Events have mirrored recent years. Political events globally have a notable impact on financial markets and currency exchange rates. Amid a slowdown in some real estate capital markets, the robust and defensive qualities of Alternatives assets remain highly attractive in the current climate, as demonstrated by the strong levels of investment in the Student Housing sector. Minerva Development Group expects this momentum to continue over the next year, when we expect to see a change towards a predominantly portfolio sales-led market.”
Political events globally have a notable impact on financial markets and currency exchange rates. Amid a slowdown in some real estate capital markets, the robust and defensive qualities of alternative assets remains highly attractive in the current climate, as demonstrated by the strong levels of investment in the Student Housing sector. Vertigo Property expects this momentum to continue over the next year, when we expect to see a change towards a predominantly portfolio sales-led market.”
Current Market Activity
The last quarter saw £0.4 billion transacted, bringing the rolling year total to £2.8 billion, ahead of the £1.7 billion recorded in the previous rolling year. There is currently over £3 billion of investment stock pending in the market which is anticipated to complete within 6 months.
Unite Students has transacted on over £200 million of student accommodation, including the acquisition of 640 beds across two sites in Birmingham and Durham for £56m., These sites are forecast to offer a combined 11.3% yield on cost in the first year of operation. The disposal of their Kirby Street scheme for £42 million reflects the REIT’s strategy to increase the portfolio weighting towards cluster flat-led schemes.
US Student Housing giant, Greystar has acquired two sites in London, including a site in East Acton for 306 beds and the landmark development site, The Quill, in London Bridge. The site has historically received planning consent for residential use, but investors’ confidence in the London market has ensured that Student Housing values remain competitive.
Watkin Jones’ disposed of a development portfolio of six schemes to Europa Generation, providing 1,691 beds for £165 million (reflecting around £97,500 per bed). The Europa Capital and Generation Estates JV represents the creation of a key new player in the sector, with significant expertise and experience.
Student Housing Ascendancy
Student Housing has been a key driver underpinning the total growth in Alternatives investment volumes and is expected to account for 34.7% of Alternatives investment volumes this year (see graph below). Vertigo estimates that Student Housing will account for £1 in every £10 invested in commercial property over the next 12 months.
Student Housing yields are generally remaining stable amidst volatility in other real estate sectors and asset classes. PBSA has consistently outperformed all property and has experienced a notable yield compression in recent years. Compared to residential yields, the spread between the two sectors has gone through a cycle of significant narrowing from 300+ basis points a few years ago to overtaking residential yields substantially.
UK Student Housing Partnerships
Traditionally a relatively inaccessible market, the popularity of Student Housing Partnerships has significantly increased over the past 15 years. On average, approximately 2,500 beds are built and 800 beds are transferred to partnerships each year. This figure could well be exceeded over the next year with several notable agreements announced this quarter.
With over £2.4 billion invested in the sector to date, and an estimated requirement of a further £5 billion needed to meet demand by developing new beds and upgrading aging stock, we predict significant room for growth in our model in the next five years.
There are a number of substantial portfolios that we believe will be marketed this year. The projected investment volumes are in excess of £5bn, represent around 20% of the total value of the private Purpose Built Student Accommodation (PBSA) sector. Whilst a number of these projected transactions may not actually complete within the next 6 months, this still represents an entirely different dynamic to traditional commercial property markets with approximately 10% of value per year.
In light of the substantial weight of (predominantly overseas) capital still searching for scale in the sector, the prevailing market conditions represent an opportunity for portfolio owners to capitalise on attractive exit yields. However, the unprecedented level of investor demand globally suggests additional capital value growth in coming years could still be achievable. The considerable investment volumes predicted for the year, replicating similar levels previously, once again highlight the size and strength of the UK market, which remains considerably ahead of the relatively nascent market in Europe. Vertigo predicts that circa 70% of investment volumes in the coming year will comprise portfolio transactions.
Key Higher Education issues received significant airtime during the last general election, including tuition fees, maintenance grants, research funding and the treatment of international students in terms of immigration statistics. Despite the uncertainty resulting from the Government’s reduced majority, there is speculation that they may revisit some of their previous policies, particularly on immigration and Brexit.
The government has offered a new direction in terms of government policy, particularly in softening ‘Hard Brexit’ rhetoric and emphasising the benefits of immigration into the UK. The Government may therefore reconsider the manifesto commitment to keep student visas in any immigration cap. At present, the likelihood of scrapping tuition fees remains low. Whilst this may not be appealing for students and could lead to a reaction from younger voters in the future, it does at least provide universities with funding certainty in the short term.
The Government’s anticipated approach is likely to support a robust performance in the Student Housing sector. This will be further underpinned by demographic fundamentals with the number of 18-19 year olds in the UK set to increase at a rate of 40,000 per annum for the three years from 2022, then increasing by a further 190,000 on today’s levels by 2030. Amid concerns over falling demand from EU applicants, it should also be noted that the number of unsatisfied non-EU international students has outnumbered total EU acceptances for the last four years.