Student accommodation providers resilient

Specialist student accommodation providers in the UK have struggled through 2020, facing losses as students were prevented by lockdowns from attending higher education establishments.  

However, having wrestled with reputational issues, such as returning rents for rooms that could not legally be occupied, major players in the sector are poised for a return to normal service. And while revenues were depressed during 2020, attractive fundamentals have helped maintain asset values.  

Key to investor confidence was last year’s GBP4.7bn acquisition of student accommodation provider iQ. The February 2020 deal saw Blackstone complete the UK’s largest private equity deal to date, buying iQ from Goldman Sachs and Wellcome Trust. The move gave Blackstone control over a portfolio of 67 properties around the UK, with more than 28,000 beds plus a 4,000 strong development pipeline.  

At the time – ahead of the unfolding of the cover-19 crisis – iQ chief executive Rob Roger hailed the deal thus: “With student numbers in the UK at an all-time high, and growth set to continue in the coming years, there has never been a more exciting time to be a leading player in the student accommodation sector.” 

In recent weeks, leading listed players in the market have reported results. And, while earnings have fallen, valuations remain strong, with dividends still being paid to shareholders.  

At Unite Group, EPRA earnings fall 12% to GBP97.3m and earnings per share fell 35%. A valuation loss of GBP178.8m wiped out the previous year’s valuation gain of GBP198.1m.  

“The fundamentals remain strong,” said CEO Richard Smith. “Universities have remained open, and we are expecting a full return of students post Easter. Being on campus is absolutely where students are telling us they want to be.” Occupancy, at 65% in midMarch, was consistently improving.  

“We’re expecting strong demand for 21/22, and I expect participation rates to continue to improve.” He sees further pandemic-related opportunity: “Covid has really made universities think again as to whether they are best placed to operate their own accommodation, and that will lead to opportunities for us.” Conversations with existing university partners include potentially adding 7,000 beds, he revealed.  

CFO Joe Lister said there has been movement in asset yields. “What we’ve seen is a continuing divergence, where assets in London and the stronger markets have shown strength and some compression, with weakness in those regional markets where a university’s outlook for growth is weaker – we think that will continue.” 

In late 2019, Unite acquired Liberty Living from owner Canada Pension Plan Investment Board in a GBP1.1bn deal, paid for by a share issue that saw the Liberty interest representing 20% of the enlarged group. Lister said he is still looking for further additions: “With Liberty, we picked what we felt was the best largescale operation. There aren’t many large portfolios left which we feel would fit very well with our portfolio, albeit we are still looking for smaller portfolios and single asset acquisition opportunities.” 

Following publication of the results, in March Unite won planning permission for a 700 bed development at Nottingham university, which will open for the 23/24 academic year. The project is part of a development pipeline that will add almost 4,000 beds over the next three years.  

In early March, listed Reit GCP Student delivered half year results. The group, which focuses mainly on the London area, has 4,100 beds in 11 locations. It saw its market value dip to GBP652m, from GBP901m in the equivalent 2019 half year, while its portfolio value increased, reaching GBP1,029.7m. 

“The group’s portfolio continues to benefit from resilient valuations supported by the strength of investor demand for student accommodation assets in attractive locations, including the company’s core London market,” said David Hunter, chairman. “Positive news flow regarding Covid-19 vaccines has given cause for optimism for a gradual easing of restrictions on mobility, including for international travel. The board and the investment manager are confident that the company’s portfolio has the resilience to take full advantage when students resume physical attendance at university.” 

At Empiric, full year 2020 revenues were down 16% to GBP59.4m. The company returned GBP6.5m of rents to students who were unable to take up their accommodation due to lockdown restrictions, while expected summer rentals were also lost. And for the autumn term, a slow return of students saw occupancy at 70%, against an expected 94%.  

“The Group has remained resilient and is well placed to benefit from opportunities when the market recovers, and our underlying business outlook is positive with customer demand set to grow.,” said CEO Duncan Garrood. “Our Hello Student brand proposition, especially in a COVID-19 affected world, gives us a competitive advantage with predominantly self-contained studio apartments, and a friendly supportive service focused on student well-being. There is still more to be done to maximise the benefits of our operating model and we remain intensely focused on delivering further value for all our stakeholders.” 

HA Perspective [by Chris Bown]: For the university accommodation providers, there seems a strong feeling that the new normal will look much like the old normal. Never mind any marginal loss of overseas student numbers short term, Unite’s Smith painted a confident picture of strong local and international demand for UK universities – and a strong desire for those students to be present, rather than online, for their time as a student.  

Let’s hope they keep coming. For the accommodation operators, this still appears to be a magical time, with demand consistently rising, and students (or should that be their parents) still content to shoulder rental increases that beat inflation. Will this virtuous spiral continue? Or will a post-pandemic awakening see students wondering quite why they’re spending three years studying underwater basket weaving, when there are fewer highly paid jobs to follow; and they’ll be asked to work from home anyway. At some point, price must surely become an issue – but for now, make hay!  

Additional comment [by Andrew Sangster]: PBSA and branded hotels have many overlaps. This fact has not gone unnoticed by the UK’s biggest PBSA player, Unite, which this month announced the hiring of IHG’s managing director for UK and Ireland Karan Khanna. He will be its chief customer officer. 

There are now 680,000 student rooms in the UK PBSA sector, almost as big as the entire UK hotel sector which is usually estimated at 700,000 or so rooms (depending on definitions of what constitutes a hotel). 

But note, this is not all branded hotel rooms, which is a smaller number. In other words, PBSA, on a like-for-like basis, is bigger than the branded hotel sector. 

At IHG, Khanna was looking after something over 50,000 rooms at 350 properties and now takes charge of just over 76,000 rooms at 177 properties 

Aside from its size, PBSA matters due to the increasing overlap between the different verticals within operational real estate. Khanna’s predecessor at UniteJohn Blanshard, has, for example, moved to residential landlord Grainger to be its director of operations. And Unite noted in its results presentation that planning consents are increasingly geared towards mixed-use PBSA and build-to-rent projects. 

The skillsets to succeed in residential are increasingly similar to what is needed in student accommodation. And both these sectors overlap with hotels. 

A particular focus is branding. At Unite rival, Empiric, is focusing on its Hello Student proposition. Investment is being poured into the website, ESG initiatives, data analytics and customer service. There is much that can be cut and paste from a hotel brand company presentation. 

With branding, PBSA providers are seeking to increase consistency through investment or disposal of non-core assets. At Empiric, 37 sites meet brand spec, 15 require investment to get up to grade, 23 need repositioning or operating as unbranded and 20 are being sold. This looks a lot like the activity of IHG with its estate. Khanna should feel at home at Unite. 

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