Good bet on student housing

Source : Sunday Times – 12 Jul 2009

Student accommodation promises good investment returns even as UK property market remains dull

Property investors are turning to the student accommodation sector as a would-be phoenix rising from the ashes of the UK real estate market, promising growth in returns and size for at least the next few years.

Property experts reckon average rents for UK student housing will rise about 10 per cent this year – as demand outstrips supply – and then slowly wane as investors crowd in.

Student housing is viewed as a rarity in the UK property market that still makes for an attractive investment, as more traditional commercial assets suffer falling capital values and rents, and rising tenant defaults.

‘Ten per cent increase (in student housing rents) per year is not sustainable in the long term when you have new supply coming on,’ said Mr Philip Hillman of property agency King Sturge.

‘But with the chronic shortage of student housing, rents will still rise for some time.’

Property broker Savills said it now gets about two enquiries a week from pension funds new to student housing, as rents for other assets like offices, malls and factories are forecast to fall up to 15 per cent this year amid the recession.

‘Pension funds had their fingers burnt in commercial assets where, if a big tenant drops out, the entire building is vacant; but if a student drops out, you still have a hundred more ready to take the room,’ Savills associate director Natasha Ham said.

The student housing sector, valued at 26.5 billion euros (S$54 billion), two-thirds of which is owned by universities and the rest by private operators, is about 10 per cent the size of the total commercial property market. Risk-averse banks are still willing to lend to build new student flats, thanks to an expected double-digit growth in Britain’s student numbers, student homes operators said.

University Partnerships Programme (UPP), the UK’s second-biggest student homes operator and part of Barclays Private Equity, last year raised £300 million (S$711 million) from banks, and plans to further invest £1 billion and double its portfolio of 18,000 student beds by 2015.

New entrants to the student housing market have been attracted by the prospects of steady returns, where property yields have held steady at about 6 per cent over the past three years.

Sydney’s Campus Living Villages, backed by four Australian pension funds, made its first UK deal last December, buying 755 student flats from the University of Salford in Manchester, and is in talks over deals with other British universities, its UK chief executive, Mr Gary Clarke, said.

Elsewhere in Europe, agents say Germany and France also offer investment opportunities because of their attraction to overseas students, and relatively undeveloped student housing where average rents are a third cheaper than in the UK.

Savills is working with a Germany-based institutional investor to set up a 210-million-euro fund later this year, with plans to build student homes offering 6,000 beds across 15 German cities, including Frankfurt and Munich, Ms Ham said.

‘The fund manager has identified a UK-listed developer to provide sector expertise, to create the branded student accommodation model in Germany,’ she said, declining to name the parties as an agreement has not yet been finalised.

Branded student housing can be pricey, with high-end versions offering en suites, flatscreen TVs and laundry services costing up to £300 a week in London.

Despite the recession, King Sturge’s Mr Hillman said there are few signs that the target market – mainly affluent first-year and post-graduate international students – is trading down.

‘First-year students usually can’t find housemates to rent with, and there is no guarantee the flat will be near to school,’ said UPP finance director Gabriel Behr.