Stock transfer opportunities arise from those higher ranked universities which require large sums of investment to improve their accommodation offer, in order to remain competitive in an increasingly difficult market. The transfer of poor quality university-owned stock to investors achieves a double financial benefit for the institution involved: they avoid future calls on capital by avoiding future expenditure on costly repairs and upgrading as well as the annual costs of administering the accommodation.
They also receive a capital sum with which to make alternative investments in their academic offer at a time when other types of funding are being withdrawn.
Private sector operators will look at these opportunities with interest because they provide investment opportunities in a market where the development pipeline offers much fewer prospects than in the past.
The combination of academic demand, asset quality and the financial ability to react to a changing climate will be key to future residential asset performance. We have therefore analysed universities’ need for funding, likely calls on funds due to asset condition, and their academic quality in order to assess where the best investment prospects lie.
Graph 8 analyses the cost to upgrade university owned accommodation, which is categorised by HEFCE as either Condition C (“Operational, but major repair or replacement needed in the
short to medium-term, generally three years”) or D (“Inoperable, or serious risk of major failure or breakdown”) as at 2009/10 to Condition B standard.
This Condition B standard is described by HEFCE as “sound, operationally safe and exhibiting only minor deterioration”. The analysis takes into account full-time student numbers and produces a cost to upgrade per full-time student figure. The model takes the extra step and infuses each individual university’s balance sheet position, as at July 2010, and incorporates this figure to demonstrate the potential constraint and ability to improve an institution’s own residential accommodation to Condition B standard without private sector assistance.
This analysis is the initial stage of any investment or development risk assessment. The analysis does not begin to touch the surface of what information funders or developers would require pre-decision, but does begin to show strength of local markets.
Investors are likely to be drawn to opportunities arising from those universities within the Blue Zone on the graph above, where supply/ demand variables are positive and where the universities’ ability to fund redevelopment is limited.
A numbers market
In a period where equity is scarce and development finance is challenging to secure, viability, land values, planning policy, future supply pipelines, private sector rental values and the propensity of students to live at home in university towns or cities all grow to be even more significant.
The ability to adapt to changes to tuition fees and the funding of universities, alongside improving the recruitment strategy of international students will be key to future performance of the sector, at a time when equity and finance for large scale investment and development is restricted.
Investors, developers and funders across the UK student accommodation sector will look to be aligned to those institutions and locations which continue or become to show significant opportunity, in light of recent policy changes.
The trend in applications post-financial change will be key to future investment and development decisions. Most equity providers and developers will also be aware of proposals set out by the UK government to introduce more competition between universities from 2012/13, towards more market-based mechanisms, adding additional risk to their strategies.
The student market will require universities to compete on grade for approximately 65,000 younger full-time students who achieve AAB (or above) A-level grades and on courses which will be priced primarily at £9,000 per year.
Other universities, with a strong track record of creating opportunities for students from a wide-range of backgrounds and ages are unlikely to be able to compete in this market in the same way. These market-based mechanisms will impact on the demand for university places and subsequently affect accommodation demand ratios.
Those universities which will be disproportionately affected by changing government policy, and especially in current market conditions where equity and debt funders are less risk averse, are more likely to be those institutions which are ranked towards the lower quartile of university rankings (Red Zone).
Investors, developers and operators of student accommodation will look to align themselves with universities towards the upper quartiles of university rankings and those which show increasing or stable demand, alongside a need to upgrade their residential accommodation to an improved standard in order to minimise competition risk (Blue Zone).
Our analysis in this document does not factor in micro market factors that need to be considered in the later stages of the strategic decision making process. Thus, we would recommend that micro studies are made in all instances.
Not all investments will be a ‘dead cert’ in the areas and sectors that we have tipped as high performing. Equally, we have no doubt that opportunities exist in areas and sectors that we have begun to describe as poorer performing.
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