What could be better than tapping into the boom in tertiary education while also reducing exposure to economic risk? Student accommodation has been a fast growing property sector as it satisfies investor demands for more growth and less risk. This piece looks at a recent transaction in this sector in the UK and highlights why student accommodation has investor appeal.
In early July Unite Group*, a UK publicly-traded landlord, purchased Liberty Living from the Canada Pension Plan Investment Board. Liberty Living has 43 student accommodation assets totalling 20,541 beds. Unite Group paid a reflected price of £1.9bn and the transaction has a net initial yield of 5.3%. This reflects a price per bed of £92,500. The acquisition will increase Unite’s size by about 50% and establish it as the clear market leader in the UK.
The transaction reaffirms existing student accommodation valuations in the UK, which have risen substantially over the past decade. The high quality portfolio is 82% aligned to British high and mid-ranked universities, with 51% master leased via “nomination agreements” with the universities with a weighted average lease term of 6 years. The portfolio has averaged over 99% occupancy over the past 3 years.
Location, location, location
The British university sector is highly regarded with the University of Cambridge and the University of Oxford ranked in the top 10 universities globally. There are currently 1.88m fulltime university students in the UK, of which 19% are overseas students with 7% coming from the European Union. The British university sector continues to be highly sought, with 690,000 student applications in 2018 and 530,000 acceptances. In the UK, initial student higher education applications for the 2019/20 academic year are up 0.4% with overseas applications up 6%.
As with all real estate, location is very important. The top 10 British universities have grown their student numbers by 50,000 since 2012 with these top 10 universities accounting for 42% of all student numbers growth. The student accommodation fundamentals are strongest in the top tier university markets. We believe these markets will continue to offer good returns into the future. In 2016 Government student control limits were removed leading to further growth in student numbers. The Augar Review of Post-18 Education and Funding is recommending reducing tuition fees to £7,500 per annum, which could further drive student numbers.
Occupancy rates are attractive
The British student accommodation fundamentals continue to be strong with occupancy rates remaining at very high levels. There are 627,000 purpose built student accommodation beds in the UK, approximately half total student numbers. Supply has been consistent with long term trends with 31,348 beds built in 2018 and an estimated 36,000 beds to be delivered in 2019.
Approximately 50% of all student accommodation beds are private, off campus assets, with the balance located on campus and affiliated directly with the universities. Over recent years there has been a move for the universities to enter into concession agreements with the private owners to increase the development of more on campus beds. Average rents outside of London total £127.51 per week, with the higher quality off campus rents higher at £137.6 per week, an increase approximately 3.5% over the year. Average rents in London are commensurately higher at £223.04 due to higher land values.
There’s an app for that
The private purpose built student accommodation market in the UK has become increasingly sophisticated with the adoption of technology. The landlords have apps providing 24 hour service, students can check into their room online and log maintenance issues etc. They also focus on offering a safe and secure environment and offer WiFi throughout the buildings. Today there are 750,000 1st year and international students. These students tend to have a higher propensity to use purpose built student accommodation. Although with the improvement in student accommodation product offering, the percentage of 2nd and 3rd year students using purpose built student accommodation has increased from 16% in 2011 to 21% today.
Over the past 10 years, UK student accommodation has delivered very good returns of 13.2% p.a. and capitalisation rates have firmed to 4.25% for prime London and 4.5%-5.0% for prime tier one markets. However, the prospects for future returns remain very good. The attractiveness of the British university sector to overseas students continues to drive increased student numbers. With student demand being lowly correlated to economic conditions, the demand is sustainable through cycles. These factors combined with the increase in the quality of product offerings through location, improved building amenity, security and technology are leading to increased student adoption of student accommodation. Overall, the strong fundamentals of the British student accommodation sector are expected to continue well into the future.
*Disclosure: Unite Group is currently owned in many global portfolios managed by the CFSGAM Property Securities team.
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