Student housing market value doubles

Total investment into the sector soared to £2.1 billion in the 16 months ending April 2012, up from £1 billion in 2010 and Savills research forecasts that total market turnover will exceed £2.25 billion in 2012. 

Investor demand for sound, income-generating assets has doubled the market for student housing over the past 18 months and it is now worth over £2 billion a year, according to Spotlight on Student Housing published today by real estate adviser, Savills.  Investors’ attention is focused on high-quality stock aligned to the best performing universities.  Investment funds have begun to fill the debt gap left by banks and could fill some of the funding gap now left by the government.

“A lack of bank finance and uncertainty regarding university funding has created unprecedented opportunities for investors.  Some of these are in high quality university cities which would not otherwise be available to them, due to a lack of newly built supply,” says Yolande Barnes, Head of Savills research. 

“Student housing is widely considered to be a new or alternative sector, but it has outperformed many commercial property asset classes over the past five years, with average blended annual yields approaching 6 per cent.  Its appeal to investors looking to offset riskier assets with a more defensive asset strategy cannot be overstated, particularly against the current economic backdrop.”

At the same time, she says, new investment opportunities are arising as universities seek to avoid calls on capital and revenue arising from their own ageing accommodation and are increasingly looking to generate capital receipts (and upgraded accommodation) from investors through stock transfer. 

Investor appetite growth forecast to continue

The Savills student investment team has identified 80 major student housing transactions since the beginning of 2011, covering both sites and investment deals, with just over a third London based. 

Investment funds are increasingly active in the market, securing loans with operators such as Unite, iQ and Nido.  This is an encouraging shift for operators/developers already in the market as this is their first real taste of direct let product and possibly the first step in acquiring direct let assets.  M&G, L&G, Aviva and AIG have all entered or are entering this space. 

Is student demand secure?

On the student demand side, concern that changes to the funding of universities would impact on student numbers so far appear unfounded.  Total applications for the age groups of 18, 19 and 20 (which account for 75 per cent of all applications) are already well over 90,000 ahead of the number of degree place acceptances in 2011 for the same age group.  Longer term, investors should also scrutinise domestic demographic changes.  By 2020 the cumulative fall in the 18-20 demographic is projected to fall by 358,000 from its high of 2.48 million in 2010. 

International student demand for UK university places is forecast to rise by 30,000 by 2020* provided UK immigration policy allows for this growth, and the distribution of this demand will be key. As  Barnes says, “Universities with a track record of attracting high calibre international students will be those catching the eye of investors”.

Assessing risk

It now seems inevitable that investors, developers and operators of student accommodation will increasingly look to align themselves with universities towards the upper quartiles of the academic rankings, which will in turn be those attracting international students.

“Investors should focus attention on universities that show increasing or stable demand, with a growing share of international students,” says Marcus Roberts, head of Savills student investment team.  “But the key to good investment will be to identify universities that meet this and other criteria – most particularly high demand coupled with a need to upgrade their residential accommodation significantly to compete for top student talent.  Above all, an investor still needs to consider the micro location of each asset and site.”

Savills research has created an investment matrix which combines individual university rankings, balance sheet pressures, the quality of accommodation and cost of required upgrades, analysis which suggests the top 50 per cent of universities are the investor opportunity markets.  But, they say, investors will also need to take account of supply and demand issues and local planning issues. 

This means, for example, that the Oxbridge universities, despite being extremely well-financed institutions and owning the majority of their accommodation, will reward an investor able to identify accommodation opportunities, such is the strength of their international reputation and demand profile. 

At the other end of the scale, institutions such as the University of Hull, Leeds Metropolitan University and Liverpool John Moores are seeing decreasing demand and do not enjoy the same academic ranking.  By contrast, the London School of Economics while seeing falling domestic demand – possibly linked to the cost of living in the capital – is seeing stable international demand.  But given the shortage of quality purpose built stock in London, this could represent a valid investment target.

“The likely winners in attracting investment into their student housing offering will be those universities able to adapt to tuition fee and funding changes, whilst simultaneously boosting international student numbers.  The losers, or those less well-placed to attract investment in a risk averse environment, are likely to be those lower ranked universities unable to make their property assets work for them.

* Source: British Council, “The shape of things to come: Higher education global trends and emerging opportunities to 2020”

To view the Spotlight on Student Housing 2012 report click here