Earlier this year, the UK’s largest ever private real estate transaction was agreed for a portfolio of student accommodation assets.
The buyer was Blackstone, which agreed to pay £4.7 billion to Goldman Sachs and the Wellcome Trust for iQ Student Accommodation. iQ owns and operates 67 student premises in 27 towns and cities, including Birmingham, Sheffield, Leeds and London, where the majority of its assets are concentrated.
The price tag was agreed in February – prior to the outbreak of Covid-19 more widely across Europe, which eventually caused universities to close and send students home.
The sale went ahead despite the pandemic at the agreed valuation and was completed in May. For property investors, the deal can be seen as a vote of confidence in the sector, particularly given that some areas have become more challenged since the pandemic. Think traditional office blocks, many of which are now half-empty as workers stay at home, as well as shopping centres where footfall has dwindled as shoppers go online.
A new source of yield
While it will take an exceptional sale to overtake the Blackstone acquisition, it is likely that deals in this part of the property market will continue to tick over, borne out by the fact that transaction volumes have remained fairly steady this year.
According to Savills, 2020 is expected to be a strong year for purpose-built student accommodation investment despite the impact of the pandemic. One reason for this is because the student property market is going through a boom phase. In 2019, the market saw the most investment in four years and was the second-strongest year on record, with £5.4 billion traded, Savills reported.
Property is broadly seen as an alternative source of income for investors in a low-yield environment. Both domestic and international investors continue to be lured by this asset class given that it has the potential to provide an attractive yield.
However, within the wider property market, student accommodation might also be considered an alternative asset. The retail, office and industrial sectors are considered the core commercial property assets that investors might seek exposure either directly or indirectly through an open-ended or a closed-ended property fund, such as a real estate investment trust (REIT).
The prospects for university accommodation appear to be promising, though, as it probably won’t be long before investors begin to think of it as a mainstream asset class, alongside industrial units and office space.
One thing going for it is that there is a significant supply-demand imbalance – demand for purpose-built student accommodation is far outstripping supply across most of the UK. Only Sheffield, Newcastle and Liverpool are thought to have excess supply, while students in London are also well catered for.
Different market dynamics
The student accommodation sector is quite unique in property terms. Whereas a typical lease on a shop or an office block is 10 to 15 years, a student flat or room is leased annually, or for between 40 and 50 weeks of the year. What this means is that, for most of the time, the rent on an office or retail outlet is pretty static and as a landlord it tends to be viewed as quite secure.
The shorter lease on student property is less secure in that sense. But this offers both crisis and opportunity. Opportunity in the sense the landlord can push the rent higher every year. The crisis occurs if the students cannot be found or the rate is not maintained.
However, one tool that student accommodation providers have at their disposal is the ability to forge a relationship with universities. One operator that has been particularly successful at this is Unite Group, which is the largest private operator in the UK, benefiting from significant economies of scale.
The majority of its portfolio is nominated to universities, mostly under under multi-year contracts, giving it far more certainty of income, but without having to commit to a 15-year lease. For example, a university will say, ‘we will take 100 rooms from you for the next three years at £200 a week’.
Unite Group, which is a REIT, was behind much of the investment activity in the purpose-built student accommodation space last year, following its acquisition of Liberty Living from CCPIB in November. In June this year, it raised £300 million via a share placing.
Closed-ended vs open-ended
Liquidity issues among open-ended property funds have given investors cause for concern in recent years. Many of these funds suspended dealing and prevented investors from withdrawing money when stock markets fell in March this year on the basis that assets could not be fairly valued during a period of market stress. While some funds have reopened, many remain suspended – a situation that can be frustrating for investors.
However, liquidity is often not an issue for REITs such as Unite Group, which is now the third-biggest REIT in the UK by market cap. Property has always been a favoured alternative investment in the UK and student accommodation is yet another compelling reason to take a closer look at the asset class.
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