A good recession

Even though investors, developers and financial institutions reined back funding for commercial and residential development during the three years to the end of 2010, student housing was affected to a much lesser extent.

The flow of equity into the sector continued, and so the development of student accommodation aligned to strong institutions and in strategic locations remained fluid. It was helped further by opportunities for land acquisition as competition from other use classes diminished, land values fell and sites became more viable.

The resilience and attractiveness of London’s purpose built student housing (PBSH) sector immediately after the recent economic downturn meant it was one of a few locations that continued to see development activity. This has now borne fruit and unit delivery rates peaked during 2011/12.

London completions

Demand for student bed spaces in London was boosted by a surge
in acceptances throughout the 2009/10 and 2010/11 academic years but accommodation supply has still not met the increase in student numbers.

Delivery has historically fallen short of student housing requirements as London’s full-time student population now totals close to 290,000 and has increased by an average of 9,000 additional students
per annum over the past five years. The magnetism of London’s burgeoning international and significant domestic student population, alongside increasing demand for private residential rental accommodation within the capital has attracted new equity into
the sector.

Most recently, large-scale investment activity into the London sector has come through pure Student Living, a joint venture between global alternative asset manager The Carlyle Group and Generation Estates. Consequently, at least 18 PBSH schemes across London will complete and be operational for the 2012/13 academic year.
Most of these will be completing in time for the Olympic summer lettings period. These schemes account for approximately 6,500 bed spaces and are focused predominantly within London Underground
Zone 1 & 2 locations. A further 3,800 bed spaces within Zone 2 are currently under construction and will complete during 2013 and 2014 (Map 1).

London supply pipeline

The supply pipeline of schemes at either planning application or planning permission stage has fallen to around 14,800 bed spaces. The pipeline remains dominated by large-scale, capital-intensive accommodation schemes, with 65% of the pipeline consisting of buildings over 100 bed spaces in size, as operators look for economies of scale.

This is a fraction of the total student accommodation need as they are likely to be delivered over a minimum of five years, if at all. At best this can only supply a third of the additional student demand each year and will not begin to address the demand from postgraduates, 2nd and 3rd year undergraduates who are currently not guaranteed university accommodation.

There continues to be opportunities for inward investment into the London market as vast sums of equity will be required to deliver all the bed spaces currently proposed. As traditional development and debt finance remains absent from the market, opportunities for new money from institutional investors, insurance companies and pension funds could fill the void, on low risk projects. It therefore remains unclear whether and how much of this supply pipeline will be delivered.

Planning policy

The future delivery of London’s purpose-built student accommodation has been further muddied by the release of the Mayor’s draft Housing Supplementary Planning Guidance (SPG). The draft SPG highlights the need for the continual growth of the higher education sector if London is to maintain its world city status. It presumably therefore implicitly acknowledges that an accompanying first-rate accommodation market is essential to sustaining London’s offer as a place to study.

Affordability

However, the draft SPG also strongly notes the need to make student accommodation more affordable, by potentially reversing the current market led approach to rental levels to a benchmarked approach. This policy measure could easily impact future development viability if it affects schemes and sites which have hitherto been appraised and valued on market rents.

The new approach could render pipeline schemes uneconomic. It might also call into question the ability of future schemes to compete in land value terms with other use classes, notably residential.

Future policy to dictate or force student housing development away from core traditional hotspots has also been discussed and is a potential threat to future delivery of units. The aim would be to disperse development pressure away from certain Inner London Boroughs, in order to regenerate other London economies.

This policy has the potential to slow down the rate of new delivery because viability is more marginal outside core locations and land economics become more constrained away from the core. Highest market demand for student housing is generally in locations close to central London campuses.

Taken from
Spotlight: Student housing, Summer 2012