Distinction between First Class and Pass grade student accommodation becomes ever more critical for investors

15 May 2017

• Total of £5.3 billion expected to be invested in the sector in 2017, up 17 per cent from last year
• International investors boosted market share to 64 per cent in 2016, up from 35 per cent in 2015
• Brexit seems not to have dented interest in the market, with value of trade higher in H2 2016 than H1
• New Savills student housing development league table sees more locations falling down the ranks than rising – but Exeter, Guildford and Leeds rise to first tier

The UK student housing market is now an established global market, attracting rapidly rising levels of international investment, so far largely unaffected by the Brexit vote, according to the latest Savills UK Student Housing Spotlight.

A total of £5.3 billion is expected to be pumped into the sector this year, up 17 per cent on 2016, against a 10 per cent uptick in the number of beds traded, at 75,000. 

International investors have almost doubled market share in the past two years, up to 64 per cent in 2016 from 35 per cent in 2015.  Much of that international money (26%) came from just two investors in Singapore, Mapletree and GIC.  “Singaporean sovereign wealth fund GIC is one of the most experienced investors in the UK student housing sector. Their continued investment in 2016 is a massive vote of confidence in the sector” says Jacqui Daly, Director of Savills investment research and strategy.

Two new names – Brookfield SRE from Canada and Mapletree from Singapore – have entered the Savills top ten private sector investor rankings by number of beds owned, acquiring accumulating 13,500 and 6,000 bed portfolios, respectively.  

The vote to leave Europe does not yet appear to have impacted investor appetite. Savills estimates that some £2.1 billion of student housing stock traded in the second half of 2016, against £1.9 billion in the first half of the year. “Student housing is countercyclical, making it a good hedge against other risks. That and the currency discount make UK student investment especially tempting to international investors,” says Jacqui Daly.

But the landscape is changing.  Portfolio consolidation is dominant theme in the market. Savills recorded a premium kicking in on deals over £150 million, reflecting investors wanting to build their stock levels quickly and efficiently.  Lenders increasingly see UK student housing as a secure sector, lending at higher loan to value ratios and at cheaper rates than seen before.

However, James Hanmer of Savills student housing investment team suggests a need for discernment. “In an ever more competitive market, and against the backdrop of uncertainty regarding the treatment of international students post Brexit, developers need to be more careful than ever when selecting sites.  We see less capacity for investors to drive rental growth outperformance unless they have the very best quality stock in the best locations.”

The 2017 Savills Student Housing Development League Table, which takes account of supply, demand, affordability and potential rental growth, has seen more towns falling in the ranking than rising.

Three locations - Exeter, Guildford and Leeds - graduated to the ‘first’ tier for investor potential.  Their success in attracting new students combined with limited supply, make them particularly attractive for new purpose built development. 

Amongst towns falling down the rankings, Liverpool stands out having slipped to a ‘Pass’ grade.  The pipeline of 12,400 units under construction will means that the ratio of students to beds will slip from 2.1 to just 1.4.  

“Growth in investor demand for student housing is just part of UK residential property’s growth as an asset class,” says Jacqui Daly.  “In high supply markets such as Liverpool, where there is clear evidence of rental demand, the market will absorb new Build to Rent while student housing looks less attractive. 

“The only real difference between operating student and Build to Rent housing is the profile of let up and stabilisation – student properties must let up completely every year, while Build to Rent has constant levels of churn.  

“Ultimately, we believe there’s a huge opportunity for investors to offer products across both asset classes, with the same developers and investors providing rented housing for students, young professionals, families and older people.”

 
 

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