The UK student accommodation sector is no longer a niche property market, according to property agents and consultants, King Sturge. The sector, it said in a report last year, is now recognised as an asset class in its own right by financial institutions and investors, with over £700 million of transactions in 2006/2007.
This may have been a little premature, as we'll see. It's still a tiny sector fraught with risks. But student accommodation has definitely been getting itself noticed of late, with some excellent returns which appear to be relatively insulated from the pain in the wider property market.
The chief attractions have been increasing values and rents due to the inability of supply to keep up with demand from rising student numbers. King Sturge also highlighted the relatively stable and secure nature of the market due to its counter-cyclical tendencies; more students enter education, rather than the workforce, during uncertain economic times.
Fund performance
The performance of the Brandeaux Student Accommodation Fund demonstrates the highly stable and attractive nature of this market. It has posted consistent annual returns of around 10 per cent since launch in June 2000 and, remarkably, its returns seem to have been completely unaffected by the downturn.
University Capital Trust returned 11.96 per cent in the 12 months to March and Braemar Student Accommodation has also done very well so far, returning 26.2 per cent since launch in November.
Unite's UK Student Accommodation Fund fared less well over the last three quarters - its figures were hit by exposure to the swaps market and a deposit of cash held with Landsbanki, which it is hoping to retrieve.
Coral Portfolio SAF only opened in March but has returned 1 per cent a month so far.
Commenting on overall performance in the sector, Cameron McVean, head of fund services at IPD, says: "Student accommodation funds have, to some extent, been insulated from the extremities of wider property capital value falls. The government has promoted higher education for a number of years which means there is a more secure income flow than, say, investing in an office in Canary Wharf."
"Given that these funds have been less volatile in the past, their capital values could hold up better than the rest of the market this year. Furthermore, the security of the rental income has proved a resilient factor; these assets have inflationary-linked annual contracts with upward-only rents reviews, as a result."
Health warnings
That's the (mostly) good news. Now for the large health warnings.
Despite King Sturge's claim that this is an asset class on its own right - due to increased availability of data for comparison - student accommodation remains a highly niche sector with only a handful of funds to choose from.
These are run in very different ways and are extremely difficult to compare, (indeed, no data provider has performance statistics for all the funds). Brandeaux, for example, is an owner-operator fund manager while Unite is a property developer with its own fund. Brandeaux's fund is 10 per cent geared, while Braemar's is 50 per cent with the potential to go to 70 per cent gearing. Some - including Brandeaux and Braemar - welcome investment from retail clients via IFAs. Others, such as Unite and UCT, are mainly designed for institutional investors. However, you can gain access to both of these via the Coral Portfolio SAF - which oddly, for such a small market, is a fund of funds.
Major liquidity problems
The biggest problem with property funds is often liquidity and so it has proved to be with student accommodation.
Unfortunately Brandeaux's sparkling returns have been hiding an uncomfortable fact which is that the fund was suspended for three months between December and March this year.
This followed a particularly large redemption request on another fund run by the company, Ground Rent Income, and both were closed as a precaution. The Brandeaux SAF was reopened with a new six-month redemption clause to protect it from future liquidity hits. But most worryingly of all, even small redemption requests from the fund are only just starting to be met.
Brandeaux's directors said it is their intention "to accelerate modest redemption requests particularly from income takers and to deal with all other redemption requests as quickly as possible."
But it rather brings to mind the quotation from Mark Twain: "Investors should have greater concern about the return of capital rather than return on capital."
There is some encouraging news to emerge from this "nuclear winter" as Brandeaux describes it - demand is surging once again. Brandeaux has received subscriptions of more than £25 million for SAF in the first three months since reopening.
Also, as a result of this strong subscription level and demand from international institutions and wealth managers for a US dollar and euro version, Brandeaux is to launch the student accommodation fund in both of these currencies.
Offshore status
Another problem for many advisers is the offshore status of these funds. Brandeaux, for example, is domiciled in the British Virgin Islands and listed in Ireland, Braemar is in Guernsey and Coral Portfolio is in Luxembourg - all beyond the jurisdiction of the Financial Services Authority (FSA). This may be why you haven't heard much about the sector; it means the funds can only be marketed to intermediaries and not to the public.
However, these problems have not put off Neil Mumford, of Milestone Wealth Management. He says: "We have undertaken a lot of research to find funds that have continued to deliver through all market conditions since the turn of this century. We now use a number of core funds that have a proven track records of producing those consistent returns with low volatility to provide clients with exactly what they want. Brandeaux is one of the few groups that fit this criteria and its Student Accommodation Fund has become a core holding in every client portfolio."
Mr Mumford agrees that some IFAs may be frightened away because the fund is offshore and unregulated in the UK, "but we only have to look at the recent events with Arch Cru and Keydata to see that FSA regulation means very little. Brandeaux has a long track record and is one of the largest providers of offshore funds and I believe is a far safer pair of hands than most fund houses. In particular with student accommodation, you only need to visit the universities to see what your money is invested in. There are not many managers that can show you that degree of security.
"They do what is says on the tin and have shown that they can deliver outstanding consistent performance over the longer term."
Recession-proof?
Roger Boyland, chief executive of Brandeaux, says: "We are a pure owner-operator, our returns have not been affected by development or gearing. But most importantly the properties have held their value and in fact increased in line with our ability to increase rental income year on year by about 6 or 7 per cent. This is unlike the general commercial property market, which has seen occupancy rates and rents stripped back and affect capital values. Because of imbalance of supply and demand we are able to increase rents and are always 100 per cent full. It is a sustainable and growing income stream.
"Family budgets have not yet had an effect. Usually the child's education is the last thing to go. We have very small levels of bad debt."
Brandeaux is covered by the regulations in British Virgin Islands and Ireland and has an adviser in the UK which is covered by the FSA. "We pride ourselves on having very high levels of corporate governance," says Mr Boyland. "We have real independent executives on the board - not just padding - just like any UK corporate board. The reason we stay offshore is to shelter our overseas investors from the UK tax regime."
With regard to the redemptions problem, Mr Boyland says that the average redemption term previous to December was seven days. He says: "We are very confident we will be able to meet redemptions well within the six months and we are rebuilding liquidity."
One sign in favour of King Sturge's assertion that this is no longer a niche market is the increasing number of players, including new entrants Braemar and Coral Portfolio, which launched its SAF in March.
Asked why he launched a fund of funds, Lawrence Frampton, director of Coral Portfolio SAF, says: "Our research suggested that investors were looking for more diversity. One downside of the student accommodation market is the limited supply of buildings, so the funds were often not open to new investors. We therefore decided to invest in a number of projects. This was shown to have foresight as [around the same time as we started] Brandeaux shut its doors."
It may still be niche, but the UK student accommodation sector is certainly throwing up some interesting opportunities from both new and old providers.
Student accommodation fundamentals
The counter cyclical theory has held true over the last year. Latest figures show that there has been around an 8 per cent increase (about 42,000) in applications for full-time study at university, the biggest in eight years.
The recession and rising unemployment have caused more sixth formers to seek higher qualifications and even more adults are wishing to retrain. This trend is a repeat of the last economic downturn. All the indications are that accommodation supply will continue to fail to meet the rising demand.
A report from Savills released in May 2009 also confirms that sentiment in the sector is still very positive despite the very harsh winter endured by the wider property market.
It said that student housing has been one of the most resilient investment sectors during the downturn. Although the credit crunch put the brakes on development activity, investors are still enjoying robust performance compared to other asset classes. The combination of high demand, low supply and rising rents is still in place and many private operators of accommodation are already fully booked for the next academic year (2009/10).
Savills notes that yields in the student sector may not be as attractive as they were compared to other commercial property sectors, but the rental growth prospects and high occupancy rates ensure that student housing will remain a key investment sector. Rental growth in the student sector has been consistently over and above RPI. Importantly, capital values in the sector in 2008 did not fall to the same degree as the wider residential or commercial markets.
The market is in fact bucking the trend by expanding rapidly in the wake of the credit crunch. Critically, says Savills, if the financial sector in the UK permanently shrinks in size, possession of a higher degree will become even more important. This will boost postgraduate student numbers further.
London is a key sector
From a regional perspective, London continues to lead with the largest student population in Europe and an acute shortage of housing. Student numbers are growing at 15 times the rate of new supply in London, according to data from the Higher Education Statistics Agency (HESA).
Pressures on London are set to increase, with Government forecasts indicating a further 125,000 international students over the next decade. In the short term, demand from international students may rise even more sharply because of the weakness of the pound.
A key attraction of student housing to investors is the relatively long-term income stream and its rental growth prospects, according to Savills.
Private sector student rents grew by an average of 8 per cent nationally compared to 5 per cent nationally and 6 per cent in the university sector in the past year.
These private sector rents have been growing at a much faster rate because they are generally for newer accommodation blocks providing higher quality student housing and services. The 97 per cent occupancy level achieved this year and the full occupancy expected next year (2009/10) provide strong evidence of the affordability of private sector rents and the high demand for good quality accommodation - this is especially being driven by overseas students.
