After a record-breaking year for student housing in 2015, investor appetite for the sector remains strong, according to latest analysis from international real estate adviser, Savills. But as new investors increasingly look to amass large portfolios, the challenge will be stock availability, which will present new development investment opportunities in leading university cities, the firm says in its latest Spotlight on Student Housing report.
Last year 74,500 purpose built student beds were traded with a total value £5.9 billion, a doubling in value compared to the previous two year average, but 80 per cent of all deals were existing stock. This accounted for almost a tenth (8.5%) of all existing stock and around 30 per cent of all privately owned student beds.
UK investors and operators have traditionally dominated this market, but this has changed. Last year, UK buyers accounted for £1.6 billion worth of deals, the same as in 2014, but US buyers completely dominated, buying £3.3 billion of assets.
“Appetite from global investors continues to be extremely strong,” says James Hanmer of the Savills student housing team. “Unlike earlier private equity investors in the market, who sought higher returns from development, most recent global investors are using institutional equity and are looking for longer-term secure income streams. The challenge will be to find enough stock in a fragmented market to allow them to achieve the desired economies of scale. It will also be vital for investment to be focused in the right locations.”
Savills has updated its development league table, which now rates ten university cities as offering First Class opportunities for student housing development. Full time student numbers increased last year and are almost back to 2010/11 levels, but there is a real trend towards the perceived value for money offered by higher ranking universities and STEM subjects. Such considerations, alongside existing stock levels, the demographic profile of students and the broader rental market in a given location are vital components in determining development viability.
Birmingham is the one city to achieve promotion to First Class. Full time students outnumber purpose built bed spaces by approximately 3:1, underscoring the strength of demand and investment opportunity. Some smaller, niche opportunities are also emerging and other promoted cities include Guildford and Falmouth, where the private rented market is increasingly stock constrained and student numbers are rising.
Swansea has also moved up into the Lower Second tier, and is arguably a better opportunity than Liverpool due to a larger supply-demand imbalance, although both cities have the same rental affordability constraints.
The need for more supply in the Third tier is limited and developers should only target the very best sites in these towns and cirites. A ‘Pass’ grade was given to 21 locations, including four relegations, and indicates that any speculative development should be seen as very risky.
But Hanmer concludes that “a lower ranking for development does not always make a town or city unattractive for investors looking for income providing supply and demand are balanced and returns are appropriate for the risks involved.”