A degree of aspiration
Everybody remembers their student digs; most are probably trying to forget them. But the old image - in the UK at least - of run-down terraces with peeling wallpaper and leaky pipes or prison-like halls of residence is no longer the reality of student accommodation. They certainly still exist but the growth of student numbers in recent years has called for a modern alternative.
This has opened up a lucrative commercial property sector that is continuing to expand across the UK. As other sectors of the UK property market have seen returns dip in recent times, student accommodation has become more attractive to the investor, offering generous returns.
Unlike sectors such as business where rents are reviewed conventionally every five years, student rents are reviewed annually, averaging rises of 2-5%. In some areas rents can rise by as much as 10% year on year. Furthermore the sector also enjoys enviable stability in what can often be a volatile business. While other property asset classes rely upon a capricious market to generate demand, student accommodation has much more certain indicators.
With accurate data on the UK's higher education student population, investors and developers can predict with more certainty the levels of demand, development and rent. The academic year, with students arriving and leaving at generally the same time for a certain number of weeks, also offers a certainty that other asset classes lack.
The UK government's determination to see 50% of 18 to 30-year-olds in higher education has boosted students numbers by more than 500,000 in the past decade and with that the growth of various accommodation products as universities look to meet their housing needs. These include attractive investment opportunities coming from so-called
commercially operated communal establishments (COCEs).
These managed student halls provide large-scale high density accommodation for students in an attractive, safe and convenient environment and often to the highest specifications. While this residential provision was historically the remit of the university, now the sector is increasingly being run by large scale private manager/owners, bringing expertise as well as national coverage, thus offering significant economies of scale.
One of the more significant attributes of the student accommodation sector is that it is still relatively immature despite significant developments in most towns and cities with large student populations. As student numbers in the UK have grown to more than 1.75m, the demographic has also changed as universities are forced to look abroad for students to increase revenues which in turn offers investors longer letting periods; there are now around 300,000 overseas students enrolled in UK universities. Not surprisingly, the booming Chinese economy is fuelling a huge increase in the number of Chinese students coming to the UK to study for a degree. Their numbers have increased by 35.8% since 2002/03 and it is a trend that is likely to continue for some time.
The post-graduate sector also needs further exploration. A survey conducted in 2004 found that 26% of undergraduates questioned wanted to go on to a post-graduate course. Their accommodation requirements will be different from the normal undergraduate accommodation and the potential for a full 50-52 week letting is very attractive.
Some 60% of students still live in houses in multiple occupation, with a mere 6-7% living in COCEs. However, this situation is changing. As regeneration in many urban centres continues apace, the development of new halls of residence becomes all the more attractive to local authorities and communities as a whole.
Student ghettos are returned to local residents, rejuvenating the local housing market and bringing in increased revenues through council tax, although these demographic changes can put added pressure on essential services like health and education.
Students are also becoming considerably more discerning about their living arrangements and there is fierce competition to provide the lifestyle that students now crave in this media-driven digital age. Parents, many of whom are paying thousands of pounds to put their children through university, are looking for a high quality option as well as a safe environment for their offspring. Consequently an increasing number of them are favouring these well managed developments, with knock-on interest for investors.
There are many development opportunities available, particularly in run-down areas where commercial or residential development might be unviable. This diversifies the investment portfolio and creates retail demand in the surrounding area. The introduction of real estate investment trusts (REITs) might well help the sector mature and become a serious, divisible, accessible alternative asset class available to all types of investors. They could incorporate not only accommodation, but also a university's educational facilities.
This might not be suitable for some of the older red brick universities (founded in the late19th and 20th centuries, not Oxford or Cambridge) and the set-up costs may still be prohibitive for some educational institutions. There are obviously alternative forms of investment vehicles which could be considered more suitable, depending on the aspirations and circumstances of the educational establishment. Such vehicles include Jersey property unit trusts.
Interest has been shown in the university/education sector as being a potential market for setting up a REIT as developed in the US, where there are three dedicated REIT structures targeting the student sector. These were launched in recent years by American Campus Communities (ACC), Education Realty Trust and GMH Communities Trust. ACC opted for REIT status in April 2004, raising $253m (€202m) initial public offering through Deutsche Bank and Citigroup. ACC owns or manages 34,000 student beds and 3,900 apartments, while GMH owns or manages around 36,500 beds.
Indeed, the provision of student accommodation is a growing market throughout Europe where, in certain countries, the market is reminiscent of the UK student sector of 20 years ago. The immaturity of this sector could therefore present an opportunity for both investors and developers. However, there are subtle differences in the requirements, planning and tax implications compared with the UK so caution should be exercised. With the advent of REITs in other European countries could there be room for a European student REIT?
What is certain is that there is still room for the UK student accommodation sector to grow, although the product is still evolving to meet the changing needs and demands of students and universities.
Student debt will also undoubtedly play a part in years to come as graduates face average debts of £15,000 on finishing their degree. Numbers are still expected to rise, if much more slowly.
However students - and hence developers - focus much more on quality than cost. With so many developers entering this market and building to a similar standard, any property that falls short could quickly become unviable.
The market is hot; there has never been a better time to invest in student accommodation.
Marcus Roberts is partner at Knight Frank's Birmingham office, specialising in mixed use development