All right. Good morning, everybody, welcome to our results presentation. Thank you to all those who have come along to Numis' offices in person. Thank you to Numis for hosting them in their excellent new office. Thank you to everyone who's joined on the webcast and by audio as well. We're delighted to be presenting this morning a very strong set of results, which I believe demonstrates the enduring attractiveness of our offer to our customers, our ability to deliver sustainable and attractive returns, excuse me, and our clear commitment to doing what's right.
Our sector remains structurally supportive, and the consistent strategy we've had for a number of years now, I think is central to the performance that we're delivering, and it will continue to guide us as we move forward. We'll continue to ensure we deliver meaningful growth in what remains a volatile external environment, but an operationally very positive period for us. Looking at 2022 headline financial performance, record earnings, EPS and dividend, each up 48%. The dividend represents an 80% payout, and therefore signifying our continued confidence as we look forward. We've delivered a total accounting return of just over 8%.
Looking more currently, at what we're seeing, in the here and now, operationally, we're arguably enjoying the strongest conditions we've experienced for, you know, many years. There is greater urgency amongst our customers, both students and universities, to secure their accommodation with us. We're seeing growing demand from all our key customer groups, and therefore there is a material rental growth opportunity. As a result of that and, you know, what we're seeing for the next academic year, our reservation performance for the 2023-2024 academic year is at record levels at 83%. We're also, alongside these results, upgrading our rental growth guidance for the next academic year to 6%-7%.
As we've always done, we will continue to ensure that we balance rental increases with investment in our service, investment in our proposition to deliver value for money and affordable price points for our customers. These results are underpinned by a robust balance sheet, and I'm delighted to be able to announce as well today that we're committing to two further development schemes in our development pipeline. That's a total of three development commitments we've made since the mini-budget, and I think demonstrates the ongoing viability of this key growth pillar, and demonstrates that we can continue to deliver value through development even in our new higher rate environment.
Our confidence in the demand outlook, the rental growth prospects that that is delivering for us means that we believe our values are very well supported. I've said before, our business is underpinned by the enduring strength of UK higher education, and I don't think that strength is diminished at all. We do expect to see sustained domestic and international growth. That growth will be strongest in Unite cities. We've been very deliberate over the course of the past five years through disposals, through development, through acquisition to ensure that we are aligned to the universities that are performing the best. International students, they do still continue to value UK higher education and the degrees that they can secure here.
By international students coming to the U.K., they do generate significant value for the U.K. economy. It's one of our largest and most successful exports. You will have seen press speculation about the government looking at tightening student visa rules. While we don't yet know quite where this will land, there's been no formal announcement, we are expecting any tightening of visa rules to very much focus on restricting dependents coming to the U.K. with international students. Given our offer is single occupancy rules, therefore, you know, that is not a market where we have exposure. We would expect any changes around dependents to have very limited impact on us. As I've mentioned, the business is supported by U.K. higher education. The demand drivers, I hope are clear.
We continue to see demographic growth in the 18-year-old population domestically and will continue to do so out to 2030. We're continuing to see sustained international growth. Both of these are core customer groups, customer groups that need high quality, purpose-built, affordable accommodation in great locations. We are seeing a material slowdown in the supply of PBSA in many of the markets we are operating in. We're also now starting to see a net reduction in the number of houses of multiple occupancy, so your traditional student digs, HMOs, as those HMOs are consistently now starting to leave the student market. Over the next few years, we would expect student demand to increase and increase by up to 20%.
That additional need for accommodation, we believe, will be largely met by purpose-built student accommodation. Our market position, our university relationships leaves us uniquely placed to provide a solution for that growing need. The opportunity is just one of a number that we'll look to leverage over the coming period. Development will continue to offer attractive returns, and we would expect to add more opportunities during the course of 2023. We've identified a series of opportunities to invest in our estate and drive improvements for students and to achieve strong returns. There remains the opportunity for targeted acquisitions. Additionally to this sort of core growth potential, we're progressing meaningful discussions with our university partners about on and off-campus development opportunities. We'll continue to explore our build to rent pilot.
I'll come back to each of these, sort of growth areas, a little bit more at the end of the presentation. To say, you know, we have a highly attractive set of opportunities ahead of us, supported by that positive operational environment and the sector fundamentals that I've mentioned. Now I'd like to hand over to Joe, who'll take us through the financial performance in a little bit more detail.
Thank you, Richard, and good morning, everyone. Put the glasses on. Yeah. Likewise delighted to announce a very strong financial performance, and the strong recovery and earnings has been delivered by the returns for occupancy, the positive rental growth, and managing operational and funding costs in an inflationary environment, delivering the EPS of GBP 0.409 and a dividend of GBP 0.327, both up 48% in the year. The combination of earnings, rental growth, and development has delivered the total accounting return of 8.1%, of which the earnings yield importantly was 4.6%. The balance sheet is in good shape with net debt to EBITDAR at 7.3, ICR at 3.7, and LTV at 31%.
Our performance has really been underpinned by the growth in our like-for-like net operating income, and this has been delivered through that return to full occupancy, a full summer program post-COVID, and positive rental growth. The income growth of 20% has significantly outstripped the cost growth that we've seen from utility, staffing, cleaning, and marketing, which have grown through a combination of that increased activity and also the inflationary pressures. Our utility hedging has meant that the growth in utility costs has been limited to GBP 2.2 million. We are fully hedged for 2023, and we're 65% hedged for 2024.
As a Real Living Wage employer, we've increased our pay by 10% for the lowest members, paid members of our teams, and we've increased wages on average by 8% across the business on a tiered basis. Overall, this has supported the increase in the EBIT margin to 68%, and we're confident that the strong rental growth and ongoing cost discipline will allow us to improve that to around 70% in 2023. The earnings growth has been dominated by that NOI growth, as I've talked about, but also supported by growth in asset management fees and also the proactive overhead management and staff costs around and other discretionary spend. The new openings that we've delivered together with USAF unit acquisitions has offset the loss of income from disposals, whilst also improving the portfolio quality.
Whilst funding costs have increased, we've been able to utilize our flexible debt facilities to ensure that the overall debt costs remain broadly flat throughout the year. Looking forward to 2023, we're guiding to a 5%-8% growth in EPS for 2023, to a range of 43p-44p. We'll see two terms worth of benefit from the 2022-2023 sales cycle and one term from the higher rental growth that Richard talked about on 2023-2024. The full year impact of new openings and disposals adds around GBP 6 million to NOI. The NOI growth is therefore expected to more than offset the cost growth that we're seeing, delivering that EBIT margin of around 70%.
Funding costs are broadly fixed now for 2023, with 90% locked in at an average rate of 3.6%. Property valuations have been a bit of a tale of two halves for us in 2022, with H1 dominated by the GIC acquisition of Student Roost in the first half, which underpinned a real boost to regional yields of about 25-30 basis points. The second half saw the market coming to terms with the higher funding costs and saw yields move back in by about the same amount to where they had started the year.
Whilst not all of those Student Roost yields have been reflected in our valuations in H1, our yields were broadly flat over the course of the year as well, with rental growth driving the full element of that investment value uplift. It's that investment growth outlook and performance that means that yields really haven't moved out as far as we've seen in some other real estate sectors. Mike will come on to talk about this in a little bit more detail. The contribution from development was lower than it is in normal years, and that's as a result of our decision to pause or slow down development activity when the cost of funding spiked in Q3 and Q4, and we've continued to invest in fire safety as planned throughout the year.
Overall, NTA is up by 5%, delivering that TAR of 8.1, we are guiding to a total accounting return of 8%-10% in 2023, excluding yield movements, that's made up of earnings, rental growth, development, and less any CapEx. On capital allocation, it's been another busy year for disposals with GBP 339 million of disposals, GBP 256 million our share. That represents just under 5% of our total portfolio, given the ongoing focus that we've got on maintaining capital discipline.
That effectively completes the portfolio rationalization following the Liberty acquisition, and the disposal activity and the strong operational demand means that we've now pretty much completed the sale of all of our non-core assets. These disposals have allowed us to hold LTV at 31% whilst continuing to commit capital to development. We'll continue to manage LTV to that target of 30%-35%, but with a greater focus on bringing leverage down rather than up at this stage of the cycle. We're increasingly focusing on keeping ICR and net debt to EBITDA in line with our targets for 3-4 and 6-7 times respectively. Given the increased funding costs, we have increased our hurdle rates, and we'll look to maintain a 100-200 basis points spread to the long-term funding rate, and that's relative to the risk of each project.
The property team has done a great job at reworking a number of our developments to enhance returns, and we see a growing opportunity to deploy capital into develop and accretive asset management opportunities as we work through this year. We are fully funded on our committed development schemes, and we're in the process of looking at a range of funding options for the growing number of opportunities that we see in front of us, given the strength of those operational markets. The balance sheet is in a good place. Debt metrics are all in the right ballpark, and we have GBP 400 million of firepower to fund those committed opportunities. The debt markets have and are stabilizing. We had a good year managing those short-term or nearer-term debt exposures.
We increased the group sustainably linked RCF by GBP 150 million and extended that by a year. We refinanced the GBP 400 million of debt within Elsaf, and we now have credit-approved terms to refinance the GBP 380 million bond within USAF. Marginal cost of debt is in the 5%-5.5% range for long-term funding and when using that as the base to underpin those opportunities that we've been talking about. USAF and Elsaf, they do remain an important part of our balance sheet and an important source of fees for us. Following the disposal of assets in weaker locations last year, we did redeploy around GBP 140 million into USAF, increasing our share to 28%.
That supported the group's earnings performance in the year, as well as improving asset quality. Our JVs continue to be a useful addition to our capital stack, enhancing core returns from fees, providing an alternative pool of capital, and providing an opportunity to efficiently deploy capital to enhance returns. Our core business will remain focused on those two vehicles of USAF and Elsaf, and we will explore further JVs or other private capital options for growth opportunities such as Build-to-Rent and possibly university partnerships. On that note, I'll let Karan talk you through the operational performance.
Thank you, Joe. As both Richard and Joe highlighted earlier, we delivered exceptionally strong performance last year, exceeding our targets both for occupancy and rate at 99 and 3.5% respectively. We saw good year-on-year growth in every city in our portfolio. Clearing was strong, as the impact of grade inflation unwound, and our strong locations and deep university partnerships allowed us to drive both occupancy and rate. In our stronger markets like Edinburgh, Bristol, and Manchester, we continue to operate long waiting lists as well. This performance has continued into this current sales cycle, as Richard mentioned. We are now 83% booked. That is 16 points ahead of the same time last year. Sorry. As always, there are several factors that are driving this level of performance.
Firstly, we've put a significant amount of focus on our current first-year customers as they move into their second year of study. This segment, which we call as returners, and also includes third years as well as postgraduates, is up significantly over the years, and I think that demonstrates the value of our enhanced service as well our fixed price offer, all-inclusive offer. It's resonating both with students as well as their parents. This has also been backed up by improved marketing and sales execution at the front line as well, all of it focused on that returners segment. Secondly, nomination demand has been growing from universities across our cities, and we have by far the strongest nominations footprint in key cities in the U.K. This gives us the all-important base business that we need from where we can then yield our rents.
Finally, the scarcity of HMO supply in some cities is leading to students making a decision on their accommodation earlier in the sales cycle. Here, we've seen students trading up in terms of room type when they are booking with us. Going on to just a little bit on our university partnerships and the nomination agreements a little bit. Nominations remain a key strength of our business, and they delivered strong re-rental growth last year at 4%, and this underpins the 6%-7% sales guidance that Richard shared earlier at the start of the presentation. In fact, nominations rate growth outperformed our direct-led sales last year, demonstrating the value of these partnerships to Unite. These relations have been built up over a very long period, and it gives the university and Unite great visibility and security as well.
What we are doing is we are gonna focus more on income quality from our nomination partners. We are converting more single-year deals into multi-year deals. We are ensuring there are clear index-linked rental uplifts as part of each deal. Finally, we're ensuring that every new development we do is underpinned by a university partner, which means that we ramp up our developments in the shortest space of time and at the lowest cost possible. Universities, for their part, are much more confident in their own demand coming out of COVID, and they are looking for more beds for longer, and they're also looking for a deeper, more meaningful partnership with us as well.
As a result, we expect to maintain our nominations base around the 50%-57% mark. Hopefully that gave you a good overview of our performance last year and what the outlook looks like for this year. Our commercial success is only possible on delivering an outstanding experience for our students, and we've continued to make investments in improving both the product as well as the service proposition we provide them. We have now moved to a service model that is 24/7, 365, so we are there whenever our students need us. This has been a redesign of how we operate and has led to more frontline resources and roles in our properties, providing service and support to students.
We funded this investment by delayering our management structures, which led to an overall net GBP 2 million saving in operating costs on an annualized basis as well. We've also reinvigorated our resident ambassador program. That's our peer-to-peer student support program. Last year, we took the entire operations team through a learning program designed to deliver more enriching experience for our residents as well. As a result, we retained more of our students and our customers, and we delivered a 3-point increase in our Net Promoter Score. Looking ahead, I do see there being more upside in student satisfaction as we fully embed some of the initiatives that we launched last year.
We've also continued to invest in our market-leading student support programs with the launch of Support to Stay, which now makes student welfare a core part of every frontline role's responsibility. They are then supported by a specialist team which works very closely with the university resident life programs as well. This month, we have extended this program to include financial support for those students who need it most as well. Additionally, and for those who were here last year, I highlighted some of the new digital tools that we launched for our commercial teams, such as our group room booking, as well as our virtual showarounds. We are now upgrading our core Prism technology platform with a new booking engine, as well as a new property management system.
This will allow us to be more sophisticated in how we price our product, it'll improve how we present ourselves to our customers, it'll also improve our core operating processes from how you book a maintenance request to how we take calls in our contact center. When you bring all of that together, hopefully that gives you a sense of the scale of investments that we are making in continuing to offer a high quality, value for money proposition for our students, their parents, and our universities as well. Finally, from my side, in addition to the investments in our service and technology, we have started to selectively invest in our product as well. Last year, we conducted the most significant piece of market research that Unite has ever done to really understand customer needs.
Insights from that study are now informing everything that we're doing, from our service proposition to how we market ourselves, to how we think about our next-generation product as well. This segmentation has already led to several innovations that are being implemented to improve our proposition. For the most part, the first phase of the innovations have been more service focused, and they can be delivered with little to no CapEx. The trials that we've done with our postgraduate offer is a good example of that, and they continue to perform really well. The segmentation data is also powerful in helping us think about how we reposition our product as we renovate and refurbish them. To illustrate that with some examples here, we've completed the refurbishment of three properties in Manchester.
New Medlock, which we have now positioned as a primarily a first-year undergrad building. We've developed new common spaces with a real emphasis on social spaces and social connections. Parkway Gates, which is primarily for international students and therefore has a full suite of amenities because that is what they expect. Finally, Kincardine Court, which appeals mostly to postgraduates and returners because it has smaller cluster sizes. Here, we've upgraded our specification and also added new amenities such as a dishwasher in every flat as well. All of these renovations are now delivering ahead of our expectations, both in terms of student experience as well as rental growth. These projects have been key in terms of driving customer retention, and we'll continue to explore more customer-led asset management initiatives as we go forward. That's all for me.
I'm gonna hand over to Mike now to talk through the performance of our property portfolio.
Thanks, Karan. Good morning, everyone. 2022 was another year of strong investment returns for the student accommodation sector. The sector's structural growth characteristics continued to attract new capital and investment transactions reached record levels in the year. This included the acquisition of the Student Roost platform for GBP 3.3 billion, which was announced in the second quarter and completed just before the year-end. Assets continued to trade in the second half, albeit at reduced volumes. Around GBP 500 million of large transactions completed post the mini-budget, but pricing supportive of our year-end valuations. Our portfolio delivered a 4% valuation increase in the year, driven by strong rental growth. The yield on the portfolio remained broadly unchanged over the year, as Joe said, supported by the positive rental growth outlook for the 2023, 2024 academic year.
Pricing on the Student Roost transaction implied around 25 basis points of yield compression, and the fact that yields remained flat on the year suggests valuations are factored in a similar level of outward yield movement in the second half. 2022 was also another busy year for investment activity within our portfolio. In total, we completed more than GBP 700 million of projects for investment transactions, and this has further increased the portfolio's alignment to our strongest universities. We delivered two major development projects in London and Bristol, both of which were underpinned by our university partnerships. Looking forward, the current housing shortage in leading university cities creates the strongest opportunity for new developments in recent years, and this confidence is reflected in our decision to commit to three additional development projects since the start of 2023.
As Karan mentioned, we completed the refurbishment of three buildings in Manchester during the year. These delivered a yield on cost of just under 7%. These projects provide a template for future asset management initiatives where we see annual investment increasing to up to GBP 50 million per annum from 2024. 2022 also marked the completion of the disposal program set out at the time of our acquisition of Liberty Living. These sales saw us reduce our exposure to non-strategic markets, as well as certain smaller, less operationally efficient assets. The disposal proceeds were partly redeployed into our acquisition of USAF units. USAF is a high-quality portfolio that we know extremely well. We see significant opportunities for value add in the future. On the next slide, we discuss our 2022 development completions in a little more detail.
Both of the projects were delivered as university partnerships, with the universities providing planning support as well as a high level of income visibility through nomination agreements. At Hayloft Point in London, we delivered our largest development to date, totaling 920 beds in a central London location. We've entered into a five-year nomination agreement for two-thirds of the building with King's College London. At Campbell House in Bristol, our 431-bed property is fully nominated with the University of Bristol for 15 years, extending our partnership together. In total, the two projects delivered over GBP 130 million in development profits, underlining the significant value created through our development activity. Both developments are fully electric buildings with no gas use and achieve high sustainability credentials.
In addition, the projects achieved around a 30% reduction in embodied carbon compared to baseline figures through design efficiencies and selection of low-carbon materials. This puts us on track to reach our stretching targets to halve embodied carbon by 2030. Given a backdrop of higher funding costs and build cost inflation, we've carefully reviewed our development pipeline over the year. While we see extremely supportive demand conditions, we are focused on ensuring our pipeline delivers healthy earnings accretion alongside NAV growth. As Joe mentioned, we've seen a notable improvement in funding conditions in recent months, and that's given us the confidence to commit to those 3 additional developments since the start of the year in Nottingham, Edinburgh, and Stratford in East London. This takes our committed pipeline to 4 projects totaling over 2,000 beds.
There are GBP 200 million of costs to complete these projects, which are fully funded from the group's available cash and debt facilities. We continue to review the four projects in our uncommitted pipeline, which have a total cost of around GBP 500 million. Despite widespread acknowledgment of the need for new student housing, it's increasingly challenging to secure planning, giving capacity constraints within planning departments. Despite these challenges, we've had success in achieving planning consents at Jubilee House in Stratford and Temple Quarter in Bristol during the year. We are still seeking planning approval on three of the schemes in our uncommitted pipeline, including our Travis Perkins site in central London. We've had good engagement with the local authority regarding our revised scheme for the Travis Perkins site, and we're hopeful of achieving a planning consent in the first half of 2024.
Our uncommitted development projects remain under review while we seek to improve returns through planning enhancements, land price reductions, and build cost efficiencies. We're making good progress in all of these areas, which has helped deliver a 90 basis point improvement in yield on cost over the past six months. We're also seeing new opportunities to add to our development pipeline in London and prime regional cities. We will prioritize our capital towards those projects offering the strongest risk-adjusted returns. Our portfolio strategy also considers how we reduce our environmental impact and keep students safe in our buildings. During the year, we made GBP 13 million investments in energy efficiency projects as we accelerated the retrofitting of our portfolio to achieve our net zero carbon objective. These investments included LED lighting, air source heat pumps, smart heating controls, and on-site solar panels.
These projects have directly contributed to the significant improvement in our EPC ratings in the year. 80% of our properties are now EPC A to C rated, and we have clear plans to further improve these ratings for every property. There's a strong financial case for these investments through utility cost savings, which deliver a payback period of under 10 years. We have a track record of leading the sector on safety standards, and all of our buildings remain safe to operate. We have a proactive approach to investment in fire safety and completed cladding remediation works for a further 6 properties in 2022. We made an additional cladding provision of GBP 22 million in the year, taking our total provision to GBP 59 million for our share of planned future works.
This relates to properties with HPL cladding or other planned fire safety improvements, where remediation works will be carried out over the next two years. We're progressing with detailed surveys on low-risk properties and expect our remediation program to continue at an annual cost of around GBP 500 per bed in the near term. We expect to recover a substantial portion of these costs through claims from contractors. We were successful in 2022 in recovering GBP 18 million. With that, I'll hand you back to Richard.
Thank you, Mike. Just before picking up on the opportunities that I said I'd come back to, it is worth just pausing for a moment and sort of looking at the overall supply picture in our market. You know, demand is clear. Hopefully, we've got strong demand environment, but we are seeing that material slow down in supply. You know, given the events of the last few years, the supply of new PBSA, that is its lowest level for many years. You know, less than sort of 15,000 new beds opening against a historic run rate of perhaps twice that.
We estimate that the supply of new purpose-built student accommodation beds will remain at that more moderate level for quite some time due to some of the planning challenges that have just been mentioned, but also obviously higher costs. We also expect during the period of this sort of depressed supply of new purpose-built student accommodation. The supply of HMO to fall due to increased costs, due to increased regulation, due to, you know, the buy to let mortgages rolling off. We do expect HMO landlords to continue to leave the market. That creates an interesting new opportunity for us. Our product has historically been, you know, targeted in the mainstay of first years or first-year international students. It does now have that much broader appeal.
As Karan has just described, we've demonstrated that we can keep students who would have historically otherwise gone into houses of multiple occupancy, and we can attract them back from houses of multiple occupancy to come and live in purpose-built. Our focus on segmentation, I think, will only accelerate that. You know, the supply environment, you know, I would argue is a now a demand driver for us, and it's an overall net positive picture. As I mentioned at the beginning, you know, we do have a significant core growth opportunity. As Mike has just set out, we've made really good progress with the existing development pipeline and also asset management opportunities.
On development, we do expect to add one to two more schemes prior to the end of this current year. These schemes will deliver attractive returns. They'll be delivered at revised hurdle rates, which will deliver returns, you know, consistent with the past. That is after allowing for higher development costs and also the higher funding rate environment. As you've seen, in Manchester, asset management does present an attractive multi-year investment opportunity for us with, we believe, a clear opportunity to invest between GBP 35 million and GBP 50 million per year in improving our product and obviously delivering a good return.
To deliver that development, activity, to deliver that asset management activity, we've got proven in-house capability from site identification through design, planning, and then onto ultimately build and delivery. Just looking at university partnerships in a, in a little bit more detail. We've obviously long held the view that university partnerships do provide a genuine growth opportunity for us. In many markets, the growth of universities now, so the number of students that they're able to attract, is not constrained by demand from students. It's actually constrained by a lack of supply of homes for those students to live in. I spend a lot of my time talking to vice chancellors at our university partners, and the lack of student accommodation is now the top of the agenda for many of those vice chancellors.
It's creating a real problem for them in terms of their future growth. Our sector leading relationships with those universities, I think, positions us uniquely to develop creative solutions as we look ahead. I think that's evidenced by the extension of our relationship with Durham University. We're creating them a new college, and the creation of that new college being supported by a 30-year nomination agreement. A long-term commitment from one of the world's leading universities to work with us. We're more confident than we've ever been about adding further university partnerships. In the next 12 to 18 months, we believe we will do so, and we're actively engaged in several high-quality conversations right now.
Also, obviously, back in September, we did acquire an initial pilot Build-to-Rent asset in Stratford. While the priority and the majority of our growth will be in our core student markets, we do want to continue to explore this adjacency. The pilot in Stratford is performing very well, and we will fully integrate the asset onto our operating platform in Q2 of this year. We've learned a great deal about how we would operate the asset, and we're confident in our ability to operate such assets efficiently and effectively. The next stage of the pilot will now be to increase our operational scale a little bit, while at the same time preserving our capital for core growth, preserving our capital for student growth.
As Joe has mentioned, we're therefore exploring a JV where we would act as asset manager. We have a proven track record in creating these JVs, creating value for them and doing that effectively. We will continue to explore Build-to-Rent on that pilot basis. We do believe there is future due to the sheer scale, due to the fact that many young professionals will have lived in PBSA. Arguably, many of them will have lived at Unite. We will continue to explore it very much on a, sort of a pilot basis for the coming period. To conclude, before we open up for questions, we are confident in the outlook for the business.
You know, as I said right at the beginning, and probably worth saying at the end, external environment does remain volatile. I think the, you know, the demand drivers of our business are clear. We're confident due to growing demand, due to our alignment to high-quality universities, which I think is really important, and obviously, our proven platform and operational capability. Our value drivers are as strong as ever. Rental growth will be very strong, 6%-7%, and we will seek to balance that level of rental growth with ensuring value for money for students, as Karan referenced. Our earnings and margins will progress positively, as we look to 2023, and we expect to deliver a total accounting return of between 8% and 10%, before yield movements.
The opportunity for growth is significant, and I believe we are uniquely placed to deliver against that opportunity. Thank you very much. I think we'll now take questions in the room first, and then on audio and then finally by webcast.
My name is Andreas Thom from Green Street. I have a few questions. I'll just go one by one. On the supply side, I was just wondering what's driving the reduction in supply. Obviously, there is the COVID slump, cyclical headwinds, just looking at your development yields and development economics, they look pretty attractive. Is there anything more structural that's, sort of, keeping others from developing, or what's the sort of outlook on that front?
Yeah. I think that the main factor that's impacted that has been we've seen significant level of build cost inflation over the past two years. Actually, to build a viable scheme now, rents have to start at around GBP 160 per week. That means that where a lot of the supply was being built was in those more regional and lower grade cities. That is no longer viable because the rents which you can achieve are well below that GBP 160 per week. It's taken out a big slug of that marketplace in terms of what is viable and can be delivered. I think alongside that, planning in London is still very challenging.
The fact that you need to have university nominations and you need to provide affordable housing is limiting the supply in London. I think we've got a couple of factors going on there. Obviously, the impact of COVID over the last few years has probably just slowed the levels of activity that we've seen more generally.
Thank you. My second question is around just external growth opportunities. Your cost of capital is quite supportive of external growth. I'm just wondering, as you mentioned, sort of development opportunities coming along, is the opportunity set attractive also just on the acquisition market for, you know, assets which are stabilized? Perhaps, also on the pricing side, is the pricing already reflective of higher debt costs? Is there any distressed opportunities out there, or is it just too early to talk about that?
I think as Richard has outlined, we do see this growing set of opportunities in front of us, and I think that comes off the back of the strong operational performance that's being delivered and the rental growth that we are seeing. I think that given that opportunity set, kind of to deploy capital into acquisitions doesn't really make sense for us. I think we've got a track record of generating the higher returning activities, and we're not seeing people in distress either, so you're not seeing kind of the opportunity to pick up assets, you know, at really strong prices. I think we will continue to focus our capital into that higher generating activities that Richard's outlined.
Thank you. My last question is around, just, occupational performance, rental performance, across your different markets. Where do you see sort of more outperformance, underperformance, in the markets you're present?
You go first of all, please.
I think across all of our markets at the moment we're seeing, you know, strong demand. You know, our business is made up of sort of two elements, the nominations. Obviously, the nomination as Karan mentioned, with the sort of multiyear agreement that sort of underpins the 6%-7%, probably rental growth at around 5% on those nominations as we look forward. It is the direct let that's driving that. There is obviously variation within cities. You know, our strongest market, slightly ahead of the 6%-7% on average. Probably the lowest market might be down at sort of 3%-4%. We're seeing rental growth across all markets consistent with what we saw with last year.
That is a change to, you know, if we roll the clock back even before COVID, there were markets that were perhaps, you know, slightly closer to being flat. We're seeing rental growth demand across all markets at the moment.
Thank you.
Hi. Morning. Sam King from Stifel. Two questions, please. First is just a follow-up question on developments, and the opportunities that you're seeing in the market. Just interested in the levels of rental growth that you're typically factoring in to underwrite at the moment before you commit to projects. Second question, slightly more technical one, but just on the difference between the Unite net initial yield, which was broadly flat like for like for the year, versus what the EPRA yield was, which I think was up 60 basis points for the year. I appreciate it's not a strict like for like number, but it still seems like quite a big difference. Just interested what's driven that. Is it effectively that the year before, the realized occupancy was lower versus what was assumed in the valuation?
Yeah. If I start with the second one first, Sam. Exactly that. The way the EPRA yield works is you basically have to take actual cash flows realized in the sort of the final month of the year just finished. We were 94% occupied at that stage, which meant that you have a reduction in yield. The way the valuers look at the yield is they do it on a stabilized occupancy basis for the next 12 months. There's a sort of timing difference in terms of you're looking at future income versus sort of historical income, and then there's that occupancy top-up essentially that also comes into the yield for the valuers.
In terms of your other question, in terms of rental growth on developments, in our appraisals at the moment, we're underwriting around 5% rental growth, both this coming academic year and the next academic year, which we believe is supported based on where we are with reservations and the sort of 6%-7% growth we're looking at. From sort of 2 years hence, we're looking at rental growth reverting back to sort of more like the historical 3%-3.5% level.
Thanks.
Cool.
Sorry, guys. Morning. Kieran Lee, from Berenberg. It was just a quick one on rental growth versus what you're seeing on the grounds from students. Rental growth at the guidance is brilliant, but are you having more pushback on affordability? How does this compare to maintenance loans? Do you see the potential for any sort of regulation to cap what you can put through?
At the moment, we're not seeing any particular change in behaviors. You know, some of the things that we track, for example, would be students dropping out of higher education. Dropout rates are consistent with where they've been before. We track the level of payment plans that we put in place, you know, with students. Again, consistent level of payment plans. We obviously track debt with our students. Again, a consistent level of debt with prior years. I think, you know, what that speaks to is that, you know, obviously we're an all-inclusive price. We offer a lot more than just, you know, sort of the bedroom. The cost certainty, the comparability of our product and our pricing versus maybe the alternatives, you know, we're now, as we've said before, cheaper on a comparable basis to HMO.
If you look at rental increases by some of the alternatives for us at the moment, whether that's university stock or other PBSA providers, we're again the right side. In terms of your point around maintenance loans, you know, clearly maintenance loans did not increase to the same level. That was sort of 2 and a little bit %. You know, there is various, you know, small scale challenges to the government on that. You know, I don't think we're gonna see. Oops. I don't think we're gonna see any sort of fundamental change from the government around the level of funding that they are going to provide students. Certainly not until, you know, we get to the next election.
You know, as regards sort of regulation, you know, at the moment, not, you know, there isn't that regulation. You know, I think again, the position I would take is that where we have moved rents, we've consistently demonstrated value for money. We've consistently invested in the service, consistently invested in the product. And we've taken a sort of a very appropriate response. This, you know, set of circumstances that we're seeing ourselves at, you know, at the moment does provide, as Mike has just, you know, mentioned, I think a couple of years probably of heightened rental growth opportunity. It clearly is at the same time as we're seeing heightened cost pressures in our business.
I think then, you know, going forward, reverting to, you know, a sustainable sort of 3% or so rental growth, I think is appropriate and deliverable given the quality of the offer that we provide to our students.
Just to add to that as well. It's obviously a very live conversation with the front line as well in terms of really understanding how students are feeling and the impact on mental health. As I mentioned, we've historically always invested heavily in student welfare, with our Support to Stay program. We extended that to add a financial component to that as well. We are working with providers such as Blackbullion to provide more financial advice. We are doing a partnership with Aldi, where we're providing, working with universities, support to those students who need it as well. I think to Richard's point, where we can be targeted and provide the support, it makes sense, but we're not seeing sort of, you know, a systematic sort of issue. In fact, debt levels are lower than they were last year.
Yeah.
All right. Hey, Calum.
From Kolytics. Two questions from me, please. The first one is on the buy-to-let pilot that you have. What are the expected returns that you're expecting there, and are they commensurate with the student accommodation portfolio or is it actually a little bit about the fees that you can generate through JVs? The second question, just continuing with rental growth. When I look at the yields on slide 24, I'm seeing 200-300 basis points yield differentials between London and other regional and major regional. How long can the rental growth differential sort of make up for that gap? Because obviously it can't continue to perpetuity.
Do Build-to-Rent.
On Build-to-Rent, you know, I think when we appraised that, we bought that off a net initial yield of just under 4%. It is lower than a comparable student building. With rental growth, again, we're modeling broadly in line with students. The overall return was about 100 basis points lower than pure student. That's been one of the challenges I think we've been quite open with shareholders about and how we can justify that investment into Build-to-Rent when there's still meaningful opportunities for students is something that we've been obviously thinking long and hard about. We think over the medium term that the, you know, the fundamentals of the sector are very strong and will support ongoing long-term rental growth.
One of the reasons we are exploring that JV model is it allows us to generate returns which are comparable to our target returns and are in line with our 8%-10% total accounting return target. It's sort of finding that way whilst we're learning and whilst we're piloting it, but we're not sort of having to take a fundamental diminution in returns from that.
Hemant, just on your question around the yields. I think in terms of the yield differential, if you look at those other regional markets where the yields are sort of in the 6%-7% range, they are relatively few and far between in the portfolio now. The bulk of the product will be around sort of the 4%-5.5% yield mark. There is a differential there in rental growth, and London has typically been an outperformer, which does explain some of the yield differential. I think the rest of it does tend to be more around liquidity, and that's what we hear from investors. There is the best bid on London assets, and it isn't just a pure function of rental growth as well.
Don't think there are any more questions in the room. I don't know if we've got any questions on the audio. oh, maybe one. Yep.
If you'd like to ask a question on the call, please press star one on your keypad. There are no questions on the call.
On the webcast?
Yeah, we've got a few on the webcast. The first one's from David Brockton
We would prefer to invest in the refurbishment of existing student assets rather than looking at sort of office conversions in their own right. Next question comes from Paul May at Barclays. He's trying to reconcile the earnings guidance for 2023. He said, "2023, 2024 rental growth is better than expected. The average cost of debt is 20 basis points lower than previous guidance, and EBIT margins are broadly in line with expectations. Given these building blocks, EPS is lower than I would expect. Are there any offsetting factors that I'm missing, or is it fair to assume that the guidance is achievable?" Thanks, Paul.
Yeah, a few points which go into that. Obviously, the 2023, 2024 rental growth actually has a pretty minimal impact on the 2023 financial year. It's only one term's worth, and 1% equates to about GBP 1 million impact, so a relatively small impact in 2023. Yeah, I talked about the pressure on costs. We're still seeing that utility cost increases, and whilst we're hedged, the cost of those hedges were put in place 12 months after the cost of hedges for this year. We have seen another increase of probably around 10-ish% on utilities, and we'll see the impact of staff cost growth this year.
That's sort of driving to that margin of 70% on an EBIT basis. I think you possibly would expect the EBIT margin to go up more given the strength of the rental growth. We are still seeing cost pressures. I think really importantly, we're able to absorb those cost pressures and still see EBIT margin growth. Cost of debt at 3.6% is what it is. I think hopefully by the time that runs through the sausage machines, that will get to the 43p-44p. I don't think there's anything untoward within that, but happy to take through the detail of what makes that up.
The next question is from Véronique Meertens at Kempen. Do you have a view on your hedging policy for utilities costs after mid-2024?
Yeah, I think Our hedging policy actually hasn't changed fundamentally, despite what we've seen over the last 12 to 18 months. We offer an all-inclusive price, we like to ensure that we effectively are locking in, so we know what the cost will be aligned to what the rents that we will be charging. We typically, we always have hedged out 12 to 18 months ahead of time. We will continue, and we are continuing to roll that forward. I guess the one change that we are sort of transitioning towards is the use of more power purchase agreements. This is where we can invest into broader energy programs, which provide us a longer-term certainty over energy pricing.
We have 1 PPA in place, which is an investment we made in a wind farm in Scotland, which guarantees the cost of that energy for 5 years. We're currently looking at a few more, which would be between 5 and 10 years, and that therefore will allow us to grow that level of fixed level of utility buying that we currently do. It's currently at 20% on PPAs, and I think we'd be looking to get that up to in excess of 50% over the next 12 to 24 months.
The next question is from Daniela Lungu at First Sentier Investors. What cap and collars for rental growth are built into the current nomination agreements, and what range is being negotiated on new agreements?
On current agreements, it's sort of generally a 3%-5% sort of floor and cap. Increasingly as we're negotiating new agreements, we're sort of moving that floor up and seeking to move the top end, although I think 5% will be that. The 5% will be harder to move than the 3%. What we've also been able to negotiate is potential catch-ups as well. If there is another higher rate environment during a long-term agreement, there is potentially a sort of a catch-up mechanism.
Sort of that 3%-5% and where ultimately, I guess inflation is guided to be, we believe still provides us the certainty that we would want and, you know, means that nomination agreements remain valuable given that sort of income certainty and obviously the lower cost of acquisition.
We've got a final question from Matthew Saperia at Peel Hunt. With regard to the potential Build-to-Rent joint venture, will the partner already have a portfolio of assets to plug into your platform, or will you be charged with investing their capital to grow a portfolio?
I think it's early days on that one, and we're open to both. We are sort of thinking about how we structure that. We've obviously got a seed asset of our own to bring to the table, and we're happy to go and find seed investments as well as work with a partner who had the existing portfolio. Great. If there are no further questions in the room, just to say thank you very much, everybody. Thank you for coming along and listening. I hope you enjoy the rest of your day. Cheers. Thank you, everyone.