UK Student Housing

UK Student Housing
UK Student Housing

19 May 2016, by Jacqui Daly

New and existing investors consolidate and drive portfolio scale

The student investment market experienced an exceptionally strong year in 2015, with 74,500 beds traded at a total value of £5.9bn.

This investment activity was due to a surge in the number of large portfolios traded in the first quarter of 2015 and much higher levels of consolidation in the sector than we have seen in the past. Was this record breaking year just a one-off or can it continue?



Investment Activity

Figure 1

Source: Savills Research

The student investment market has grown strongly since the recession, with an average of 44,000 beds and £2.4bn traded each year between 2012 and 2014. The doubling in the value of assets traded during 2015 was a result of fortuitous timing; a number of development-led portfolios hit maturity and others went through re-structuring at the time that new global investors began to take serious interest in the sector and the opportunities to invest in portfolios and achieve instant scale.

As a result, investors’ appetite for existing assets with stable income streams has never been stronger. Of the £5.9bn traded in 2015, £850m of investment was targeting the delivery of new stock through forward funding and forward commitment deals, and around £250m was deals involving the acquisition of development sites. Therefore, £4.75bn (80%) of activity in 2015 involved trading existing stock and 8.5% of total existing beds.


Private Sector Student Accommodation Ownership by Number of Beds

Figure 2

Source: Savills Research

The consolidation in the market reflects two key trends: existing investors seeking to crystallise profit and either exit the market or target higher returns in less mature international markets, and a second wave of larger global investors interested in the UK’s maturing market.

Unlike earlier investors who achieved higher returns from development and investing in newly built stock, many recent global investors are searching for longer-term secured income streams. The primary aim for many of them will be to achieve sufficient economies of scale to deliver their target rates of returns. The challenge will be in finding enough appropriate investment opportunities for them to do so.

Many of these new investors are looking to amass large portfolios, akin to the portfolios of scale in both the US student and multi-family markets. For example; Wellcome Trust’s IQ merger with Goldman Sachs and Greystar’s Prodigy Living demonstrates the drive to achieve scale quickly in the market. But achieving economies of scale in the UK student market is difficult given the composition of the market and as investment activity continues, there will be fewer large portfolios available.

The student market is highly fragmented and, although only 8.5% of total beds were traded in 2015, the figure rises to 30% for privately owned beds. Of the top 30 operators/investors in the UK market by size (number of operational beds), 50% of the market is owned by those with less than 10,000 beds.

Therefore, as the appetite from global investors continues unabated, it appears likely that consolidation via mergers and acquisitions will be one of the defining features of the market in coming years.


Largest Owners by Number of Beds

Figure 3

Source: Savills Research


With the large inflow of investment in 2015, yields on student accommodation across all locations and lease types compressed by 50-75 basis points (excluding portfolio premiums of up to 75 basis points).

Looking ahead, we are forecasting total investment of £4 billion in 2016. This is down on last year’s record-breaking total but still an increase of 57% on the investment seen in 2014. We expect yields to remain static during 2016 and, with rental growth averaging out at 3.5%, our forecast is for average total returns of 9.5%.


2016 Yields

Figure 4

Lease: 25 year lease to institutional grade university covenant on annual RPI linked increases with a cap and collar Nomination Agreement: 15 years+ nomination agreement to institutional grade university covenant

Source: Savills Research


Investment Yields

Figure 5

Source: Savills Research & IPD

Global Investment Flows

Last year was not only record-breaking in terms of investment activity but also highlighted the sector’s ongoing evolution into a mature and global investment market.

Traditionally, the market has been dominated by UK investors and operators. Last year, the total value of deals involving UK buyers was £1.6 billion, the same as the previous year. However, rather than being responsible for the majority of deals (by value) as they were in 2014, they were put firmly into second place by North American institutional investors who bought £3.3 billion of assets. There were also significant purchases by Russian investors and, to a lesser degree, investors from the Middle East.

Although the first quarter of 2016 has seen significantly less investment activity than in the same period last year, it is still 17% higher than the average for the 2013 and 2014 first quarters. Asian investors showed considerable interest last year and that has been converted into activity this year with £420million of investment, accounting for 50% of deals by value.

Interest in the sector remains strong but it is unlikely that total investment will hit last year’s heights. The impact of the EU referendum on activity has been limited to date and we will probably see a strong second half of the year as the sector remains attractive to global investors.


Investment by Region

Figure 6


Global Investment into UK Student Housing Over Last Three Years

Figure 7

Source: Savills Research

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