Student assets safe as houses

Student accommodation in the UK is once more in investors’ spotlights, as the sector appears to be making a strong pandemic recovery. Underlying student demand, and a strong desire to return to on-campus learning, has helped drive deal volume upwards. 

The sector’s fundamental strengths have been underlined by the recent GBP969m takeover of GCP Student Living. The private equity consortium bid of 213p per share combined the firepower of Dutch investor APG – which had already acquired an 11% stake in GCP – joined by clients of Blackstone, alongside Scape Living and iQSA Holdco. The aim is that operator Scape, owned by APG, will take on five sites, while Blackstone-controlled iQ will rebrand six sites.  

Another UK listed player, Empiric Student Property, is to resume dividend payments as the business recovers. The company, which operates under the Hello Student brand, saw first half revenues of GBP25.9m considerably down against a GBP34m comparable in 2020; but expects occupancy to recover in the near term, and is writing business at rents up 1.3% year on year. “The number of students in our target market is set for continued growth and we are optimistic that a commitment to face to face teaching in most universities will result in occupancy levels for the upcoming 2021/22 academic year continuing to grow in the coming weeks,” said CEO Duncan Garrood. The company reported it has seen bookings accelerate and it expects to start the academic year with occupancy in the 75-85% range.  

Also in the wings is a change of ownership for accommodation brands Student Castle and Capitol Students. Both are owned by media conglomerate Singapore Press Holdings, which is the subject of a SGD2.24bn buyout offer from Keppel Corporation.  

Keppel, another Singaporean conglomerate, came top in a bidding process to acquire SPH and take it private, following a strategic review of the business that prints Singapore’s main newspapers. The bid is for SPH’s non-media assets, principally 7,700 rooms of student accommodation in the UK and Germany, and elderly care facilities in Singapore and Japan. SPH also has a Reit with commercial property investments in Singapore, South Korea and Australia.  

Analysts suggest Keppel is likely to offload the student assets. “What is attractive for us in SPH’s portfolio is that it comprises different assets… some of them could be quite liquid and we can monetise immediately. The timing of the potential monetisation will be quick… quite soon – for example, within the next three years,” Keppel chief executive Loh Chin Hua said in a recent media briefing. He picked out the student accommodation assets, noting they could be “ripe for securitisation in quite short order” – something local media suggest will lead to either a sale to private equity, or listing as a Reit.  

Oli Buckland, head of PBSA investment at CBRE, said the sector is facing a perfect storm right now. Students have put the concerns of the pandemic behind them, and want to get back to learning face to face. While “there’s still some uncertainty about the international student numbers”, he said the strength of demand for UK university courses remains unprecedented, with – for the first time ever – universities paying students to defer course starts for one year, “and you’ve also got the highest participation rate on record.” Last year around 36-37% of 18 year olds went on to university, but this is closer to 40% for the coming academic year.  

Alongside this, Buckland said the poor performance of other property assets, notably retail, has led to more investors seeking alternative homes for their cash. He said those looking to invest into the sector like “its granular level income, and an identifiable market.”  

Overall, the UK student accommodation pipeline has been reducing, a situation that has prompted “a number of conversations” with hotel owners, interested in potentially refitting their properties. But he cautioned that there’s still a need to have the right product in the right place, as students tend to be picky about where they live.  

As the student accommodation market matures, so there is also the issue of how to manage first generation units. “Some older schemes are being left behind in what they offer,” said Buckland, “and a lot of PE players are looking at the options. It is inevitable that first and second-generation stock will go through refurbishment.” Empiric, for example, reckons it will spend GBP44m on refurbishments of its portfolio, but expects an IRR of 9-11% from that spend. 

Inevitably, as yields tighten due to investor demand, some in the sector for longer may see the timing as opportune to take profits, and pass assets on to investors who prefer a steadier portfolio: “We’ll see a number of trades over the next three to six months.” 

HA Perspective [by Andrew Sangster]: Savills reckons that UK average prime commercial property yields are at their lowest since March 2020, with the average at 5.13%. West End offices and industrial multi-lets are the tightest at 3.25% but London-leased (core) hotels at 3.50% are not far behind. 

Student accommodation is not one of the sectors called out in the figures, but yields here are tightening too. Student REIT Unite said its average property yield was 5.0% and that there was a three BPS yield compression in London “reflecting strong investor appetite”. 

This academic year seems set to be mostly about stabilisation but Unite expects to see 3% rental growth from the following academic year (2022 / 2023). 

Demand from international, non-EU students has been remarkably robust. At Empiric, applications from China were up 17%, from India up 30% and from the US up 53%. Fears that the pandemic would change this global market fundamentally look unfounded. 

Empiric’s targets for when occupancy normalises shows why investors are excited about student accommodation. A total return of between 7% and 9% is anticipated from a gross margin above 70%. 

The read-through for hotels is broadly positive: if people are travelling across continents to study, they will again do so for leisure and other business purposes. But this is clearly a property segment still in growth and competing for sites with short-term accommodation. 

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