Doing more with less

By Martin Skinner,

"Martin Skinner"

Following on from my bright side article, I’m pleased to be able to report that the positive mental attitude approach appears to be working out rather well.  Investors (including my own little family office) have bought no less than 13 auction/receivership properties through Inspired Asset Management in the last month alone – with more sure to follow them.  That’s more than we transacted in the whole of the previous 12 months!

Dynamic duo

Dynamic duo | Inspiring interns

To achieve this we’ve been considering and discarding 1,000’s of other opportunities – more than ever before.  As you might imagine, organising, viewing and thoroughly appraising this volume of residential property is very labour intensive.  Like many other post credit-crunch businesses, we have far less resources at our disposal having dramatically reduced overheads and staffing in the wake of the squeeze.  So I would like to say a big thank you to the unsung (and unpaid) heroes of the City and the West End.  We have benefitted hugely from a series of very smart, diligent and hard working interns, most notably Louis, Kunal, Agne and Akvile who will all no doubt go on to achieve great things.  The help they have given us has been priceless.  Thank you!!

Our Joint Venture partners at Urban Share have also attracted a number of new equity investors and are close to securing their senior debt facility, so we’re clearly not the only ones making headway despite the choppy economic conditions.  Rather than blind optimism these developments are undoubtedly the result of the plain hard work and persistence that fuel most growing businesses these days; and a smile always helps.

On the macro-economic front there has been quite a lot of good news recently with employment up by 143,000 during the traditionally difficult Dec-Feb period and unemployment down by 17,000; the trade deficit reduced from £5.7bn in Dec to £2.4bn in Feb; and GDP growth again establishing itself despite the spending cuts. 0.5% growth has been initially reported for the first quarter and this is likely to be revised up, while 1.8% growth has been recorded for 2010/2011 as a whole despite an estimated 1.5% GDP fiscal tightening.

However, real incomes (i.e. after the effects of inflation) are still falling, retail spending is down and growth is likely to remain muted as public spending cuts take effect and the private sector continues to hoard its profits.  In general this should be good news as the government gets out the way and the economy rebalances from debt fuelled consumer spending and imports towards business investment and exports.

I believe this shows we are getting off our backsides and doing more with less.  The next couple of years are likely to remain tough as lower real incomes mean we feel poorer. But with this trend forecast to reverse in 2013/2014 and house prices, at least in London, expected to push beyond their previous peak, we will in due course start to feel wealthier again.

Meanwhile the North/South house price divide is continuing to widen dramatically as I and other Southerners forecast back in late 2009London is clearly driving this local growth on the back of global interest in our relative advantages, not least our discounted exchange rate and stable legal and political systems.  For example Galliard reportedly sold 80% of its new flats in the Strand for between £1,500 – 2,000 psf in just 8 weeks, with 90% going to overseas, typically Asian, investors.  Interestingly, the IPD’s recent annual results also highlighted the fact that Inner London (where we focus our activities) has outperformed all other areas on a total return basis over the last 10 years, including Prime Central London.  This is because Inner London yields are much higher than those in Prime Central London, while capital growth is only marginally lower.  And if you like London you’ll really like Jim O’Neill’s (Chairman of Goldman Sachs Asset Management) recent article entitled Brics herald a golden age for London.

IPD residential regional performance 10 year

IPD residential regional performance 10 year

George Osborne’s decision in the budget to finally link stamp duty land tax (SDLT) on bulk purchases to the average unit price, instead of the total transaction price, could actually make a real difference and eventually lead to a wholesale market developing.  And a barely reported amendment to housing benefits will mean more than 80,000 extra people need to rent rooms just as the unintended consequences of the House in Multiple Occupation (HMO) Licensing regulations start to bite and their supply is cut off.  We already expected rental growth in the young professional market to outstrip the rest of the market and issues like this will simply serve to push rents up further.

In conclusion it is my firm belief that investors should be planning their routes into the London residential property market right now, while the supply and demand imbalance is most acute, before the recovery becomes too established and opportunities for super profits dry up. Institutional investors may also start dipping their toes in the market, but are sure to lag behind the more entrepreneurial and often underestimated buy-to-let and private equity brigades.  So there’s still time for us to thrive.


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).

Halls to play for

By Aditi Shah

In a bombed-out investment market, student accommodation is one of the few areas with growth potential

Marc Duschenes is a busy man.

Seven months ago, the chief executive of Braemar Group launched an open-ended student accommodation fund. As of last month, the fund size was £11.03m and Duschenes intends to grow this to £100m by 2010.

It is the same story with several other funds investing in student accommodation in the UK. Some have already raised fresh equity and others plan to raise money over the next six to 12 months.

Although the values of student accommodation properties have fallen, rental income has grown on a three-year average by 5% to 10% across the UK. This growth is largely the result of the widening gap between the demand for housing from students and the lack of supply as developers struggle to raise development finance.

The weak pound is making London an attractive destination for foreign students.

The first Drivers Jonas crane survey on the sector says the number of student applications for the 2009/10 academic year has risen by 9% on this year. However, only 4,011 beds are under construction in the capital, which takes the total to just 48,672 beds for 270,000 students.

This differential has attracted private and institutional investors that are making a beeline for well-managed funds with low levels of debt and regionally diverse portfolios.

A new class

Duschenes says average yields on student accommodation are between 6% and 7%, and they will fall to between 5% and 6% over the next 12 months.

‘Other than student accommodation and agriculture, I don’t see any profitable British property sector,’ he says. ‘At a time when the wider commercial property market is suffering from rental deflation, student accommodation is able to deliver rental inflation.’

Braemar’s fund, Student Accommodation Cell, has a portfolio of two schemes in Manchester and one in Bristol. The net asset value of the fund’s portfolio is £13.77m, and it has £10.6m of debt.

Duschenes says the fund is looking at buying well-located and high-quality student accommodation in the UK’s top 20 university towns.

Last month, it bought Hotwells House, a 132-bed property in Bristol, for £6.57m, reflecting a gross annual yield of 9%. It is fully occupied and the minimum annual rent increase is 4%.

Data from Knight Frank’s student accommodation division shows that Bristol, Liverpool and Leeds have recorded the highest annual increases in rents for the academic year 2009/10 of 13%.

This is followed by Nottingham with 12% and Cardiff and Leicester with 11%. London also recorded double-digit rental growth of 10% and is on top of fund manager Cordea Savills’ ‘hot list’ of investment destinations for its student accommodation fund.

The Cordea Savills Student Accommodation Fund was launched in April 2006 for institutional investors and has a 10-year life.

It has a portfolio of 3,640 beds across 12 properties, of which 11 are income producing. One, in Birmingham, is due to be completed in September.

Patrick Carr, Cordea Savills’ director of investment and the fund’s portfolio manager, says that, although London property prices have been historically high, there are good buying opportunities now that yields are rising.

‘We want to get the timing right,’ he says. ‘If we can raise £50m of equity by the end of the year and gear it at 50%, we will be strategically well positioned to acquire assets and grow the fund.’

Cordea Savills Student Accommodation Fund was the best performer of all Investment Property Databank’s pooled property funds in 2007. Its returns of 19.72% outperformed those of the Unite Student Accommodation Fund for the first time since 2006 (see box, below).

Today, the fund’s net asset value is £61.5m.

It has net debt of £85.5m and a loan-to-value ratio of 56%. In 2008, however, it suffered a fall in capital values, and total returns were -26%. This escalated in the first quarter of 2009 when IPD recorded a further fall of 13.4%.

Carr says in terms of total returns, which is a combination of capital values and rental growth, commercial property yields have risen because of the continuing absence of debt finance and weakening occupier demand in other sectors of commercial property.

‘Rental growth across the commercial property sector is -10%, but across our portfolio it is 4%,’ he says.

‘The relative outperformance is driven by strong occupier demand from students. This differential is attractive for investors that are willing to pay high yields.’

However, a further fall in values could affect the loan-to-value ratios and Carr is cautious.

He is identifying underperforming assets that have less potential for rental growth in the future for disposal. The proceeds will help maintain the debt level and can also be used to reinvest in better-performing assets.

He says that, as long as the income return is strong, banks are not showing any signs of distress. ‘It is unlikely that there will be new banks entering thesector, but existing ones will continue to lend,’ he adds.

Another cautious fund manager is Quintain Estates & Development, which recently announced a 40.2% fall in its net asset value to 404p a share and a pretax loss of £129.1m.

It recently repaid some debt on its student accommodation fund, IQ – a joint venture with the Wellcome Trust – to reduce its gearing from 61% to 55%. It says it can withstand a 15.4% fall in the value of its fund before it needs to increase its equity level or reduce debt.

IQ’s gross asset value is £148.5m and it has drawn £98m of its £260m debt facility. Although it suffered a 14% decline in capital values, it recorded rental growth of 7.1%.

Lessons to be learnt

‘There is not much debt available for development or for investors with long-term plans,’ says Tonianne Dwyer, director and head of fund management at Quintain Fund Management. ‘This will dry up the pipeline for new schemes and the imbalance between demand and supply will get worse.’

By 2010 Quintain will have a portfolio of 4,253 beds across 11 schemes. Six of these schemes are already income producing, three will be completed by September and the other two by the following year. Its eventual aim, as stated at the time of its launch, is to take the value of the fund to £600m.

Despite the fall in property values and the lack of debt, student accommodation is attracting investors that are looking for profitable investment opportunities.

Fund managers are aware of the demand from investors and are competing to purchase the best properties. However, the lack of supply will make the competition tougher for managers such as Duschenes. 

Development dividend

At a time when development finance is hard to obtain, investors with a comparatively high-risk profile can secure higher returns by investing in developing student accommodation.

Richard Simpson, managing director of development at Unite, says: ‘The business model of strong rental growth, low voids and high occupancy is attracting institutional investors.’

He says the typical income for the first year as a proportion of the total development cost is 8%, whereas the average yield on income-producing assets across the UK is 6.4%.

Unite has a portfolio of 18,563 beds across 53 properties. The weekly rents range from £140 to £400, but most of its properties are up to £200.

It also has the largest listed fund – Unite Student Accommodation Fund – in terms of net asset value. Investment Property Databank says its NAV, as of 31 March, was £348.6m and that it had net debt of £453.8m.

The fund has suffered a fall in capital values and recorded a -9.2% return in the first quarter of 2009, and an annual return of -27.6% – worse than its IPD competitor, Cordea Savills Student Accommodation Fund.

Tim Goddard, head of Knight Frank’s student property division, says a reason for investors to look at developing student properties is the lack of opportunities to buy income-producing assets.

‘There is interest from investors in the £5m-to-£15m lot size, but there aren’t many products in the market with the right investment criteria,’ he says. ‘Whether it is private individuals or a consortium of investors, there is no appetite to invest in large chunks.’

Tonianne Dwyer, director and head of fund management at Quintain Fund Management, says that investors have a return-v-risk expectation that dictates their investment in income-producing or developing assets.

‘If investors want reliable income with a strong growth profile, and increase in income but low capital growth, they will turn to income-producing assets.

‘But, if they have an appetite to take higher risks and can manage to raise enough equity and debt, then developing student accommodation will generate higher returns.’ (Article by Aditi Shah reporting in Property Week).