Big Beasts See Student Housing As Defensive And Developing
UK student housing has had a helluva run. As recently as five years ago you could buy prime student accommodation assets for yields of 6% to 7%. Today that is 4% in London and 4.75% for the best assets outside the capital.
Yields fell by about 50 basis points in 2018, according to Cushman & Wakefield. That price rise won’t go on forever. But the big global beasts driving the sector are still keen to invest, attracted by the defensive characteristics of the sector, the opportunities for development, and the way that the sector is evolving.
“There are a lot of macro backwinds: There is still a strong supply-demand imbalance, particularly in larger cities like London and Manchester,” Greystar Managing Director of European Investment Troy Tomasik said.
He said that while capital values in the UK would not rise as fast as less mature markets in Continental Europe, it would still provide resilient income that is not correlated to the wider economy in the same way as the office and retail sectors.
“We see it being a defensive sector. Housing is generally defensive, and student housing is even more defensive, because when there is a recession people tend to continue to study to better themselves in a difficult job market.”
Greystar has been involved in the building of two major UK student accommodation businesses: iQ, a joint venture with Goldman Sachs and the Wellcome Trust, which has 28,000 beds across the UK regions; and Chapter, a JV with Allianz and PSP, which operates or is building 5,600 beds in London, including a major scheme near London Bridge, designed by KPF.
Tomasik said the company’s London portfolio is 95% international students, and he is still keen on the UK capital.
“We're still very excited about the London market for student housing: It’s still the global capital for education and has more overseas students than any city in the world. As education becomes more global [that] high-quality accommodation will continue to attract demand.”
London is a more mature market with a higher amount of supply than other markets, and as result, you have to provide the best amenities to compete and stand out.
Brookfield has also built a significant student housing portfolio through multiple acquisitions and developments. Its Student Roost is the fourth-largest company in the UK, with 17,000 beds across 53 sites, 49 of which are operational with the other four under construction. The portfolio is 95% occupied, according to an investor presentation.
Brookfield Vice President Jennie Wong explained how the company plans to continue to expand.
“We like to invest in cities where we already have a presence, and we are keen to do more in Edinburgh,” she said. “We currently have three operating assets there and would like to do more there. It is home to four universities, including the largest in Scotland, and the summer market there is quite resilient, which is something to take into consideration when you’re underwriting in this market. The council is very supportive when it comes to new student accommodation, because they understand it alleviates the pressure on the private market."
"We also like Brighton, because it has the highest ratio of students to purpose-built student accommodation beds, eight to one, which is something that is compelling to us as an investor, and the council there is also very supportive, and wants to take students out of the private housing market.”
Wong said Brookfield is taking advantage of modern methods of construction in other countries in order to speed up the development of new units.
“From an investor perspective we are aware of rising construction costs from a labour and materials point of view,” she said. "So in our German and Dutch student businesses we’ve used modular construction methods. The cost is the same but it allows us to get on-site and undertake development quicker, which improves our returns.”
Both Brookfield and Greystar are exploring the world of co-living, Wong and Tomasik said, as it provides a bridge between the worlds of student accommodation and institutionally owned and managed rented residential.
Brookfield operates a student and co-living scheme in Paris which has 1,200 beds, Wong said. Greystar has developed co-living assets in San Francisco and Vienna, and is looking for opportunities to do the same in London.
“Co-living is a very natural extension to the student housing sector in general, but it needs to be in a city where it can capture both the university students and a technology and startup culture," Wong said. "We’ve been able to do that with our French platform; they’ve recently launched a brand called ECLA and the idea is to launch large buildings of 1,000 or more units in cities where there is that strong entrepreneurial culture and also have the reach to top universities as well.”
“It’s a scene we’ve been looking at closely for the past 12 months now,” Tomaski said. “We’d love to participate here in the UK, but historically the planning system hasn’t allowed it. It’s a natural progression from student housing. If about 85% of residents in student housing are 18-21, well, co-living is targeting that 20-30 segment, which is the only segment of the population that has net migration into big cities, on a global basis.
“Every year about 300,000 people move to London in that age bracket, who are looking for somewhere to stay and looking for that support network and convenience and efficiency.”