Wednesday, 22 October 2014

The lure of bricks and mortar boards

Over the past decade big private sector players have muscled in on the student accommodation market, which was once housing associations’ territory. But with the UK’s student population growing fast, there are still opportunities for the social sector. Keith Cooper reports

Last month, Derwent Living made its first push into London’s lucrative student market, sealing a deal to build 136 studio flats near the capital’s City University.

The £17 million project was phase one of the Derby-based housing association’s plan to move beyond its traditional territories of the midlands, south Yorkshire and the south east.

‘This would be a move into the capital, which we haven’t done before,’ says commercial director Paul Wisher. ‘We have targeted our growth plan around where the main student demand is: either the capital or the Russell group [of elite research universities].’ The association, which manages 3,700 student rooms in total, is also in negotiations to buy another 160 student homes near the City development.

It is not hard to see the appeal of London’s student housing market.

According to a May report by property firm Savills, student numbers in the capital are growing 15 times faster than the supply of student homes - compared with a national ratio of 10 to one.

‘Student housing continues to offer investors attractive investment returns, long-term income streams, rental growth prospects and high occupancy rates,’ the research states.

With housing associations facing having to drop their rents by 2 per cent next year because the retail price index has fallen, the returns in the student section also look good. Nationally, average rents for purpose-built housing grew by 5 per cent in 2007/08 and 7 per cent in London.

Derwent Living is one of three housing associations to make Savills’ list of the top 11 providers of purpose built student housing. The other two are Cosmopolitan Student Homes, a member of Cosmopolitan Housing Group, with 5,032 bed spaces, and Sanctuary Housing, with 8,255 (see table, right). The largest supplier by far is private firm Unite, which manages 36,700 units.

Marcus Roberts, director of student investment at Savills, says that social landlords hold a 20 to 25 per cent market share of the student accommodation sector.

‘Housing associations were the trend-setters, but then the private sector got interested at the beginning of 2000 - before that Unite were relatively small,’ he adds.

Attractive investment
But investors would be interested in financing new student accommodation projects led by housing associations, he predicts. ‘There would be high-net-worth and overseas investors seeing the supply and demand imbalance and taking advantage of that.’

Sam McMillan, director of student services at Cosmopolitan, is equally positive about investors’ confidence.

‘We are looking at pension funds,’ he says. ‘They are looking for a stable return. The student market provides that because it is asset-backed with a good cash flow.’

The market was strengthened by increasing numbers of foreign students coming to the UK, he adds.

‘It is looking quite buoyant. The pound isn’t strong while foreign currency is, particularly the Chinese.’

In London alone, an extra 125,000 international students are expected to arrive over the next decade, the Savills report predicts. This is on top of the capital’s current foreign student population of around 70,000, according to a financial report by Unite.

Martin Hadland, head of student housing at consultancy Drivers Jonas, reckons housing associations are in a good position to develop new student housing for cash-strapped universities.

‘Very little new accommodation is coming through the universities and that is indicative of the future, because they have to spend a significant amount of money on their academic estate,’ he says. ‘The best fit is where the university and the housing association get together in a deal, because their objectives are pretty similar. Housing associations have a stronger pastoral role [than private providers] and are not-for-profit.’

Tony King, group director of capital investment at Sanctuary Group, says the recession has had a counter-cyclical effect on the student market. ‘There are now more people looking to stay in education.’

But the recession has taken its toll on the market, according to Chris Baines, commercial operations director at Servite Homes, which manages 2,700 rooms.

‘Traditional first year halls of residence have been part of the “student experience”, but the increasing supply of empty buy-to-let street properties, as a result of the current economic climate, is creating a cheap alternative,’ he explains. ‘We have seen fewer second and third year and post-grad students in our halls as a result.’

And there were also fewer major student accommodation deals over the last 18 months, Mr Baines added, leading to a predicted two point drop in equity return to 6 per cent.

The government’s licensing scheme for large multi-storey properties classified as houses in multiple occupation could boost demand, according to a study by Drivas Jonas.

‘Some landlords may choose to let their property to the general market instead, saving them the time and regulatory burden on letting their property as an HMO,’ it states.

‘The removal of some HMOs will add further pressure to the supply/demand imbalance between students and the number of student beds.’

College digs in numbers

£18bn
Private and institutional investment in the market, according to Savills

15
The number of times student numbers are outstripping new supply in London

6%
Typical investment return on student housing

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