ongoing fall in the number of foreign graduate students might at the very least cap their ability to keep rising rents well above the rate of inflation as might the fact that the real value of UK student loans has fallen 11% in the last three years.
As the UK market turnaround gains momentum and as inflation bottoms and rates peak (temporarily at least), it will be increasingly tempting to look the various property companies trading at a discount to their net asset value. But many firms both in and out of the property sector don’t rely on extrapolating on past rises in Chinese, Indian, Nigerian and UK students, something that in today’s world is probably a good thing. Investors might be better to stick to those while they see how things shake down (anything could happen after the UK’s coming General Election).
The good news is that the demand for property in the UK is such that any excess stock in marginal university cities can easily be repurposed. Got an excess of city-center en-suite bedrooms with shared kitchens, chill-out zones and game rooms? They might be just the thing for the UK’s downsizing retirees. The over-65s are on a voyage not to 1 million but 15 million. They like pool too – and they are definitely going to need accommodation.
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