Student accommodation: In a class of its own

By Jacqui Daly

Student housing remains a strong sector for investors

Student housing continues to provide investors with attractive investment returns, long-term income streams, rental growth prospects and high occupancy rates, making it a resilient investment sector during the economic downturn.

However, tight planning regimes, especially in London, and limited development funding reduce the prospects of the sector expanding and attracting fresh capital.

Although the credit crunch more or less put the brakes on development activity in the sector, in comparison with other asset classes, investors are enjoying robust performance.

Demand is high, supply is low, rents are rising and private operators have high numbers of bookings for the next academic year, 2009/10.

Undergraduate applications have risen by 9% in the 2008/09 academic year and postgraduate numbers are expected to surge in response to weakness in the jobs market – a trend that is repeated from the last economic downturn.

Yields in the student accommodation sector may not be as attractive as they were compared with other commercial property sectors, yet the rental growth prospects and high occupancy rates ensure that it will remain a key investment sector (graph 1).

In the last academic year, private sector rents grew by an average of 8% nationally and 10% in London (graph 2).

Importantly, in 2008 capital values in the sector have not fallen to the same degree as the wider residential or commercial markets.

However, the sector has not expanded significantly in size over the past year and the opportunities to invest in new accommodation have been limited.

The market has been characterised by high levels of consolidation within the sector. Operator activity has centred around buying and selling existing stock from universities and private operators, as well as refurbishing old university stock, rather than organic growth focused on new developments.

Although the fall in development land values will help to create more opportunities to develop student schemes in locations that previously would not have been viable, the withdrawal of developer debt-funding means that many developers are not in a position to acquire or develop land, regardless of reduced land values.

Furthermore, development on brownfield land – typically the basis of city centre sites suitable for purpose-built student housing – involves extensive costs of remediation and infrastructure.

Consequently, many brownfield sites are likely to have negative land value in any land use in the current market environment. In addition, we are unlikely to see a return to investors forward-funding developments until the turmoil in the financial sector fully unravels.

As a result, the pressures on student accommodation, in London in particular, can only increase (graph 3). While the capital has the largest student population in Europe and is a premier global destination for international students, the planning system is limiting the ability of operators to expand their portfolios and increase the level of new supply into the market.” (Jacqui Daly writing for Property Week & Savills Research).

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