What will be the impact of Britain’s departure from the European Union on the student accommodation sector?
Rarely can the views of those advising on the sector – the agents, the end user and the universities – have been so different, with one group insisting that the sector will continue to power ahead while the other is warning of doom and gloom.
Investec has polled 130 clients to find their views as well, and of all the property asset classes, student accommodation was seen as the best prospect for investment returns in the next three years, with residential having the best development prospects.
At the same time, though, 78% of those we polled are concerned about losing European Union Single Market access.
So what’s going to give?
First, what are the agents saying? In its latest UK Student Housing Quarterly Bulletin, JLL reports that £900m of student accommodation business was transacted in the third quarter of 2016, and was projecting a total of £3.5bn for the whole year.
This is well above the long-term trend, with £1bn transacted in 2011, £2.7bn in 2012, £2bn in 2013, £1.7bn in 2014 and £5.7bn in the blockbuster year of 2015.
Many institutional UK investors will continue moving their portfolio exposure towards build to rent and student accommodation as a hedge against the impact of Brexit, inflation and future interest rates on the commercial property sectors.
At the same time, however, the downsides of Brexit cannot be ignored, with UCAS data showing that students applying from the European Union have fallen by 7% – the first decrease in almost a decade. Applications for places at Cambridge University have fallen by 14% alone.
Leading academics have warned MPs that Brexit in the form currently envisaged could be the “biggest disaster” in higher education for many years, also leading to long-term damage to the reputation of UK universities among their counterparts in the European Union.
Mindful of this sentiment, and considering the unprecedented growth experienced by student accommodation, at Investec we believe the student accommodation sector will now start reverting to prime.
There has been overdevelopment in some locations, with some university towns now well supplied. Developers that have bought less than well-located land for student development in certain towns, and at potentially inflated prices, could be in for a nasty shock.
Crucially, student rent affordability also has a ceiling, which could affect project returns, occupancy or both. If annual rents cease to rise, at least in line with inflation, it could make this sector less attractive to institutions particularly if the location is not perfect.
There is therefore some risk surrounding secondary student accommodation assets, especially those that have not had the capital expenditure required to maintain their appeal, in a market where new shiny stock is readily available at similar rents.
At the same time, only 41% of those polled in our client survey believe that interest rates will rise in the next 12 months.
With inflation now at its highest since June 2014, we believe the chances of an interest rate rise over the next 12 to 24 months are in fact higher than 41%. That said, much of this risk has already been priced in to longer-term SWAP rates. Even so, it will make it harder for all developers, who are looking to trade out of assets at practical completion or at stabilisation, to reach the internal rate of return hurdles they need to make investments stack up.
Rising bond yields, too, may also begin to persuade institutional investors to allocate their money elsewhere, diminishing the demand for secondary investment and potentially hitting prices.
Investec is a committed lender to the student accommodation sector, and our appetite to lend on well-located student developments, and to experienced counterparties remains strong. However, we are cautious about riskier projects.
Hayley Scott is a member of Investec’s structured property finance team
