Unite Group PLC (UTG) Earnings Call Transcript & Summary

Good morning and welcome, everybody, to our Results Presentation. Thank you to everyone here in the auditorium at Numis' offices and also everyone joining via the webcast. We're delighted to be presenting this morning a really strong set of results. And as you've all seen last night the announcement of our placing and this morning the announcement of a successful completion of the placing alongside the results. So Joe will talk us through the placing in a little bit more detail shortly, particularly focusing on the use of proceeds and the financial impacts. So just turning to the first half results. The headline financial performance for the first half of 2022 (sic) [ 2023 ] is particularly strong. Earnings up 15% to 27.5p, strong dividend growth up 7% to 11.8p and NTA at 928p is stable. We've also seen record demand for the '23-'24 academic cycle and are therefore confident in full occupancy for the academic year. We've upgraded our rental growth guidance alongside the results to around 7%. Also with these results, we've upgraded our earnings guidance to the top end of the previous range so the top end of 43p to 44p. And also earlier than we normally do, we're providing guidance for the '24-'25 academic year and providing our strongest ever initial guidance rental growth at plus 5% -- sorry, at least 5%. Demand therefore remains very strong in our markets, but additionally we're now seeing a real supply crunch in homes for students. HMO landlords so the traditional private landlords are leaving the sector. New PBSA supply is materially down on historic levels, about a 60% reduction on prepandemic levels. And I don't expect there to be a supply side response for a number of years. The qualities of our business, the combination of the positive operational environment supporting us is creating probably the strongest opportunity set that we've seen for quite some time hence the raise. And our development pipeline has now got 6 committed schemes. We've got an attractive pipeline additionally of asset management opportunities and strategic partnerships with universities, something we've been talking about for a while are getting much closer. And we'll cover each of those areas in little bit more detail as we go through the presentation. So as I've mentioned, we've seen record demand for '23-'24 academic year and particularly pleasing obviously we have increased rents more than we've done historically, in part that's to recognize the cost pressures that we are facing along with everybody else. But demand right through the cycle so our reservation performance at each stage has been well ahead of any year. I think really demonstrating that students and universities are committing to their accommodation much earlier in the academic cycle. And universities have increased their nominations with us. We've got 2,000 more nominations than we've had previously, which means our noms now represent 54% of the portfolio. And as you know, within our nomination percentage; some of those deals are fixed, some of them are single year deals. And on the 1/3 that we've renegotiated this year, we've achieved rental growth on those nominations that is ahead of our direct let performance and I think that's really a clear indication that universities value the Unite offer. They're willing to pay market rate for those beds and they're not expecting in this environment any kind of discount for volume that we might have delivered in the past. And we're also continuing to win market share from HMO. We now have 11,000 students living with us who've proactively chosen to live beyond their first year, to stay in PBSA as more mature students valuing the product. And that is important because the [ HES ] is a multiple occupancy market has got over 900,000 students in it. So any small shift we can attract from that market is a clear positive demand driver. But we're also very conscious in this higher rate environment that we need to remain focused on value for money and particularly affordability for students. I really am confident that we're striking the right balance there. We're continuing to invest in our service. We're continuing to invest in our product. We're ensuring our pricing is appropriate in every market versus the alternatives. And I really do think we offer students the best choice. Just turning to demand in the higher education sector generally. Our business is underpinned by the enduring strength of the U.K. higher education sector and we expect to see sustained growth in demand from both domestic and international students. We still have demographic growth in the U.K. out to 2030 and the growth in demand will be strongest in the cities where we've deliberately aligned ourselves to the universities the students want to go to. And international students do still continue to value a degree, a U.K. higher education degree and it's absolutely clear that when they come to the U.K., they generate real economic value and that economic value is recognized by the U.K. government. But we have seen some policy change announced over the course of the last few weeks by the government. We've seen the tightening of visa policy and particularly around dependence of international postgraduate students not being allowed to bring those dependents to the U.K. That policy comes into effect from January of next year. That will have very limited impact on us because obviously we don't provide accommodation to international students with families. That's not the product that we offer. So again you see very limited impact there. And then also more recently we've seen the announcement around low value degrees and the Office for Students having powers to restrict a student's ability to access the student loan from a degree that doesn't provide value in the eyes of the government. But again we don't believe there will be a material impact on our business. In our markets, the vast majority of students achieve really good outcomes. They continue through their degree. They complete their degree. They achieve really strong sort of earnings performance. And so that focus on the removing of low value degrees has very little impact for us in our markets. And also I think more generally, universities are already reacting to that change. Universities are taking away some of the degree courses that would perhaps be considered low value and not offering them anymore. That doesn't mean that student doesn't go to university. It means they go to a different university or study a different course at the same university. So I think it will have a fairly limited impact on demand. And as I've mentioned, supply is unable to keep up with demand and it's clear that we are seeing a housing crunch across the U.K. We are seeing a material reduction in private landlords in many of our regions that we're operating in and there are a number of factors sort of contributing towards that. We've got increased regulation. There's been specific regulation around renting in Scotland, which has caused the number of or many private renters in Scotland to look to other markets. We're also seeing increased regulation in the U.K. in the form of the Renter Reform Bill. We see that as a positive ensuring that landlords behave in the right way, but clearly there are some landlords that don't want to face into that sort of additional regulation. In terms of EPC accreditation, I think you'll all be aware that in order to be able to rent to anyone; whether it's a student or indeed anybody else rent a property; in 2027 you need to achieve an EPC rating of at least C. We estimate that for a typical HMO, that's about a GBP 9,000 investment that the landlord needs to make. Now clearly if they make that investment, which would be a great thing to do for the environment, those costs will likely be passed on to students. But some of them, they perhaps won't make that investment and that house will come out of the rental market. And then also more recently, what's happened with the cost of interest on buy-to-let mortgages. Again we've got some figures out there that are sort of typical buy-to-let mortgage we estimate will cost a landlord around GBP 3,000 extra per annum. If you sort of break that back into what that means for an additional weekly rent for a student if that landlord wanted to make themselves whole is about a 30% increase in the typical HMO weekly rent. So it's very material and I think will support that focus on PBSA as offering real value over the private landlord market. And at the same time we're not seeing a material supply side response from the PBSA market. Pre the pandemic sort of developments and new PBSA that was opening was around 30,000 beds a year. That's more than halved and we think will continue at that suppressed level for quite some time and that's because of development, viability, funding costs, et cetera. We are still active in development. We've obviously raised money to commit to new developments, but we're not developing in all markets. In development viability; the cost of the land, the material cost, the build cost, funding costs means that if you were to build a new student accommodation in that particular market; the rents you would need to achieve make it effectively economically unviable. And so we're not going to see a supply side response until any one or a combination of those factors change. And then finally in terms of supply, what we are seeing and we've seen for quite some time is really clear growing student expectations when it comes to the quality of student accommodation. And so we're starting to see quite a lot of university owned sort of first generation accommodation coming out of university campuses and universities either closing or mothballing accommodation on their campuses. And that's really because one, they don't have the finance that they need to commit to improve the quality of those assets and also quite often the university doesn't have the capability to undertake the asset management initiatives that will need to be undertaken to bring them up to standard. So that's creating clear opportunities for us to deepen our partnerships with universities to help them solve that accommodation challenge. And so we've talked for a number of years now about our unique relationships and I genuinely do believe we have unique relationships with universities. But there is a real important difference I think now in that universities are clearly recognizing that there are accommodation shortages and those accommodation shortages will impact their growth. Like every business, a university is facing real cost pressures. But at the same time for a university a large proportion of their income, the income that comes from undergraduate student fees, is fixed. It's been fixed for a number of years at GBP 9,250 and actually remains fixed until about 2026. So if you've got a large proportion of your income that's fixed while you've got cost pressures, the only way to sort of manage that is to continue to grow, to continue to recruit more students and obviously students generally need accommodation when they go to university. And that need for accommodation is even more acute when you're thinking about international students obviously coming to study in a different country. So they have the greatest accommodation need. So there is a real opportunity I think for us to continue to support universities. As I've mentioned, we've seen universities commit to us for another 2,000 beds this year. And as I said again, they've been willing to pay market rates to secure these beds because they recognize the rising costs of delivering accommodation, but also that really important point around higher and increasing student expectations. So these factors are leading to better quality, strategic conversations and we're in advanced discussions with a number of universities over on and off-campus development, over stock transfers and over asset management opportunities where we would go in and help them with their existing estate. The opportunities, the conversations are complex and they do take time; but we're as confident as we've ever been that we will be converting an opportunity in the not-too-distant future. And I think the opportunity set that we have in front of us. We need to recognize that we are operating in quite sort of challenging times for everyone with sort of the cost of living, with the expectation that the consumers have. And I hope it's clear that as a business, we are a business that operates with a real purpose and we're a business that seeks to do what's right for all of our stakeholders. And over the past 5 years, I think we've consistently demonstrated this through our response to COVID, our ongoing commitment to understand and really support students particularly when it comes to sort of mental health and well-being, a deep investment in being part of the higher education sector not just a supplier of bedrooms to the sector and our investment in critical areas of ESG with a particular focus on the environment and also diversity and equality. And this commitment to really being a purposeful landlord is something that we're committed to continue with. And by doing what we do by delivering student accommodation, by developing more beds, we are positively contributing towards the creation of homes across the U.K., which is incredibly important. We're supporting local communities by enabling students to come and live in those towns and cities and students do bring real economic value and diversity to towns and cities. And we're also supporting universities to grow so supporting them to provide world-class educational support and clearly supporting students, the communities and the environment. So as a landlord with purpose, I think we really can look ahead with confidence and continue to be successful. So at that point, I hand over to Joe to take us through the financials and also the placing.

Good morning, everyone, and thank you, Richard. Delighted to be announcing another set of strong results this morning with earnings and EPS up 15%, dividend per share up 7% off the back of the strong letting performance that we've delivered. And given that strong H1 performance, we are upgrading guidance, as Richard said, to the upper end of our 43p to 44p range and guiding to 5% rental growth for the '24-'25 academic year. Both NTA and LTV have been flat since the year-end. Valuations are up 0.8% and rental growth has offset the outward yield movement and we expect this trend to continue over the next 6 months. And we've made positive progress with both earnings yield and net debt-to-EBITDA ratios. The positive earnings growth in H1 is taking our earnings to a record level for our business, which is another major milestone. The return to full occupancy and rental growth in '22-'23 really driving that. We have seen cost pressures, as we've talked about in the past, principally around utilities and staff costs and obviously also inflationary pressures across the rest of the supply chain as well. But we've been able to hold gross margin flat and see some steady progress around EBIT margins as well through that maintained focus on overheads, interest and development costs. This is shown probably most clearly visibly through the earnings bridge showing those key drivers flowing through of earnings, rental growth offset by those costs and finance costs. As I mentioned, we have been able to manage the inflationary pressures through the rental growth that we've been delivering and been able to pass on those higher costs to both universities and the students who book directly with us. We have tried to balance this, as Richard mentioned, with our position as a responsible landlord to manage those affordability pressures. We are seeing others being more aggressive in the marketplace, which we think holds us in good stead over the medium term. On utilities, we are fully hedged for the 2023 financial year and 75% hedged for next year and this will be fully hedged by September when the academic year starts in line with our policy and the increase year-on-year does represent about 2% of our rental growth. So we'll continue to focus on margin improvement in '23. The recovery won't be as fast as we previously indicated given these ongoing pressures, which seem to be lasting longer than we had expected at the start of the year. But we continue to be able to expect to manage costs through rental growth to support further margin improvement into next year. NAV has been stable. Valuations, as I mentioned, up 0.8% in H1. Rental growth has more than offset that outward yield movement of 13 basis points in the first half, which has taken the overall yield movement to 27 basis points since the peak in June 2022. Mike will cover a bit more color on the transactional market shortly. The outward yield movement has been reflected in our development portfolio with a 4p hit to NAV from that development pipeline. And the ongoing investment into fire safety has resulted in a 3p impact. We've increased our provision by around GBP 15 million in the first half and made recoveries of GBP 3 million to offset that. And we continue to expect to make an investment of around GBP 500 per bed after recoveries for the next 3 to 5 years to ensure that our buildings meet the new safety standards. Delighted as well to be announcing the GBP 300 million placing that was closed late last night at a price of 905p and that really does allow us to continue to look forward and continue to invest with real confidence into that strong market, which Richard has outlined, whilst also strengthening and maintaining a very strong balance sheet. We will now commit to the 2 developments that are shown on the slide, Temple Quarter in Bristol and Meridian Square in Stratford, These developments are in 2 of our strongest cities in Bristol and London. They will be let to longstanding university partners of ours in those cities on 50% nominations agreements. The development team have worked really hard to increase the returns on those given the rebase in funding costs and our own return hurdles as a result and at around 100 basis points from development yield over the last 12 months to those schemes through land renegotiation, enhanced planning and enhanced rents through discussions with the universities and allowing us to, therefore, increase our assumption with direct elements as well. Temple Q has planning, is ready to go on site now and will be delivered for 2025. And on Meridian, we've completed a full preapplication consultation with the local authority and partners in that area. It is now in planning and we expect to receive planning before the end of the year allowing us to buy the site and move into the build phase immediately thereafter. And the asset management activities we've talked to you recently about in Manchester and this year we've got schemes in London, Birmingham, Edinburgh. We're starting to identify more of those opportunities on some of our older stock as we've seen rents rebase and really to invest in those properties, lift the rents, also make environmental investments into those to ensure we're hitting the EPC and also reducing the energy intensities in those buildings as well. And so we've identified those schemes and we'll be gearing up to go on to site over the summer of '24 and '25 to deliver those schemes. And that will allow us to commit around half of the proceeds in the first 12 months and just under 75% over the 2-year period. So a pretty effective use of capital with the surplus capital being used initially to repay our revolving credit facilities and allow us to save at our marginal cost of debt to ensure that this supports our earnings accretion in 2024. Pro forma LTV will reduce to 25% initially and we are reducing our LTV target to around 30% from the previous range of 30% to 35% and we will target net debt to EBITDA at the lower end of our 6x to 7x range as a result of the placing. And we continue to actively manage our balance sheet, something that we've always taken a lot of pride in doing so. We have a portfolio of assets in the market to recycle capital. That will allow us to continue to invest in our portfolio, continue to invest in growth and that ongoing investment that we want to see in our business. And whilst the public debt markets aren't yet back to where we'd like them to be or historic levels, the private debt markets do remain supportive as was seen by the recent facility that we secured with the Legal & General for use of 7-year facility an all-in cost of 5.4% and we also extended our RCF by another year to 2026 at the same terms that previously had been agreed. Our marginal cost of debt is currently about 5.5% to 6% depending on the duration of that debt and that's what we're using again to benchmark and base our return hurdles on that level. As we flagged at this time last year, we are expecting to see a gradual increase in our cost of debt. We are fixed in under all of our investment debt so it's that increases and where we're borrowing new money that we will see the increased rates flow through. And we're focused on our GBP 300 million refinance of the unsecured bond at the back end of 2024 and we have full hedging in place, forward hedging in place for when we need to refinance that. I'll now hand over to Mike to give you a bit more update on our property activities.

Thanks, Joe. Good morning, everyone. The first half of the year saw a pickup in investment activity in the student accommodation sector albeit transaction volumes remain below the historical average. There remains strong investment appetite from private equity and institutional investors who are attracted to the sector's sustainably growing income returns. Transaction activity is focused on major regional markets where property yields are higher. Given the high reservation levels for this September, deals are now being priced off the rental levels achieved for 23-'24 academic year. As Joe said, we're currently in the market with the disposal portfolio of GBP 150 million to GBP 200 million of regional assets, which has attracted a wide range of interest at pricing at or around book value. Our investment valuations increased by 0.8% in the first half and that was driven by rental growth off the back of our strong sales performance. This more than offset the impact of the 13 basis point rise in property yields. We expect to see a growing volume of transaction evidence in the second half based on a healthy pipeline of deal activity. We also expect our valuations to benefit from further rental growth in H2, but on completion of the '23-'24 sales cycle and our sales launch of '24-'25. Turning the slide. As Joe said, our equity raise has enabled the business to commit to a further 2 development projects in 2 of our strongest markets in Bristol and London. Both of the newly committed schemes are expected to be around 50% nominated to university partners on long-term agreements. This provides us with a high degree of income visibility. For Temple Quarter in Bristol, we've confirmed construction costs with one of our framework contractors and we'll go on site in the coming months. For Meridian Square in Stratford, our planning application has been supported by UCL and we expect a decision by the end of the year. In September, we'll open our newest development at Morriss House in Nottingham. The asset is located next to the University of Nottingham's Jubilee campus and will be fully let on opening. Thanks to our strong leasing performance, we've outperformed our original rent expectations leading to an improvement in the development yield to 8.5%. We're continuingly looking to improve the customer experience in our new buildings and Morriss House will incorporate new design concepts for our communal and outdoor amenity spaces used by our students. The project will also be our most sustainable development to-date thanks to efficient design and use of low carbon materials. The project will achieve a BREEAM Excellent and EPCA rating on reducing body carbon by 1/3 compared to benchmark residential developments. Looking further ahead, we've also made good progress at our Lower Parliament Street development in Nottingham City Center, which we now expect to deliver a year earlier than previously planned in time for the '24-'25 academic year. Across our GBP 8.5 billion estate of completed properties, there's a significant opportunity to invest in accretive asset management initiatives to improve quality and customer experience. Replacement costs for new student development are now above property values in many of our markets. We believe this will limit new development for the foreseeable future and provide us an excellent opportunity to upgrade our buildings into a supply constrained market. The equity raise will allow us to accelerate our run rate of major refurbishments to around GBP 50 million per year on which we expect to deliver a yield on cost of over 8%. Planning and delivery risk is relatively low and we have experience of successfully delivering GBP 75 million of these projects in the past 2 years. The supply crunch that Richard talked about earlier only increases our conviction in this opportunity. Over the page, we look at these opportunities in more detail. We will deliver 3 asset management projects in 2023 in London, Edinburgh and Birmingham for GBP 24 million. These initiatives go above and beyond our usual building maintenance program. They deliver significant enhancements to bedrooms and living areas within apartments and create new and enhanced community space for students. We will also use the works as an opportunity to deliver energy efficiency initiatives required for EPC compliance on net 0 carbon. The combination of these works delivers returns through improved rents and lower utility costs. We expect the 2023 projects to be fully let this September delivering a yield on cost of around 9%. Looking ahead, we've also identified a further pipeline of around GBP 140 million of projects for 2024 and 2025 at similar returns. As Richard said, we believe the strength of market conditions creates a multiyear opportunity for new investment in development and asset management. We're making good progress in unlocking a range of new projects. Firstly, we have 2 secured but uncommitted development schemes in Bristol and Paddington in London, which we plan to deliver subject to achieving planning approval in 2024. We're also considering a substantial pipeline of longer-term asset management initiatives beyond the GBP 140 million I just spoke about. Over and above those, we also continue to see a healthy flow of new development opportunities at attractive returns and we're in advanced discussions for a handful of projects in London and prime regional markets. All of these new schemes have the potential for long-term nomination agreements with high quality universities. As Richard mentioned, we're also seeing increasing engagement from universities for strategic partnerships to create new or improved accommodation, which will help unlock the potential of their campuses. We're uniquely placed to secure these opportunities thanks to our longstanding university relationships, operating platform and development capabilities. As an example of the flexibility we offer universities, we will be able to relocate students into other buildings in our portfolio in the same city while their beds undergo redevelopment. Taken together, the range of opportunities we are considering is the most exciting we've seen for a number of years and we expect to make progress in each of these areas in the next 12 months. In build-to-rent, we're also continuing to explore opportunities to increase the scale of our pilots in the sector. We will not increase our capital allocation to build-to-rent in the short term, but would instead look to fund any growth through coinvestment with institutional investors. This type of structure would enhance our returns through management fees and limit our capital commitments while we develop our understanding of the opportunity in the sector. And with that, I'll hand you back to Richard.

Great. Thank you, Mike. And so just to conclude before opening up to questions. We are experiencing the strongest market conditions that we've seen for many years. We've got record reservations, record earnings and the dividend at record levels and we've increased our EPS guidance as we've said to the upper end and we're also targeting at least 5% rental growth for the '24-'25 academic year. We firmly believe that these positive conditions will persist. The sustained supply is a reality at the same time -- sorry. Sustained growth in demand was a reality at the same time as reducing supply. And taken together we think the combination of these opportunities, as Mike has just said, creates the strongest opportunity we've seen for quite some time and an opportunity set that we believe as a landlord with purpose, we're particularly well placed to execute on. So we're confident that we can continue to deliver sustainable rental growth, that we can continue to deliver sustainable earnings and grow the overall size of the business in 2024 and beyond. So with that, we'll open up for questions. I think the plan would be that we'll have questions in the room first, then questions on the audio line and then finally, we've got some questions coming in the webcast which Mike will facilitate. We also in the room have Karan Khanna, our Chief Customer Officer, who will be able to answer questions as well. So firstly, any questions in the room?

It's Sam King from Stifel. 2 questions from me, please, if I may. The first is just on strategy and picking up on the points on strategic partnerships with universities. Just interested if you have some more comments in terms of the size of the opportunity in that market in terms of stock transfers and refurbs of old stock? And also what that might look like in terms of financial structures, i.e., are you looking at JVs at universities where you expect CapEx and then act as asset manager or are you looking at effectively acquiring assets and then signing a long-term noms agreement almost like a sale and leaseback kind of deal? And then secondly, in relation to that in terms of the financial strength of universities and in terms of how you manage that in relation to covenant risk. Clearly lots in the press at the moment about the financial health of universities' reliance on international students. So just interested in terms of how you think/manage that when you sign these partnerships or look at new nomination agreements?

Maybe if I take sort of the size of the market and the strength of universities and Joe could pick up the sort of potential structuring for these opportunities. I mean in terms of the size of the opportunity, universities own and operate around 300,000 beds across the U.K. The whole of the private purpose-built market is around sort of 400,000 beds. So it's a very material opportunity. Clearly all of those beds aren't in the markets that we're operating in. But many of our university partners have accommodation, many of our partners are really considering whether that's the right thing for them to be doing and so the opportunity set I think is very material. We are talking to universities that we believe are longstanding, growing universities that will sort of manage any challenges they've got sort of in the short term. So the top end not just Russell Group Universities, but those really strong university partners who I really do think will survive any change in international student numbers, any change in domestic demand, any sort of government regulation. U.K. higher education I think is enduring. I would be very surprised even at the bottom end of the U.K. higher education sector if we see a university fail. I think we might see universities at the bottom end of the higher education sector contract in size. I think we might see universities coming together and forming alliances to deliver particular sort of faculties. But I think the universities that we are talking to will continue to grow and sort of continue to provide a world-class education for domestic and international students. We are, therefore, confident with those university partners that they've got sort of the longstanding financial covenants that work in any kind of university partnership transaction.

So I guess I'll start by saying each university is different and each university has a different set of problems and challenges. And what we found as being really successful is working alongside those university partners to help them to answer the exam question, which is they need some new beds. They may have some existing beds which need refurbishment. They don't have great access to capital. The PFI PPP model doesn't work in a high interest cost environment. So the model which seems to be landing favorably with universities is where they contribute an existing asset into a joint venture vehicle with us. So they're not having to put any physical cash into that. We would be able to access capital to invest in that building and upgrade or build new on to their campus and that would be a long-term real estate transaction whereby they will be underlying underpinned from the nominations agreement as well. So that's the model which nobody is doing at the moment, but is really gaining traction with those universities and this complex sort of set of funding criteria.

Any other questions in the room? Don't think so. Are there any questions on the audio line?

[Operator Instructions] We currently have no questions on the phone line.

Great. I think we do have some questions on the webcast, which Mike will read out for us. And if anybody on the audio does want to ask a question particularly of Karan, that would be great.

So the first question on the webcast is from [ Simon Lamar ] from STL. What impact have you seen from Brexit on international student numbers?

I mean we anticipated that we would see sort of about a 2/3 decline in the number of EU students coming to the U.K. and I think that is what's transpired. EU students represented about sort of 8% of all students in U.K. higher education. It was sort of slightly higher in our portfolio around 9%. That is now down to 3% and it's simply a fact -- a matter of sort of commercial. Those individual students coming to the U.K. used to be able to access a loan from the U.K. government. They now can't access that loan and they're also treated as international students so they don't pay GBP 9,250. They pay whatever the higher international fee is. I do think actually over the course of the next few years we'll see EU international student numbers start to recover. For a university, it sort of hasn't been commercially sensible for them in the past sort of pre-Brexit to target, let's say, a student in Germany because they'd have to go to Germany, set up a rep office, do all the marketing, find that student and they could only charge GBP 9,250 versus they could do that same thing in China and charge probably materially more. Clearly with that change, universities are targeting much more aggressively Germany, France, Spain, the Nordics; setting up rep offices. So I think we will see that recover. I don't think we'll see it recover back up to the sort of 8% to 9%, but I do think we'll see growth in EU student demand over the coming years.

We then have a couple of questions from David Brunsdon at Aztec. The first question is with the clear demand for PBSA, how does the new build-to-rent initiative fit within the business strategy?

I think as Mike sort of articulated, the build-to-rent pilot is something we're exploring because it's something that we believe could be sort of an interesting opportunity in the medium to longer term. We wanted with the acquisition of 180 Stratford to test our operating capability to see if we could understand the customer base, how do you sell? And actually that pilot is performing really well. It's sort of outperforming what we thought in terms of sort of business assumptions, rental growth is incredibly strong, there's very strong demand. The next step would be to look to expand that pilot not using our capital, but again expand our operating understanding; but being very clear that in the short term our capital will be deployed into student. So we think it remains a sensible thing for us to explore, sensible thing for us to continue to pilot and expand our operational understanding, but absolutely the priority remains student.

And the second question from David Brunsdon, Aztec is what are the drivers to the increased build cost inflation you're seeing and what is the outlook?

I think the build cost inflation over the past 2 to 3 years has been driven largely by the energy cost increase and therefore, costs in materials. There's also been an increase in the labor costs across the construction sector. I think thankfully we're starting to see that inflation sort of level out now. So when we're pricing the contracts, we're certainly seeing a more normalized level of inflation being factored into '24 and '25 contracts in the build elements. So encouraging that that's leveling off now and I think we've seen the peak of that build cost inflation.