Real Estate

The temptations of student real estate


As an institutional asset class, student accommodation has a few things going for it.

The tenancy rates are high, and a lot of the marketing is outsourced to the university. The tenants themselves — students — are often bailed out by their parents if they are unable to pay the rent. The cash-flows in the first place mainly come from centralised government loans.

Student accommodation is also by definition a type of real estate concentrated in university towns or cities, making it a play on a global educational exports industry centred around the English language, as well as domestic migration towards such areas. An institutional investor in this field is effectively competing against small-scale, unsophisticated landlords with weak access to credit.

Finally, there is a tenuous case to be made that education has some counter-cyclical qualities. If a recession leads to high youth unemployment, the government might have incentives to increase the higher education rate (either to counter the problem, or, more cynically, to give young people something to do).

These are a few of the reasons investors have flocked towards the asset class over the past few years. One of the country’s biggest providers of purpose-built student accommodation is jointly owned by Goldman Sachs and the Wellcome Trust, a charity (the homepage of its brand, IQ Student Accommodation, is available in English or Chinese). The University Partnerships Programme, which works with universities across the UK to provide tens of thousands of rooms, was spun out of Barclays Infrastructure Funds in 2012, and is jointly owned by PGGM, the Dutch pension fund, and the People’s Bank of China.

The other dynamic boosting the sector is the global pressure on investors to shift into alternative assets, because of low returns in bond markets. Student accommodation is not merely a small-scale and idiosyncratic development; it is an early example of a vast move to gain exposure to rental property, instead of financial securities. Retirement accommodation is another example.

M&G, the investment manager, is investing in a student accommodation development in London. It rates the investment at triple B, according to its internal rating system, and says it provides a premium of 1 to 1.5 per cent over public bonds.

Knight Frank, the estate agent, says it is currently marketing £1bn of stock, that the key investors are overseas, and that the demand is “ten times” the supply. Around 30 per cent of first-year students in the UK live in purpose-built accommodation, compared to 22 per cent five years ago.

In a survey Knight Frank conducted with UCAS (an organisation which administers the application process for UK higher education), it found that 41 per cent of students intend to stay in the city in which they study after graduation. Graduate retention is 67 per cent in London; in Manchester it is 46 per cent.

Given universities are institutions which, among other things, corral young people into certain geographical regions, and help to keep them there, you can see how purpose-built student accommodation spirals into purpose-built graduate accommodation. Currently, the post-university rental market in university towns and cities is overwhelmed by largely unregulated private landlords.

There are many risks with student accommodation, and most of them are downplayed. The largest is the exposure to international student flows, which is also an enormous credit risk for universities themselves, their lenders, and the real estate they support.

If a university fails, it has clear implications for local real estate. This is an issue for institutions. It is also an issue for private property-owning individuals, who, unlike other classes of investor, may never have realised the true nature of the market they were buying into.

Related Links:
The real student politics — FT Alphaville
Cambridge university’s £1bn bet on housing
— FT Alphaville
University accommodation deals: it’s a wrap
— FT Alphaville
The financing of student accommodation
— FT Alphaville


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