Degree of certainty persuades property to get into beds with students

By James Whitmore

Students are responsible for the most recession-proof property sector.

The tallest tower in London’s financial district, rental growth of 5% a year for the last six years and a conference that this year was more than double the size of last year’s all relate to the fast-emerging student accommodation sector.

While every Tom, Dick and Harry is scrambling around trying to persuade institutions to part with their money, Unite Group, the UK’s only listed student accommodation provider, announced its UK student accommodation fund was in the final stages of raising £150m of new equity for the expansion of its portfolio. The new units will be sold at a 6.7% premium — yes, premium — to the fund’s 30 September net asset value.

The fundraising was oversubscribed and, while existing investors put £60m in the fund, £90m came from new ones.

The attraction is what all investors are clamouring for at this point in the property cycle: secure income. The fund provides a net 7% income return on its NAV, which is very compelling. Add to that the very likely prospect of rental growth — Unite has actually achieved 9% growth in the last two years but expects 3%-5%in future — and annual returns should exceed 10%.

High grades

Any thought that the fund’s income could fall should be dismissed. The occupancy level of the fund has always been in the high 90% area — it is currently 98% — and shows no sign of falling. As Blackstone director Stuart Grant, who oversees the private equity firm’s student accommodation business Nido, told Bloomberg this week: “There is a chronic imbalance between supply and demand in this sector.”

Property Week’s Student Accommodation conference, held last week in association with Unite, attracted 328 delegates. Senior figures from the likes of Blackstone, British Land, Heron and the Royal Bank of Scotland were in attendance.

Knight Frank’s student accommodation expert, James Pullan, discussed his firm’s latest Student Property Review, which shows that:

  • Rental growth remains robust, recording growth of 5% a year over the last six years, compared with 0.6% for commercial property.
  • Demand for university places continues to rise.
  • The total number of people in higher education has grown from 1.8 million in 1996/97 to almost 2.4 million in the academic year 2009/10 — an annual growth rate of more than 2.5%.
  • As an asset class, the student accommodation sector is maturing and becoming recognised as an important element of the wider property investment market.

On the eastern edge of the City of London, meanwhile, Nido Spitalfields, Blackstone’s second student hall in London, is rising fast and is expected to open in the middle of next year. The 33-storey building will have space for 1,204 students, paying as much as £300 a week for an en suite room. It will overlook Broadgate, the office complex that is half-owned by Blackstone.

Blackstone entered the student accommodation market four years ago and has so far invested more than £400m.

Its first project was a pair of 16-storey towers at King’s Cross that were completed in 2007. Most rooms at Nido King’s Cross cost £245-£270 a week, and around 80% of them are occupied by foreign students, notably from America and China.

Blackstone plans to build a third student hall next year on a site close to Notting Hill in west London. The building’s 272 rooms will be available from 2011. Outside the UK it has bought a site in Barcelona and is looking at others in Paris, Sydney and Singapore.

Within three years Blackstone will probably sell the Nido business, which could take the form of a flotation to create a REIT, joining Unite.

It would be no surprise if British Land’s new senior triumvirate of Jean-Marc Vandevivere, Steve Smith and Charles Maudsley take an interest in the sector, especially given their relationship with Blackstone with whom they jointly own Broadgate. (James Whitmore, Property Week) http://www.propertyweek.com/story.asp?sectioncode=38&storycode=3154535

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