Student housing: UK to go from star to dropout?
Between Utrecht Central railway station and the Dutch city’s business district sits the dilapidated Oudenrijn hospital building. A 10 minute bike ride from the centre of the second largest student city in the Netherlands, it is the site of private equity firm KKR’s first European student housing deal.
KKR, which closed its first real estate fund on $739m (€637m) two years ago, said in July that it had bought the site through a joint venture with property manager Round Hill Capital. The pair will transform the old hospital, which, alongside a new 23 storey building, will provide 577 purpose-built student accommodation beds.
The foray of one of the world’s biggest private-equity firms into the student accommodation market comes as investor demand for these assets increases.
A survey by JLL in January found student accommodation was the most popular niche sector among real estate investors looking to increase exposure to alternatives, at 17% of respondents. Care homes and the private-rented housing sector followed in joint second place with 14% of respondents each. JLL attributed the interest to better data and increased awareness of student housing among others.
Figures from Real Capital Analytics illustrate substantial growth in the European student housing market in the past decade. Deals last year reached a total of about €5bn for the UK and €2.9bn for the rest of Europe. This is up from €3.5bn and €2.4bn, respectively, in 2016, and €319m and €111m in 2007.
Knight Frank puts the total value of UK purpose-built student accommodation at £48bn and is expected to reach £50bn next year. According to the real estate agency, universities owned and operated 69% of the existing stock in the UK, but they are relying increasingly on the private sector to supply accommodation. Private developers are expected to provide three-quarters of beds due for completion by 2020, and 84% of the beds ready for the 2018-19 academic year.
A growing student population has driven demand. The UK student population stood at 1.5m 20 years ago, compared with 2.27m last year, according to a report published by KPMG.
EU students have contributed significantly to the growth – KPMG said they accounted for 5.5% of the total UK student population in the 2015 to 2016 academic year, up from 4.4% in the 2004 to 2005 period. Currently, EU students do not require a visa to study in the UK, nor are there limits on the amount of EU students allowed to study in the country.
The UK’s departure from the EU has raised concerns about its leading position in student accommodation market. However, figures from the Universities and Colleges Admissions Service, which runs the higher education applications process in the UK, show applications for courses starting this October were up on the same period last year.
The number of UK applicants has risen by 6% to 41,970, the highest number recorded since 2010. Meanwhile, the number of applications from the EU has increased by 6% to 6,610. This rise has reversed much of the 9% decrease in EU applicants at the same point in the 2017 cycle.
Knight Frank said demand for UK student accommodation had remained solid this year following average rental growth of 2.55% last year. In fact, it highlighted the sector had been one of only a few asset classes to deliver positive rental growth each year of the last decade.
The outlook for UK student housing is positive despite the geopolitical landscape, according to Ben Harvie, managing director of investment management at GSA Investment Management. “Inevitably, Brexit has affected some sentiment towards markets in general in the UK,” he says. We’re not seeing the drop-off in student numbers that some might have expected.”
Numbers from the Universities and Colleges Admissions Services (UCAS) are still positive, he says, with placed students in the EU having grown 3% and international students having grown 4% for the 2018-19 academic year. “However, there’s uncertainty depending on where we land on Brexit regarding fees for European students to study in the UK post-2020,” he says.
Meanwhile, appetite for investment in continental Europe is also increasing, with growing numbers of institutional investors eager to address the shortfall in student housing.
“We classify the UK market as a mature student housing market,” Harvie says. “We see the European market evolving in the same way over the next five to 10 years. The European market still has similar compelling supply and demand imbalances.
“Arguably there are certain markets that are significantly more pronounced than in the UK. A good example would be Germany, which is the largest European student market but has very limited supply.”
KKR’s first deal in European student accommodation came amid a flurry of activity.
In August, Corestate Capital bought a 413-unit student housing project in Sevilla, Spain. It said it had acquired the project for private investors as part of a club deal, having secured a €19.8m loan from a debt fund advised by LaSalleInvestment Management.
In July, Munich-based specialist investor International Campus Group said it would develop student housing in Krakow, Poland with boutique real estate manager Alkyon Partners. International Campus Group plans to operate the asset under the brand name The Fizz and aim its 1,000 apartments at students and young professionals.
Thorsten Leipert, managing director of central and eastern Europe-focused Alkyon Partners, said at the time: “We have been operating in CEE for more than 25 years now… Student housing is a quite new idea in central and eastern Europe, though there are some very interesting hot spots for investors – such as Krakow.”
In May, the previously UK-focused Amro Real Estate Partners said it had launched its student accommodation business in southern Europe by opening a Madrid office and buying its first property in continental Europe – a development site in Granada, Spain.
It also said it had appointed CBRE Spain to find it a joint venture partner for a €300m capital investment targeting student housing in Iberia. Amro said the region had more than 1.8m students but just 97,000 beds in student housing.
“They’re relatively early-stage markets,” says Raj Kotecha, co-founder and managing director of Amro Real Estate Partners. “The characteristics of those markets reflect many of the characteristics evident in the UK market 10 or 12 years ago. People have commented that the UK market is 10 years behind the US, and Europe is 10 years behind the UK and I think that is a fair evaluation of the stage of development.
“For the most part, in Spain the real estate sector went on hold from 2008 to 2013, and the market recovery has been ongoing since 2014. The European universities are also becoming much more aware of how they can attract international students. The number of English language-taught courses across the key European markets have increased dramatically over the last three or four years. “Capital is flowing from the UK market to European markets and investors and operators like ourselves are seeing the opportunities in Europe and starting to enter those markets.”
The European student accommodation market is maturing. Knight Frank forecasts there will be about 2.5m students in the region by 2020.
Merelina Monk, student property partner at Knight Frank, says: “It has a long way to develop to reach the maturity of the UK market, but with continued investment and migration of students across Europe, we forecast the transaction volumes across Europe to increase rapidly although focused on core university cities and countries.”
The differences in the characteristics of the UK and continental European markets are clear – portfolio consolidators seeking economies of scale drive the UK market while development drives European deals, according to Knight Frank.
The supply and demand dynamic will not be enough to ensure strong performance for investors. In the UK, the significantly higher tuition fees of today will increasingly widen the gap between the stronger and weaker universities, says Kotecha.
Greater studying costs are leading students and their families to be far more selective, highlighting the importance of sourcing deals close to the higher-ranking institutions.
The established nature of the market means returns expectations are changing, too.
Martin Gilbert, head of indirect investment at DTZ Investors, says the UK is “more of a crowded marketplace in terms of buying the sites for student accommodation and the funds being able to access those assets”. He continues: “In terms of valuation, there’s probably a lot less prospect for capital growth. When we first went in, in 2006, there was probably more scope for capital growth but now it’s…. more of an income play.”
In the development market of Europe, investors must ensure they have the product right for the country. In Spain, for instance, students typically expect catering as part of their accommodation.
Furthermore, the early-stage nature of Europe means lenders are keen to provide debt to student housing projects but remain unfamiliar with the strategy, according to Kotecha.
Harvie says: “In Europe, the key is people will try and build scale, but one of the critical factors missing is the presence of really established specialist operators. While there might be a relative drive to acquire real estate and develop, the real key to the success of a student accommodation provider is serving the students and building communities. The return starts with the student. You will see the emergence of lead operators in Europe.”
Source: IPE Real Assets