Student accommodation has long been affiliated with getting trashed at parties, being home to an assortment of personalities – some unhygienic – and barely having enough space to allow people room to move inside.
Bunking down in student digs has long been seen as a rite of passage for teenagers or 20-somethings starting university, typified in television programmes such as Fresh Meat. But, over the past two years in the UK, the space – and sector – has become increasingly sophisticated, with en-suite bathrooms, on-site gyms and rooftop terraces – nowhere more so than in London. With the rising trend for luxury digs comes a hefty rise in income for student housing developers and landlords.
Nowhere in Britain do pupils pay more than in the capital, with some schemes charging more than £400 per week in London – more than the average homeowner pays on their mortgage.
James Pullan, head of student property at Knight Frank, says: “The structural undersupply in London has never been more acute.”
That begs the question: why are there not more schemes being built to satisfy the demand?
Research by Knight Frank shows the severity of undersupply in London. There are 281,500 full-time students in the capital, but just 70,986 purpose-built beds and a meagre 8,472 under construction. The problem, says Pullan, is that – certainly in zones one and two – developers now deem the sector financially unviable.
That is a view echoed in the action of at least one major operator, Unite, which told EG earlier this year that it planned to shift its pipeline to the regions because of soaring London land price values.
Richard Simpson, managing director of property at Unite, says: “Between 2009 and 2013, we were focused almost exclusively on London development, with more than 90% of our capital going into London. Since summer 2013, that percentage has shifted and we are now spending 60% in the regions.”
The main competition for land is from housebuilders looking to capitalise on residential undersupply and rising values. Last month saw British Land pre-sell a number of flats at its Clarges development in Mayfair, with some prices hitting a new W1 record of £5,000 per sq ft.
While most student housing developers would not be eyeing sites in the heart of the West End, the Clarges performance echoes across London – values are jumping and therefore pricing out some student accommodation developers.
An alternative for those looking to get a slice of the market seems to be investment rather than physical development. Again, the figures are impressive, with Savills calculating that transactions in the sector totalled £5bn in 2012 and 2013 in the UK. It has forecast a £2.5bn figure for 2014. A large chunk of the turnover is expected to come from London.
Deals this year include Unite and Oasis Capital Bank selling three blocks comprising 1,129 beds in north and south London for £174m to Canada’s Public Sector Pension Plan Investment Board and US investor Greystar. In May, Canadian investor Realstar Group bought 164-bed Canto Court in Old Street, E1, for around £39m. Both Greystar and Realstar want to develop large portfolios in the UK.
As a result, the market is becoming increasingly liquid, with a number of parties having brought or preparing to bring chunky assets and portfolios to the market. JLL has been instructed to sell Carlyle Group’s £500m Pure portfolio, while the agent is also marketing the City fringe campus of Hult Business School, which comprises a 317-bed student tower, for £100m.
Lenders are also hot on student housing, says Alexandra Lanni, head of transactions at Laxfield Capital, which arranged in June for Singapore’s sovereign wealth fund, GIC, to provide a £90m whole loan to developer Urbanest against its Hoxton and St Pancras developments.
Lanni says: “Assets and operators have become more institutional in nature and a significant weight of domestic and overseas capital is very attracted to the market. We are seeing yield compression in London as well as corporate-level consolidation as new operators seek to establish portfolio critical mass and economies of sale.”
She adds that Laxfield has arranged three debt deals on behalf of international investors so far this year.
With the 2012 introduction of university fees of up to £9,000 per year for UK students, there were concerns that applications would drop. This has not been the case and the number of admissions in September was 4% higher than in September 2013, putting more strain on student housing supply. For the time being, though, the cranes that litter London’s skyline are more likely to be for residential and office development.
OTHER OPTIONS
There are alternative models that can help to keep student housing profitable and sustainable.
One firm that believes it has a unique model is student housing provider UPP, which designs affordable digs by working with a university’s existing assets to develop schemes and free up university resources.
UPP chief executive Sean O’Shea comments: “It is getting increasingly difficult to acquire sites in London because you are competing with a residential market. We are very keen to do more in London, but we will work with existing sites.”
O’Shea says a number of universities have big real estate portfolios where there is scope to redevelop or increase the number of beds.
The company also makes use of letting space in schemes in the summer months when students are on holiday. O’Shea says the company can generate an extra £3m pa in revenue from short-term lets at its schemes, for example to foreign exchange pupils. Its method is clearly working, with UPP this year getting a £200m equity injection from its shareholders, setting it up for a £1bn expansion drive.
Another firm that is trying to make an impact in the capital is The Collective – a London-based, shared-living concept offering affordable renting options for students and people on median salaries. It buys existing buildings and converts them for multiple flats use.
Founder Reza Merchant says The Collective has built up a portfolio of 350 beds in zones one to three over the past three years and now wants to dramatically reach 5,000 beds within
12 months.
Merchant explains: “In London, we identified an acute need for our product.” He adds that being a smaller business and working with existing properties means it can work swiftly. “Bigger companies can get held up in long approval processes, and conservative funding can hold them back,” he says. “In this respect, we have a definite advantage.”
RENT
DTZ has calculated that average rent at university halls is around £165 per week, compared with £142 per week last year. In the private sector in London, the figure climbed from £259 to £282.
Some schemes are charging much more, such as at the King’s Cross Nido block, where students can expect to pay as much as £419 per week, and the Spitalfields Nido development (pictured), where rents can reach £339 per week.
Sarah Jones, director, education and innovation at DTZ, said: “I think it’s possible that the rent rises next year will be between 6% and 10%. They could even rise beyond that, given the strength of demand from some types of international students.”
Average weekly rent
University halls (2014) £165
Private sector in London (2014) £282
Source: DTZ
