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Student housing passes the test

Created:

9 February 2010

Written by:

Claer Barrett

Student accommodation is a niche investment area that private investors have been eagerly studying. Backed up by statistics that any professor of economics would be proud of, the market seems to be immune from pressures faced by the wider property market. But how much longer can this out performance continue?

The recession has boosted university applications, with admissions service UCAS reporting a 12 per cent rise in applications for the 2010-2011 academic year. Since 1996, student numbers have maintained an annual growth rate of 2.5 per cent (see graphs below). With universities unable to provide sufficient accommodation, values and rents in the rapidly growing private sector are rising.

Research from Knight Frank shows that rental growth is rising at the rate of 5 per cent per annum for operators of private halls, and restricted supply is one reason for this sustained increase. "Only 26 per cent of London's higher education students are able to access halls, and only 3 per cent have access to private-sector halls," notes Knight Frank partner Tim Goddard. "This is a substantially lower proportion than other major cities."

The positive numbers are very attractive to private investors, and as the sector matures, there have never been as many ways to gain exposure. In the past, the direct route via a buy-to-let investment near a university was the only option. Today, there are a growing number of funds which specialise in the sector, and the Unite Group, one of the biggest fund managers and developers, is listed on the UK stock market.

If you're a fresher when it comes to student accommodation, it is worth doing your homework about the trends that are driving the market.

Foreign bodies

With budgets under pressure, UK universities are targeting foreign students because they pay substantially higher course fees than UK students. So, it follows that the private hall operators are targeting foreign students, because they also pay far higher rents.

Listed student accommodation specialist Unite Group controls a portfolio of 38,500 rooms, most of which have been sold into the USAF fund, which it manages. The Investors Chronicle's best performing buy tip of 2009, two-thirds of its London beds are currently occupied by foreign students.

"China and India are the biggest source of international students for us," confirms Mark Allan, chief executive of Unite Group. Research carried out by Unite indicates there are 1.2m full-time students in the UK, of which a quarter come from overseas - and a quarter of those come to study in London.

"We have three international agents in China who pre-book our London halls, and we've invested in having a Unite microsite developed in Mandarin Chinese characters. This means we get picked up by the Chinese search engine, Baidu," he says.

Unite also has international agents in India, Russia, the Middle East and Africa. "The international channels for customer acquisition is something we feel we can do a lot more with," Mr Allan says.

Interestingly, the UK student population is an area he is far less excited about. "In ten years' time, the UK undergraduate numbers are going to plateau and arguably decline," he says. "Spending cuts at UK universities are anticipated, and all the main universities I've spoken to in the last 6 months are not focusing their growth on UK graduates. They are all targeting international students, as international students are profitable."

The trend is certainly backed up by the most recent UCAS statistics. In October 2009, UCAS recorded a 16.6 per cent increase in applications from foreign students, including a 27 per cent increase from Chinese students.

American students, who are accustomed to expensive tertiary education, are also a significant group,. So it should come as no surprise that US giant Blackstone has developed two London halls aimed at American students with joint venture partner Generation Estates. Trading under the Nido brand, images on their website are more akin to a boutique hotel. As well as plush living accommodation, students have their own games room with pool tables and a juke box, and receive a text when their laundry is ready to be collected. The cost of staying in this student paradise? A cool £295 a week.

For this reason, the top-end student market ticks all the right boxes for foreign investors. Last August, Unite forward-sold three London development projects into a £194m joint venture with Bahrain's Oasis Capital Bank

In October, Unite raised £78m in a placing to boost its London development programme, and in December, its USAF fund completed a £167m capital raise. For the time being, London is the focus, as regional locations do not pass the investment test with flying colours.

"London is a completely different market compared to the rest of the UK," Mr Allan says. "There are a number of provincial cities we will not build in any more," he adds, believing that Sheffield, Leeds and Liverpool have all now reached "saturation point".

"Student numbers aren't growing [in these locations] and there's already a good level of supply," he says. "There are 4,000 empty rooms in the Leeds market, and the vast majority are older stock."

Do the maths

Companies like Unite and Nido are firmly targeted on London's foreign-student market. It is worth remembering that other options available to investors tend to have a more regional focus.

Private funds are a popular option for private investors and their advisers, and a new fund, the Mansion Student Accommodation Fund, was launched last month following its maiden acquisition of a 421-bed hall of residence in Liverpool. The fund is now reviewing several acquisitions in London, Oxford and Glasgow, according to fund manager Mark Stubbs.

However, as with other private funds of this type, it is geared towards long-term capital growth rather than income return.

With average student debts now topping £17,500 there is an argument that investors may be better rewarded by old-fashioned student buy-to-lets than more expensive purpose-built halls. It figures that the private rental sector could be a cheaper option for cash-strapped UK students. Knight Frank's statistics also show that a growing number (19 per cent) are opting to stay home with their parents.

The direct market was always a management-intensive job, but it stands to become more complicated still. This week, it was announced that from April, landlords will have to apply to local councils for planning permission if they want to create an HMO - a 'house of multiple occupation', defined as a property shared by three or more unrelated tenants. The move is designed to give local authorities control over "studentification" of whole neighbourhoods, as witnessed in the Headingley area of Leeds in the past.

Unsurprisingly, the announcement has caused uproar in the buy-to-let community."Would new landlords buy a house on the chance that it will be granted planning permission as an HMO?" asks student landlord and popular Property Hawk blogger Terry Samuels. "The growing complexity of letting properties will ensure that letting agencies continue to prosper."

With such a mixed national growth story, it is clearly worth swotting up on the student market in case your investment theory turns out to be purely academic.