BLOG: Student housing comes of age
More than £15bn worth of transactions were made into alternatives last year, representing a quarter of the total commercial property market, data from agent JLL show.
Standing out as the stellar performer among the alternative sectors was student housing. A record £5bn was invested in student housing last year compared with just shy of £500m in 2010, making it one of the most dynamic property sectors in the UK. So what has driven this exceptional growth and how sustainable is investment in this sector?
Pricing has been a major driver. In an environment of low bond yields caused by sustained loose monetary policy and prolonged quantitative easing, higher rental yields on student housing make them look more attractive on a relative basis and generally this is expected to remain the case over the next few years.
However student housing yields have compressed considerably in the past couple of years owing to strong investor demand caused by a plethora of large portfolio deals and a shortage of investment-grade purpose-built student accommodation (PBSA).
With prime London student accommodation yields now at around 4.5-5.0% compared with 3.5-4.0% for prime central London office yields, they are starting to look overpriced, especially considering the additional risk premium required for investing in a sector that is less mature and has lower levels of liquidity than the well-established central London office sector.
Better value can be found in new and emerging locations in the outer areas of London while still being easily accessible to central London and with good transport links. Examples of this include Stratford and Wembley, which are seeing increased development activity of purpose-built student housing. Meanwhile, pricing in regional markets outside of London is also more attractive with a risk premium of 50-100 basis points over London, which is expected to remain relatively stable over the next few years.
In the past, a key barrier to investment in the student housing sector was the scarcity of modern investment-grade stock, however supply is now increasing quickly in London and recovering elsewhere.
Cushman & Wakefield, the commercial real estate agent, reports there were 539,200 student bed spaces nationally in 2015, up by 19,300 since 2014, with the private sector growing by 10% and studio bed spaces up 41% in just one year. Furthermore, by the end of 2019, the number of beds in corporate student hall accommodation in London is forecast to increase by 40% to approximately 49,000 and by 24% nationally to 234,000.
As competition for existing stock has driven down yields, investor demand has been shifting towards forward-funding of developments. But with the yield gap between a development scheme and that of an existing scheme now shrinking to about 25-50bps, the margins are becoming tighter.
In addition, some locations, such as prime central London and some major regional cities like Liverpool, also face oversupply risks. Others, such as Manchester, remain undersupplied. Careful monitoring of development activity in specific locations is therefore essential for investors.
Nevertheless, underlying demand for student accommodation remains positive. Despite student numbers falling by 12% in 2012 owing to the impact of the cap on tuition fees rising to £9,000 per year, there has been consistent growth in student numbers since 2013. Admissions through the University and Colleges Admissions Service (UCAS) increased on average by 3% per year from 2012 to 2015, with approximately 523,000 people accepted to academic universities in 2015.
At the same time international student numbers are increasing. Internationally mobile students are forecast to increase to about 7 million globally by 2025 from approximately 4.5 million in 2013 and the UK is likely to be a popular destination given that it is home to several highly ranked universities. These students tend to prefer London and the top-tier Russell Group university cities.
Among domestic students, 47% now study away from home as high tuition fees have prompted them to choose universities carefully, selecting the best in order to maximise their future employability and earnings potential. This creates greater demand for more good quality purpose-built student accommodation in major regional university towns and cities but at more affordable rents.
As a result of all of these factors, divergences in rental growth prospects between London and the major regional university towns and cities are emerging. While on average rental growth of about 3.5-4% per year is expected from the sector over the next five years, this masks wide variations between the cities.
All things considered, the future looks promising for student housing as it continues to mature as a sector and the investment market becomes more mainstream. Increased opportunities for institutional investors to invest will emerge with a more diversified range of direct and indirect investment choices, as well as lending opportunities. But as the prime London market has already become overheated and select regional markets are facing potential oversupply risks, understanding the specific risks in this sector and detailed local market knowledge are essential.
Joanna Turner is head of property research at Canada Life Investments