UK Student Housing

UK Student Housing
 
In a league of their own

10 May 2017, by Andrew Smith

In a highly competitive market, developers will have to be careful when selecting sites

 

Our student housing development league table has changed substantially since last year. With more towns falling down the rankings than rising, it’s more important than ever for investors to be selective.

Well-located assets in strong markets will enjoy high occupancy and rental growth. Assets in secondary locations could struggle with competition for occupancy and rental growth regardless of the university town.

Our analysis takes account of a range of factors such as current and future supply, demand, affordability and the potential for rental growth.

We combine this with our knowledge of advising in these markets to create a single, simple indicator of each city’s development potential (see Figure 6).

FIGURE 6

Student Housing Development League Table

 
Figure 6

Source: Savills Research

Best in class

Each of our top cities is attractive for development because of strong demand characteristics, high occupancy levels, strong rents and good prospects for rental growth.

In 2017 three new markets moved up to the First tier: Exeter, Guildford and Leeds. Continued strong demand in these markets, demonstrated by their success in attracting new students alongside limited supply, make these cities particularly attractive for new student development.

See me after class

Liverpool has fallen down the rankings to a pass this year. There are now 21,700 PBSA units in the city, meaning 2.1 students for each unit. With supply of a further 12,400 units either under construction or with planning permission, this ratio just 1.4.

In this highly competitive market, we see little capacity for investors to drive rental growth unless they have the very best quality stock in the best location.

Another market to watch is Plymouth. It has just 5,900 PBSA units, putting its student to bed ratio at 3.7. However, the planning pipeline looks full, with almost 3,300 units committed. This amounts to 56% growth relative to existing supply.

With such a large concentration of supply in the pipeline, it could be challenging for operators to let their schemes unless they are priced attractively relative to their competitors.


Findings from Finance

More Lenders Compete to Fund Student Housing

words by David Yeadon, Director, SPF

Lenders now see student housing as a secure sector. We are seeing a growing number of lenders willing to lend in the space, at higher loan to value ratios and at cheaper financing rates than we’ve typically seen in the past.

Traditional lenders, including the UK and European Banks, are growing more comfortable lending on schemes without a long-term university lease or a nominations agreement. European banks tend to focus on larger loans over £20m and are usually more willing to finance schemes over a longer term than their UK counterparts. As a consequence we have seen many more deals involve European lenders in the past 12 months and their appetite to fund student development is strong.

Debt funds, offering higher cost / higher leverage finance, have also been increasing their activity in the student market. We have seen an increase in specialist debt funds with a pure focus on development finance. They often finance deals with loan to cost ratios as high as 80–85%, which typically translates to a 70% loan to value (day one). However, these loans are only available as a short-term option, so developers / investors need to refinance or sell their assets soon after construction is complete.

Interest rates are the lowest they have ever been, and we expect this low interest environment to continue over the next few years. Long-term loans can be secured at an all-in rate of just over 3%, the lowest rates we have seen.

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