Real estate activity remains subdued across the UK as the
industry continues to deal with heavily restrained lending.
The student accommodation sector has remained resilient in comparison to private and public residential development and investment (see Graph 2).
Despite current economic woes and difficult financial conditions, investment activity in purpose-built student accommodation (PBSA) across Edinburgh has been positive.
Savills Research has recorded eight major transactions over the past 18 months amounting to over £90 million, with six of these transactions being investment deals for completed stock. These deals reflected a net investment yield averaging around 6.2%.
Rental uplift
The market is diverse with new entrants (Crosslane), established institutional investors (Aviva, Rockspring and Cordea Savills) and national student housing operators (Mansion Group), all capturing a segment of the growing market. Our analysis shows rental values for the most basic accommodation unit increased by 2.4% across the city to £114 per week.
Although the PBSA market appears to be robust, operators are cautious as top end rents have slightly decreased since the previous academic year.
Development market
Residential housing starts in the city of Edinburgh declined to their lowest levels for at least 15 years during the 2010/11 financial year, and now stand at 29% of their 10-year average, down from 77%
in 2009/10.
The financial crisis has made residential developers and housebuilders across Scotland extremely risk averse. Large-scale development in Edinburgh has retreated, as prospective homebuyers struggle to raise enough finance to purchase. By contrast, development of PBSA continues to expand.
Three new PBSA schemes were completed ready for 2011/12 occupation (adding c.485 student beds across central Edinburgh). This takes estimated student bed spaces to 10,100 across the city. The largest of these new completions was BeaverbankOne, operated by Fresh Student Living.
University involvement
There are two notable student accommodation deals in the market with university involvement. West Fountainbridge, an Edinburgh Napier University backed scheme for 778 en-suite beds was put out to the market earlier this year as a pre-let forward funding opportunities, on a 22 year FRI lease with RPI uplifts of 1.5 to 3.5%. The site received consent in July 2011 and the development is currently under offer, with no price disclosed, to be delivered in September 2013.
The University of Edinburgh issued a tender in April 2011 for a developer/operator to design, build, finance and operate c.1,150 beds of student accommodation on two sites owned by the University in Holyrood. The University is offering a lease of up to 50 years on the land. The process is currently at the shortlist stage and the scheme is likely to be delivered in September 2014.
Increasing demand
The city of Edinburgh is home to approximately 47,000 full-time students according to HESA 2009/10 statistics. Strong growth in full-time students – averaging 5% over the last two academic intakes – has increased the pressure on the delivery of student accommodation, increasing the shortfall of bed spaces across
the city.
Based on the average annual number of extra full-time students over the last three years, we estimate that there will be an additional cumulative shortfall in student bed spaces (above the current shortage) of 2,100 by the start of the 2015/16 academic year.
As funding for large, complex, residential developments is limited, this presents an opportunity for equity investors to diversify and take advantage of proven, attractive returns from student accommodation. However, site availability, rental ceilings and rising tuition fees suggest that there are possible risks to the future development of purpose-built student accommodation in Edinburgh.
