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This property stock could buck a recession

Image: Persimmon. Fair use

Manager and developer of student accommodation, Unite (LSE: UTG), has released a positive trading update today. It shows that demand for student accommodation remains high and is showing no sign of slowing down. With Unite having a sound business model and enviable operating environment, it could perform well in any economic conditions.

Unite’s occupancy rate for the current academic year is 98%, with the company recording average rental growth of 3.8% versus the prior year. The main reason for this strong rate of growth is that student numbers in the UK continue to increase. In the current academic year, overall student numbers have increased by around 40,000. Most of this rise is at mid-to-upper tariff universities, where Unite is focused.

Looking ahead, demand for education in the UK is unlikely to be impacted by a recession. In fact, if a recession hits due to Brexit then it could encourage more UK-based young people to attend university in order to delay seeking a job, and to also improve their job prospects in what could be a more competitive employment environment. Similarly, a weaker pound could encourage more foreign students to come to the UK since it will be cheaper, with the standard of education unlikely to be impacted by economic challenges.

As such, Unite faces a bright future even if the UK economy endures a difficult period. The company is expected to increase its bottom line by 13% in the current year and by a further 16% next year. This puts it on a price-to-earnings growth (PEG) ratio of only 1.1, which indicates that capital gains are very much on the cards.

Furthermore, Unite remains a top-notch income play. As mentioned, its business is stable and relatively defensive, which makes the payment of its dividend likely compared to its index peers. And with dividends being covered 1.5 times by profit, there’s scope for them to rise at a faster pace than earnings over the medium term. This means that Unite’s current yield of 3% could move higher at a brisk pace.

Value for money

Of course, the property sector includes a number of attractive opportunities right now. Brexit has caused uncertainty within the industry and for long-term investors, now could be a good time to buy. One stock that offers excellent value for money is housebuilder Persimmon (LSE: PSN). It currently trades on a price-to-earnings (P/E) ratio of only 8.6, which shows that it has a wide margin of safety. Not only does this equate to upward rerating potential, it also means that Persimmon’s share price may not fall heavily if house prices begin to slide.

Persimmon also has a yield of 6.6% from a dividend that’s covered 1.7 times by profit. This indicates that despite the potential for a dip in earnings, Persimmon’s dividend prospects remain healthy. However, because of Unite’s more obvious defensive characteristics, it has greater appeal than Persimmon given the uncertain outlook for the UK economy. Although both stocks could be sound long-term buys, Unite has the superior risk/reward ratio at the present time.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.