“The student accommodation market has never been more liquid,” states James Pullan, head of student property at Knight Frank.
If anything, this is an understatement. During 2012 and 2013 some £5bn of student accommodation was transacted. In 2014 a total of £2.5bn changed hands.
For 2015, transaction levels are a further £2.5bn. Already. In just the first quarter of 2015, in just five deals, as much student accommodation real estate has changed hands as in any of the previous years.
“The level of transactions now compares with mainstream,” says Investec’s head of property lending, Mark Bladon. “Student accommodation is now the third- or fourth-largest property sector in the UK.”
Pullan confirms this assessment: “Over the whole of 2015 we are projecting a total of £3.5bn.” Of that, he adds, 60% is being bought by people who previously had not been active in the sector.
Take LetterOne, for instance. At the beginning of March the international investment arm of Russia’s Alfa Group made its first forays into UK student accommodation. One purchase was McLaren’s 253-bed, 13-storey Paris Gardens, SE1, for £61m. The biggest deal was snapping up the Carlyle Group’s Pure Student Living portfolio for £532m.
The portfolio comprises 2,170 rooms across four London properties – in Highbury, Hammersmith, Bankside and in the City – and a development site in Whitechapel. Once it is completed, the Whitechapel facility will provide a further 417 rooms.
The Carlyle Group first entered the student accommodation market in 2010, when it bought the Highbury site. As Carlyle managing director Mark Harris notes, this was “at a time when there was little equity, debt or appetite for development”.
Now, however, the market conditions are perfect for Carlyle to sell. “If you have spent three to four years building a portfolio,” says Bladon, “you can exit now and see a great return. If you are a fund looking to invest half a billion in one go, you can get a very well-run, well-located student asset at a 5.75-6.25% yield. Compare that with funds looking at 4-4.5% for industrial, with five-year rent reviews. We think that student accommodation is mis-priced.”
However, student accommodation, especially in London, is being chased by a lot of institutional and international money and the competition for the right stock in the right location is fierce. It is thought that, with costs, the Pure portfolio represents a yield of below 4% for LetterOne. And they are, reportedly, very happy with that.
But is the Pure deal a good example of what is happening across the market? Or is it just another example of the ever-increasing appetite for prime London assets?
“London is a hotspot as it is a global capital,” says DTZ associate director Simon Lowe. “And it is absolutely a good time to sell given the recent yield compression.”
But, he adds, there is more to it than that. “It is also the biggest student market in the UK and it is undersupplied.”
And the deals keep on coming. Just last month Greystar paid Round Hill Capital £600m for the Nido portfolio, which comprises three blocks of flats in King’s Cross, Notting Hill and Spitalfields, totalling 2,375 beds. Round Hill itself bought the properties from Blackstone in 2012 for just £415m.
DEALS DONE IN 2015
| Price | Location | Providing | |
|---|---|---|---|
| Greystar buys Nido portfolio from Round Hill | £600m | Central London | 2,375 beds |
| Canada Pension Plan Investment Board buys Liberty Living from Brandeaux | £1.1bn | UK wide | 16,700 rooms in 40 residences across 17 towns and cities |
| LetterOne buys Pure portfolio from Carlyle | £532m | London | 2,170 beds |
| LetterOne buys from McLaren | £144m | Bath, Brighton, Edinburgh and York | 839 beds |
| Apache Capital buys 12-25 Paul Street from McLaren | £108m | London | 456-bed development |
| Empiric Student Property buys Liberty Fields from Brandeaux | £13.5m | London | 79 beds |
In London the picture is a classic tale of supply and demand – there is a negligible supply of decent, purpose-built stock and a whole raft of money chasing it, which is increasing competition and driving down yields.
The other factor whipping all of this up is the constraints on development.
Notably, student accommodation simply cannot compete in London with other land uses. “For the moment we do not foresee huge amounts of development, owing to these constraints,” says Lowe.
“There was a small window of opportunity where student accommodation could compete in London with other uses and that was in 2010-12,” says Investec’s Bladon. In terms of new development, there is now no way that it can compete. “So whatever is already there is going to get more valuable,” adds Bladon.
DEALS ON THE SLATE
| Price | Location | Providing | |
|---|---|---|---|
| Project Ardent (Mansion) | £400m | UK wide (a third in London) | 5,500 beds |
| Knightsbridge portfolio | £450m | UK wide | 5,867 beds |
Of course, for lenders such as Investec, London is a no-brainer as it is the most undersupplied market. “But we are very keen to lend into other main student cities,” says Bladon. “The fundamentals are there and that gives banks confidence.”
Pullman agrees. “London is flavour of the month, but everywhere is being looked at.” In London, he says, investors are trying to align student property with other residential, and that offers very good value.
“Anywhere that there is institutional-grade product – and that means quantity and quality – or product capable of becoming institutional-grade, is being looked at and fought over.”
Indeed, when LetterOne plunged into the market, it did not go shopping only in London. At the same time as it snatched the Pure portfolio and McLaren’s Paris Gardens, it also forward-purchased a four-asset portfolio from McLaren, covering developments in Bath, Edinburgh, Brighton and York, for £83m.
LetterOne’s purchase is canny, as these cities are among the hottest spots for student property in the country. They have the perfect combination of good institutions, chronic undersupply, planning and development constraints – and student appeal.
In Birmingham, in the Selly Oak area, for instance, there is quite a bad shortage of stock. “The same goes for Durham, Kingston, Oxford, Cambridge…” lists Pullan.
“Dublin and Belfast, where there is no real investment yet, will be good targets,” says Hayley Scott, Bladon’s colleague in Investec’s structured property finance team.
“The best examples of cities starved of stock are on the south coast,” says Lowe. The statistics seem to support this. The ratio of students to purpose-built beds in the UK is around two to one. On the south coast it is two-and-half to one. “The south coast doesn’t have the best institutions, but it does have huge demand,” says Lowe.
Much of the student accommodation in the UK – 45%, according to Savills – is owned by universities, or at least on their land. And much of the stock, again 45%, is below standard. So there are also great opportunities where the universities are looking to improve themselves. “Bournemouth and Coventry are looking to go up in the ranking,” says Investec’s Scott. “Because of that they want to invest in purpose-built accommodation.”
“Most of the tier-one regional cities can be considered as hotspots,” says Lowe. “It isn’t just supply and demand driving this. It is also quality and location.”
But it is not all double-firsts. While there are a number of thriving hot-spots, there are plenty of not-spots.
Despite talk of a chronic undersupply, many university cities are awash with housing stock and not so awash with students.
Even in those towns with good demographics, it seems the picture is rather more complex.
“I’m not sure there is a chronic undersupply,” says Gary Clarke, chief executive of Campus Living Villages, which bought the Opal portfolio last year and now has 8,727 beds in the UK across 11 properties. “There is more of a fine balance. In Leeds and Liverpool, I don’t see queues of students begging for rooms. We have to fight for occupancy.”
In those areas with an undersupply, is it a case of if you build it, they will come? Not necessarily, says Clarke. “We have seen some horrors.” In one city where CLV has managed to get 100% occupancy, a developer has built 240 beds just down the road. “They have just 10 students,” says Clarke.
He adds: “Some get it right, and some get it wrong. The ones who think they can just wade in and build; they are missing a lot of nuances.”
These nuances can include price – after all, if a purpose-built room costs significantly more than a one-bed flat, why not go for the flat? But there is also the problem of location, or not forging good enough links with the universities.
“If the developers get it wrong, then the students will stay in HMOs,” says Clarke.
Next year the cap on student numbers is being lifted. Each university will, in theory, be able to recruit unlimited numbers of students. You may think that this could only be a good thing for those looking to fill spaces in student blocks, but that is not the case.
“There will be winners and losers,” says Lowe, “and that will all feed into the market.” He expects the top half of the Russell Group will grow a little bit. In the second half – and in some of the former polytechnics – there will be a great opportunity to pull in more students.
“But in much of the third and fourth quartile there is some concern,” Lowe says. “What is their place in the market? Why go to your local uni when you could go anywhere?”
Some institutions, such as the University of Central Lancashire, in Preston, has already said that it will not even try to compete. As a college that grew into a university, it has candidly said that it will retrench.
In London, meanwhile, the students keep coming and so do the investors. Yields are at a point where selling is a very good idea. And as long as the supply of stock stays low, that will continue to be the case.
“There is no possibility of that being corrected,” says Pullan. “We will simply not be developing any more stock in central London.”
However, he argues, all core markets are structurally undersupplied.
Investec’s Bladon agrees: “Anyone with good-quality stock is holding all the cards. There are a lot of investors wanting to buy this kit, without putting it together piecemeal or developing.”
This does not apply just to the prime properties put together over the past five years – even though that is what is being transacted at the moment. “The market is broadening,” says Lowe. “It is not just about the prime end any more.”
Some private equity fund managers, notably Fortress and Moorfield, are now looking at secondary and tertiary stock. “They need greater returns so that kind of kit is attractive,” says Lowe.
The next three quarters of 2015 could see a wave of deals at this lower end of the quality scale. But Investec’s Scott says: “As a bank we are having to be more cautious.”
Why is this, when it seems like such a no-brainer of a market? Because in order to compete in such a bull market, and with alternative-use value creeping so high, some of the sums are being stretched.
“People are pricing in rental growth to make the higher land values work,” Scott says. “We are already seeing hints of an affordability problem emerging for land. People are being outbid and thus having to build in rental growth.”
The fun factor
Where would you invest in student accommodation?
It seems the answer is wherever you would chose to study.
“You can have a city with a great institution and a shortage of stock, but it still might not be the best place to invest because it is not loved by the students,” says DTZ’s Simon Lowe.
As well as being well-respected institutions, or offering the right courses, they have to offer something else. “You have to say ‘Are these fun cities?’ Do people want to come to them, stay in them? Because of that, Manchester will always be a hotspot.”
Glasgow, too. With its three big universities, as well as arts colleges and so on, and a student-to-bed ratio of two-and-a-half to one, Glasgow is already a hotspot. “It is also fun to live in,” Lowe says. “It has a buzz.”
Investors, he says, should not just look at the micro-asset, or the incomes. “Investors are savvy enough to take into account the dynamics of the city.”
But it is not all about fun. In both Glasgow and Manchester, for example, the employment prospects are excellent. Lowe says: “Students, particularly international students, thrive on being able to work on in the city where they study.”
Man-made planning constraints
In some cities, it seems, even if you can find the site, the funding and the students to fill it, you still cannot get a scheme to graduation day.
In some cities, notably York and Cambridge, students have been seen to be taking housing stock out of the local market, leading the local authorities to lay down policies to encourage student accommodation elsewhere.
Other parts of the country are seeing different issues. “Some planners would like to see HMOs unlocked and returned to the housing market,” says Investec’s Hayley Scott. “But there is no policy to compensate the students, or attract students away from HMOs.
Instead, says Knight Frank’s James Pullan, there are quite a few article 4s restricting student access into HMOs, but there are no policies in place to encourage proper student housing. “We are left with families wanting terraced houses, students wanting bespoke accommodation and the councils doing nothing.”
The problem, according to CLV’s Gary Clarke, is a lack of communication. He says: “In some major cities the universities work very well with the planners, so you don’t have this ghettoisation. Others don’t talk to their local authorities and they end up with too little product or product in the wrong location.”
However, as DTZ’s Lowe insists, ghettoisation may have to be the way forward. “Developers want critical mass, both from an investment point of view and to optimise costs. You have to move that further out to get that.”
Budget accommodation
With course fees at £9,000 a year and costs rising, students have become more aware of what they are getting for their money from their university.
In some ways this has boosted the appeal of purpose-built student accommodation. The idea of spending three years in a derelict meth-den is somehow less appealing when you are footing the bill for your education.
For some, this has turned university into a far more “high-end” experience than before. The Nido portfolio in London, recently bought by Greystar for £600m, is a good example, with rents averaging £500 per week.
Empiric, too, is occupying this upper tier. “It is pretty sexy stuff,” says DTZ’s Simon Lowe.
For Lowe, it is a classic example of divergence in a market. “At £500 per week, most UK students are priced out. They are mainly targeting international students.”
What is not happening is anything at the other end of the spectrum. For those willing or able to spend only £100 a week or less, the choices are university digs, an HMO or staying at home.
“Budget schemes aren’t happening,” says Lowe. “At the moment the developers are chasing profit.”
Added to that, land values make a budget new-build a tricky equation to balance. But Lowe thinks there could be a huge market emerging. “As we go through the cycles we will see some first-generation stock being recycled as low-budget.”
