It has been a bruising 12 months for Unite Group (LSE: UTG). The FTSE 100 real estate investment trust (REIT) has dropped 25% in a year and, on 26 August, the stock hit a 52-week low of 722p.
That may sound grim, but for income hunters like me, a share price tumble can spell opportunity. At today’s valuation, Unite trades on a price-to-earnings (P/E) ratio of just 10.4 and a price-to-book (P/B) ratio of 0.73. In other words, it looks cheap compared to its assets and earnings power.
The question is: does this Footsie landlord deserve a place in an income portfolio, or is the low price a warning sign?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
What does Unite Group do?
Unite Group specialises in student accommodation. Across the UK, the company manages tens of thousands of rooms for university students, making it one of the biggest players in a niche but resilient sector. Even during downturns, demand for university places has remained high – a factor that often supports rental income.
That said, Unite is not immune to the wider UK property malaise. Housebuilders like Taylor Wimpey and Barratt Redrow have also struggled this year, and the weakness across the real estate market has dragged down sentiment for Unite’s stock too.
A closer look at the numbers
Despite the gloomy share price, the business itself is ticking along nicely. Revenue is up 12.7% year on year, while earnings have grown 13.3%. Free cash flow is strong, with a margin of 38.8%, and the balance sheet looks reassuringly sturdy – assets outweigh liabilities four-fold, with a low debt-to-equity ratio of 0.28.
For income investors, the dividend story looks attractive. Unite currently offers a 5% yield, with a payout ratio of just under 49%. Better still, dividends have grown almost every year since 2012, averaging a 10% rise annually, aside from a temporary Covid interruption. Of course, that Covid break reminds us that dividends are never guaranteed.
What’s new?
Just two weeks ago, Unite announced a £723m takeover of Empiric Student Property, a rival student landlord. This deal is part of a wider consolidation wave across the real estate sector following years of subdued activity. If it pays off, Unite will significantly boost its market share. If it doesn’t, however, it risks the deal weighing on returns for years to come.
The market reaction so far has been cautious, but analysts remain upbeat. Citi slapped a Buy rating on the stock in mid-August with a target of 1,205p. The average 12-month price target from analysts is 973p, suggesting a potential 34.5% increase from today’s level.
My verdict
The FTSE 100 contains plenty of dividend payers, but Unite is unusual in offering both income and long-term growth potential. Yes, property market challenges could linger, and the Empiric deal carries execution risk. But with the shares at a 52-week low, I think the losses look increasingly priced in.
While I do think there’s potential here, I’m not rushing to buy today. I’d like to see clearer signs of recovery in the UK property market before jumping in. Still, it’s worth considering – because if conditions improve, this FTSE 100 REIT could reward patient investors with both steady dividends and capital growth.
