An education in housing

Go to the top of the asset class 

Student accommodation is becoming big business, having emerged as an attractive asset class for investors. In the process, it might offer clues to the creation of an institutional private rented sector 

By Mark Cantrell

This article first appeared in the June/July edition of Housing magazine

STUDENT accommodation isn’t quite what it used to be. For those old enough to feel a certain wistful nostalgia, the traditional halls of residence remain, as do student digs in the private rented sector, but over the last few years the market has seen an influx of institutional investment that has wrought profound changes not only to the way many students now live but also in their expectations.

“Student accommodation has come on leaps and bounds since I was studying. It wasn’t so long ago that a box room and shared bathroom facilities were the norm for students across the board. The student accommodation sector now is a completely different landscape,” said Bob Crompton, chief executive of Student Housing Company (SHC).

“As the power of the consumer has risen over the last couple of decades, so have expectations for quality, service and tailored offerings. Increasingly, students nowadays are looking for more than just a room. They are not only after excellent properties in unrivalled locations, they also want fantastic around the clock support and facilities, and that puts additional pressure on student housing providers.”

Consumer-power may well be leading change, but investors appear to be driving it. SHC is what you might call one of the ‘new breed’ of companies that are as much developing this market as they are catering for it. SHC was established in June 2011 by Knightsbridge Student Housing to market and manage its student accommodation across the UK. This latter company was itself established almost a year earlier, in July 2010, by Oaktree Capital Management, which specialises in emerging and alternative investment markets on behalf of a range of individual and institutional investors.

Knightsbridge states an intention to acquire £1bn worth of student property assets, indicating how attractive this emerging market has become; investors clearly smell money in the air. And those behind Knightsbridge are not the only ones.

In April, to give one quick example, investment management firm Round Hill Capital sold its Nido London portfolio of luxury student accommodation to Greystar Real Estate Partners for a cool £600 million. This consists of three “premium” sites in London’s King’s Cross, Notting Hill and Spitalfields areas that combined accounted for 2,375 beds in a mixture of cluster flats and large studio apartments, with facilities such as gyms, cinema and karaoke rooms, bars and so forth – a far cry from many a traditional hall of residence.

You might call Round Hill an early adopter; when it bought this portfolio from Blackstone in May 2012 for £415 million, the UK student housing market had not then – it said – “established itself as an institutional asset class”.

“Round Hill identified student housing as an institutional investment grade opportunity well before other investors in the market and this sale underlines our strategy to invest in high quality portfolios and exploit first mover advantages,” said Michael Bickford, the firm’s founder and chief executive. “We still see significant value in the sector both in the UK and Europe and will continue to invest in quality assets like these which we can reposition for a higher and more stable operating profit and then sell to core investors looking for long-term stable income.”

So, the student accommodation market may not be big business – it remains something of a specialist niche market – but nevertheless it clearly represents serious money, and student accommodation has come to be seen as a legitimate, mainstream asset class.

The underlying causes are many and entwined. The changing demographics of the student body, the rise in student numbers, the increasing significance of foreign students, the impact of tuition fees have all impacted on the changing face of the market. As with any other, it has its ups and downs, but all told the purpose-built student accommodation market has risen relentlessly, driven by consumer-savvy youth no longer quite so prepared to slum it like their parents’ generation, and fuelled by shrewd investors looking for a secure, long-term – and relatively low-risk – return on their capital.

“The attraction of the student accommodation sector has been driven by the story of structural undersupply and positive rental growth every year throughout the economic downturn,” said Knight Frank’s 2014 Student Property Index. “We forecast this contra-cyclical dynamic will remain the driving force behind investment into the medium term. The structural undersupply remains in all key university markets and this will ensure positive rental growth remains a defining characteristic.”

About the same period, Savills was talking about a “surge” in activity over the preceding two years, as the appetite among investors for student accommodation as an asset class began to gain a kind of critical mass.

In 2012-13, £5bn worth of standing stock and development sites were sold. In the first four months of 2014, transactions worth £950 million took place, equating to over 17,000 beds, and Savills anticipated £2.5bn by the year end.

That report was nigh on a year ago, of course, so it remains to be seen quite how 2014 panned out in the end, but with the next edition of its student spotlight in production, the overall theme remains the “ongoing maturity of the sector as an investment class” according to Neal Hudson, associate director of residential research.

“It’s very much a niche sector that’s grown up,” he said. “It started to attract UK private equity investment and now it’s moving into the mainstream where it’s attracting international wealth and some of the longer-term investors from institutions, so it’s really become a recognised asset class. Accordingly, there’s been a lot more activity in the market.”

The universities themselves continue to provide accommodation, and despite a drop in what they provide, there’s little sign of them retreating from offering accommodation. Well, why would they – they provide an income stream not just from students, but from conference activities too. It’s not so much that private investor-backed provision is competing with university provision as complementing it – at least for now – and sometimes in partnership.

As it is, higher education establishments have long been unable to cater for their entire student body, so there’s plenty of leeway for private providers to step in; if anything, it’s perhaps those landlords renting out traditional student digs that stand to lose out the most as the institutional investors move in.

“The number of beds provided by institutions continues to slowly reduce from a peak of 260,000 in 2001 to the current provision of 247,000,” according to the latest Higher Education Statistics report from the Association of University Directors of Estate (AUDE), published late 2014. “Private sector provision has transformed the landscape and now provides over 100,000 beds for institutions (these are beds that are considered part of the institution’s own provision via a lease or hard nominations agreement).

In 2001/2 the amount of beds represented 16% of the total number of taught students, now the percentage is 13%. However, if private provision is also included, this represents 19% of the student headcount.”

Savills added in its report: “One in every four full-time students lives in purpose built student accommodation. The market has matured significantly in recent years with greater competition from private sector providers through the direct-let market or by providing accommodation on behalf of the university.”

For all the growth in purpose built accommodation, as Knight Frank pointed out, it remains a “structurally under-supplied” market, so there’s plenty of scope for investors.

As with any investment area, however, there are risks. Student numbers could fall, for instance, leaving a glut of properties with no takers; although the UCAS figures from January suggest this risk isn’t currently high. The organisation reported that the number of applicants this year has risen 2% over the same period last year to reach 592,290 although it said the increase was smaller than in recent years. Of this increase, only 1% were UK applications, but there was a 7% increase from the EU and a 3% increase from outside the EU.

Those overseas students are pertinent when it comes to the matter of immigration policy. Foreign students are an attractive market and policies that may – even if inadvertently – dampen international demand for UK university places is bound to make investors twitchy. They don’t like uncertainty, after all, and fewer numbers inevitably hits the income stream. Students from overseas tend to have money behind them, whether that’s family, business or state backing, so they can absorb the premium fees and accommodation costs, they are charged.

UK students, of course, face higher costs. In the 2012-13 academic year undergraduates were hit with the introduction of fees of up to £9,000 prompting Savills to note “it is no surprise that the number of students fell by 7.4%”. Numbers may have picked up again since, but the inevitable ups and downs in numbers, finances and employment prospects certainly add a degree of uncertainty – and therefore risk – to investors contemplating future demand and the prospect for returns on their capital.

Factor in a demographic “crunch” over the next eight to 10 years and the international market can only become all the more important. As Savills’ report added: “The number of people born 18 years previously peaked in 2012 (those born in 1994) at 750,000 and will have declined to 650,000 in 2020 (those born in 2002). This could reduce the potential domestic student market.”

Students come and go, but they are perennial for all that, but the market that has emerged to cater for their needs may offer at least a few clues for those pondering the burgeoning private rented sector and how to foster the emergence of a large scale institutional form of provision.

“Certainly there are lessons to be learned from the student housing sector,” said Savills’ Hudson. “It’s further ahead in that process than the private rented sector.”

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Tales of the city

High-flying City boys have been knocked off their perch in some of London’s prime rental hotspots – by students of all people.

But these aren’t just any student; they’re international students, high-wealth individuals with the spending power to soak up the capital’s premium rents without breaking a sweat. Since the 2008 crash this group has displaced those historically dominant bankers, according to research by high-end property business London Central Portfolio (LCP).

According to LCP, finance professionals have been the mainstay of the rental market in prime central London’s (PCL) most exclusive neighbourhoods, but their dominance was cut short by swathes of job losses that cut through the sector in the wake of the credit crunch. International students have since stepped in to take up the slack.

“The increase in student renters in PCL should be no surprise. Westminster houses three of the best universities in the world – Imperial College, University College London, and LSE – and sees 100,000 students visiting a year,” said Naomi Heaton, LCP’s chief executive.

“London has become a magnet to these privately wealthy young adults looking for top quality accommodation to go with their top drawer education, as parents are keen to install their children in the best, most secure homes.”

Back in 2006, international students accounted for 12% of PCL tenancies, the company said; in the last 12 months, they represented 34% of tenancy starts. Bankers have slipped to second place at 31% followed by lawyers and accountants at 11%. The most popular area for the students is, apparently, Marylebone with 23% opting to rent there, but other popular places are Knightsbridge and Fitzrovia at 10% each.

Heaton added: “Landlords are increasingly buying into the concept of international student tenants. Many have experienced a sophisticated lifestyle: they treat properties with the same care as corporate tenants but the wealth underpinning them is stronger. This means they can often outbid professional tenants, offering higher rents and as they have no recorded credit history in the UK, they tend to pay a year upfront. The average rent paid last year by student tenants has been  £2,405 a month.

This article first appeared in the June/July 2015 print edition of Housing magazine. It was subsequently republished on the Housing Excellence website, 3 July 2015

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