Attractive investment

As the global financial markets began to recover during 2011, the fluidity of money into the more so called safe haven prime office, retail and residential property assets increased, as caution among investors, equity providers, and fund managers remained.

However, during that same period, other trends emerged which suggests that global investors are further diversifying their portfolios and investing in the relative attractiveness of more so called alternative investments such as student housing.

The counter cyclical nature of the student sector and secure long term income streams enables investors to offset riskier assets with a more defensive asset strategy. Graph 1 places the UK student housing sector in context with other mainstream asset classes, as recorded by IPD. This shows a relative outperformance in blended initial yield of around 6.3% for direct let/leased assets.

Trading

Since the beginning of 2011 Savills has recorded approximately 80 major student housing deals, covering both sites and investment deals, with circa 36% London focused. As the sector escaped
the worst of the recent economic downturn, a consequence of favourable market conditions, investment into the sector soared totalling around £2.1 billion.

Of the deals traded over the past 16 months, 70% were investment deals for forward-funded or completed stock. The remaining deals involved post-planning site acquisition, with the majority located in Russell Group towns and cities.

London continues to be the prime investment location with 52% of the total transacting within the capital. The driving force being increasing student numbers, strong international demand and a shortfall in suitable accommodation, all factors which have led to a growth in London rents over the past year of around 3-5%.

Investment prospects

Investment funds are beginning to fill the debt gap left by banks and have secured loans with operators such as Unite, iQ and Nido. This is encouraging to those already in the market as this is their first real taste of the direct let product and possibly the first step in acquiring direct let assets.

M&G, L&G, Aviva and AIG have all entered or are entering this space. Institutional investment appetite looks set to continue throughout the course of the year as longer term secure income streams become preferential, within a sector which offers long leases and provides high occupancy rates.

The student accommodation sector is expected to see investment flows of over £2 billion in 2012, inclusive of the £600 million already traded to the end of April 2012 (Graph 2).

A further £1.4 billion of student housing stock is expected to be traded in the second quarter of 2012, 26,000 bed spaces to the Dutch pension fund PGGM and Blackstone’s Nido portfolio to Round Hill Capital. This highlights the continued attractiveness of student housing as an alternative property investment class. However, large-scale investment into the sector will become more location sensitive and focused towards strong covenanted assets as the effects of changing policy emerge and risks to investment increase.

Yield play

We are increasingly of the view that there are inconsistencies in the relationships between investment returns from different asset classes and that over the next 10 years or so we will see markets re-assess the returns they seek from different types of assets (Graph 3).

Under these circumstances, we observe that real estate assets are exhibiting good portfolio diversification characteristics but are
set at much higher yields than other assets that have been highly
volatile and poor diversifiers inside the ‘risk on, risk off’ investment environment.

If gilt yields are to remain low for longer than markets originally anticipated, the disparity between them and property looks increasingly unjustified. The quality and value of stable income streams against non-depreciating assets like residential property justifies lower yields (and higher capital values) in future.

Taken from
Spotlight: Student housing, Summer 2012