Student accommodation is a segment of the property market with supportive dynamics coming out of the pandemic and we think Empiric Student Property (ESP) is an attractively valued way of gaining access to this space.

Empiric trades at a substantial discount to its larger peer Unite (UTG), reflecting a somewhat more uneven track record and its smaller scale, but we think the managers of the real estate investment trust have got their act together. Investors should take advantage and buy the shares.

Based on 2023 net asset value forecasts from Berenberg of 112.8p and 950.8p respectively, Empiric is at a 19.3% discount while Unite trades at a 3.1% premium. Empiric is hoping to increase its dividend by 18% in 2023 to 3.25p per share, implying a 3.6% prospective yield.

Student property has resilient valuations and high occupancy rates thanks to significant undersupply, rising demand from overseas and at home as well as, in the longer term, a growing population.

Empiric offers modern, premium student accommodation with facilities like private gyms and cinemas which help it to attract and retain tenants.

Berenberg analyst Kieran Lee observes: ‘The Empiric of today bears little resemblance to the same company at the onset of the Covid-19 pandemic. The portfolio has been refined, operations overhauled, necessary capex expended and there remains significant opportunity in complementary verticals.’

Empiric has shifted its strategy to focus on ‘clustering’. This means expanding in areas where it already has a presence. By doing so it can boost revenue without necessitating a big increase in costs because it can make use of its existing marketing or building management teams in the relevant area. This is helping to support an improvement in margins.

The trust also has the opportunity of expanding the number of tenants it has which are on postgraduate courses and a pilot scheme is underway in Edinburgh.

Empiric has sold more than £70 million worth of assets as part of a restructuring and the focus is now on a select group of cities which contain the best universities, with the proceeds from disposals being recycled back into the portfolio. This process is expected to be completed by the end of 2023.

A risk for investors to weigh is the increased cost of borrowing and the impact this will have on the economics of new developments. The weighted average cost of debt rose from 3% in 2021 to 4% in 2022.

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