A drop in the number of Chinese students has hit Empiric Student Property (ESP), 10 weeks after shareholders approved its £634m takeover by Unite (UTG).
In a trading update, the student accommodation provider warned that since 9 September a slowdown in reservations across the university sector meant that just 89% of its rooms were booked for the current academic year, down from 95% last October, although it had seen an increase in UK student numbers to partly offset this decline.
As a result, achieving its 97% occupancy target would be “challenging” but it would seek to capitalise on the increasingly popular shorter-term postgraduate lettings market in January.
The company explained it had seen a fall in Chinese student numbers this year, which chief executive Duncan Garrood said were “potentially the result of geopolitical events”.
It had also experienced “supply and demand imbalances” in Nottingham, Sheffield and Glasgow, which accounted for five percentage points of lost occupancy.
However, the rest of the portfolio had performed better and the company said, “pleasingly we note an increase in the number of UK domestic students choosing to stay with us”.
UK students currently represent 43% of Empiric’s reservations with 30% from Chinese and 27% from other international students.
Like-for-like rental growth for rooms sold this year and in prior years remained in line with previous guidance of 4.5%, it said.
Empiric declared a 0.925p per share third quarter dividend in line with its 3.7p target for the year and said it continued to deploy proceeds from last year’s share issue, completing postgraduate refurbishments in Bath, Sheffield and Southampton with a site in Bristol expected to reopen early next year.
Unite, whose shares tumbled 9% a month ago when it missed its occupancy target, said its offer for Empiric, priced at a small discount to net tangible assets, had assumed lower bookings and rental growth.
While Empiric’s current occupancy was “slightly below” those expectations, Unite said it was confident there would be a “meaningful opportunity” to grow bookings once the businesses were integrated and that the strategic rationale for the deal was sound.
It reaffirmed its confidence in achieving annual savings of at least £13.7m, based on its experience of acquiring the Liberty Living portfolio six years ago when it delivered £18m of annual synergies.
Both companies expect the merger to complete in the first half of next year. In early October shareholders approved Unite’s cash and shares offer which at the time valued Empiric at 94.2p per share, although this has fallen to 79.3p as Unite’s stock has declined. The Competition and Markets Authority also began its phase one investigation of the transaction.
Empiric’s dipped 1.6% to 76.6p this morning at a 35% discount to NTA, according to Stifel analysts, with the news largely priced in after a 27% fall from 104.8p in June. Unite slipped another 2% to 555p at a 43% discount. Its shares have tumbled nearly 36% from 855p in early June when the £2.7bn company announced its bid for Empiric.
Our view
Richard Williams, property analyst at QuotedData, said: “Growing tensions between the UK and China, including disturbing reports of Chinese influence over UK academic research, have laid bare the reliance the university sector places on Chinese students amid financial constraints. The purpose built student accommodation (PBSA) sector has benefited from a high Chinese student population in the UK, but if that number is set to fall further then growth projections could be put in doubt. UK student numbers continue to grow steadily but not enough to offset a fall in Chinese intakes. The amount of new-build student housing has risen in the last few years off the back of strong demand (a large portion of which was Chinese students), so we may get to a point of oversupply, which would be bad for rental growth prospects.
“Unite says that Empiric’s occupancy levels were lower than it factored in to its offer price, but remains confident that it can deliver earnings and dividend growth through cost savings and improve occupancy once integrated with its platform, which leans heavily on its partnership with universities. It remains to be seen what effect a large drop off in Chinese student numbers will have on the wider sector.”
