Though the introduction of higher tuition fees for those wishing to study in the UK has seen an 8% decline in university applications this year, student accommodation has emerged as a growth sector for investors.
There are a number of reasons behind this apparent paradox which, once considered, makes investment in this sector an attractive proposition for a wide range of institutional and high-net-worth investors.
Developers are still faced with the difficult task of securing funding. Wary banks, lacking liquidity and still inherently suspicious of the property sector since 2008, are no longer an abundant source of debt for such projects.
Furthermore, ambiguous planning policy and the introduction of the Community Infrastructure Levy (CIL) has helped contribute to high demand and sporadic supply.
With the total development pipeline for student accommodation accounting for around just 2% of full-time student numbers, this market has emerged as a serious asset class and alternative funders are more than happy to provide the capital needed to fill the void left by a hesitant banking system.
This is not to say that alternative funders wish to gamble. Investors such as ourselves that have entered the student housing sector recognise that student housing investment is made up of either university-backed long leases or direct lets which are comprised of multiple guarantors.
In the case of the latter, instead of relying on the covenant strength of a single entity, each student, often with the support of his or her family, acts as a sub-tenant and, consequently, the likelihood of mass default is negligible.
Despite the fact that each lease is short-term, the shortage of purpose-built student housing provides an environment in which quality student housing projects within Russell Group locations rarely experience large amounts of vacancy.
In the current investment climate, investors are seeking low-risk and high yield. Student housing is one of the few asset classes that provide both.
Institutional investors are still able to purchase trading assets within Russell Group locations for 7% yields or more. This means that, for those that do purchase at such yields, as the industry continues to strengthen, yields are very likely to decrease, creating an opportunity for upside – which is rare to find in the current investment environment – especially with respect to stable long-term income plays.
It should also be noted that, over the past two years, rental growth in the student housing sector has averaged 3-5% nationally, significantly outperforming other commercial property sectors.
Importantly, the 68% increase in overseas students over the past decade is a trend that is likely to continue.
Investors would be wise to consider the location of a proposed student accommodation project. Higher fees and lower employment prospects will force students to be far more selective when considering where to study. Investors must show the same selectivity.
Our focus will be on partnering with seasoned mid-sized developers and operators with experience in high-demand Russell Group locations.
Investors need to focus on investing in schemes that have high-quality, proactive operators, and should remember to set aside enough capital in the form of a sinking fund to cover renovations, maintenance and repairs.
A recent CBRE report noted that investment in student accommodation has climbed to a record £2bn since the beginning of 2012. Investors are waking up to the high returns that can be achieved in this sector, and it will not be surprising to see the rapid emergence of alternative funding sources to meet increasing investor appetite.
