Investors looking for better returns in student accommodation are turning towards markets in central and southern Europe, as the UK market matures. Concerns around Brexit affecting student numbers, and oversupply in key markets, are both hitting opportunities.
Savills declares the UK student accommodation market the most mature of the country’s operational real estate markets. “Now the market is dominated by a tight group of large-scale investors, with only small movements in market share of late.” Among those coming into the market were US investors, who since 2015 have been significant net investors. Net initial yields now stand at 4% for London projects, up to 6% for secondary regional properties.
During 2019, a GBP1.4bn consolidation deal saw UK-listed investor Unite acquire the UK arm of Liberty Living, from Canadian investor CPPIB. The move creates a major player with 73,000 beds in more than a dozen UK markets, promising to cost operating costs and boost shareholder returns. However, the deal did attract the interest of the UK’s Competition & Markets Authority, concerned about the potentially anti-competitive position the deal could create.
The purpose built student accommodation sector (PBSA) in the UK now houses around 35% of full-time students, and this is reckoned to be a market penetration level that is unlikely to grow further. Short term, the UK market will struggle as a demographic trough means the number of 18-year olds from the home market dips to its lowest level in 2020. “But beyond this blip, the trend is for the number of UK 18 year olds and university applicants to carry on growing over the next 20 years,” report the agents.
And there are worries that some markets are oversupplied. In Cardiff, for example, developers of two student schemes asked to swap use to aparthotels, complaining of a lack of student tenants. While one investor who is staying away told the Property Week publication recently that the city is suffering from “indigestion”, others clearly see no problem in the medium term: JEDS Investments recently submitted an application to build a 711 bed development, the largest the city has seen to date.
Across Europe, student markets are set fair for expansion, with a substantial and growing influx of students from the East supplementing local demand. CBRE’s global student housing report notes: “Between 2014 and 2015 alone, the number of students from China and India increased by 43,000 and 52,000, respectively. There still is substantial room for growth in student numbers from these relatively fast-growing East Asian economies. Africa also is becoming an increasingly important source of international student flows.”
Paul Tostevin, director world research at Savills, told Hotel Analyst: “A lot of investor interest has come with the rise of international students,” and in response, many mainland European institutions have increased their proportion of ETPs – courses taught in English.
“Netherlands is an interesting market, and so is Austria, particularly because of the low cost of universitites. Equally, some of the French and Spanish speaking markets are good,” helped by a broader range of source markets that speak those languages.
JLL likes the look of conditions in Spain, where more students are choosing to live away from home while studying. “Spain is suffering from a severe lack of student housing which meets both the expectations of international investors as well as overseas students,” said Nick Wride, head of living and alternatives at JLL Spain, in a recent market report. The demand has led to growing development activity. “Entering the Spanish market has been about finding the right partners who can develop and then operate assets. That then gives investors the chance to build out platforms across the country.”
Investors are moving across the continent. “Historically, it’s been the domestic players that have driven the market,” said Savills’ Tostevin. But they are being joined by the big players. Greystar bought into Spain in 2017, acquiring the country’s largest PBSA provider, RESA. AXA and CBRE Global Investors are backing projects to grow its portfolio.
Also active is The Student Hotel, which last month secured EUR82m of green finance for new developments in Paris and Toulouse. The company aims to grow from 13 developments to 38 over the next five years, and is active in Netherlands, France, Germany, Spain and Italy. The group operates a hybrid model at its properties, combining student accommodation with an open market offering of short stay rooms.
Elsewhere, a joint venture between Round Hill and TPG Real Estate is developing in Lisbon, spotting opportunities in the Portuguese market. And in Italy, Collegiate is looking at a partnership with Propium Capital Partners, to create around 3,500 beds over three years, starting with a 700-unit project in Milan.
Right now, the opportunities are for the private equity, as markets scale up, said Wride. “As more and more assets currently under construction become a reality and investors then see the product in operation, capital will flow.”
While most markets have zoning or planning restrictions, Germany’s rules are less restrictive, allowing landlords of blocks to mix undergrad students with young professionals – and therefore boosting occupancy and returns.
For those seeking medium term opportunities, CBRE says it is well worth looking across the globe: “There is considerably more opportunity, particularly for those investors willing to play a role in working with universities and governments, to bring new product to the market. There are long-term opportunities in markets that are still maturing – these can be found particularly in Europe, but also in English-speaking and some key emerging markets.”
Jo Winchester, executive director, student accommodation valuation & advisory at CBRE, still sees opportunities in the UK. “We think there’s quite a lot of headroom – and there are some very undersupplied markets. In London, there are probably 50,000 students unable to access suitable accommodation.”
“Europe is at a much earlier stage,” confirmed Winchester. “It’s about development funding, rather than acquiring investments.”
HA Perspective [by Andrew Sangster]: I live in Cambridge, home to arguably Europe’s most famous university and certainly one of the richest. And it is no surprise to see a boom in PBSA in the city.
But the university’s students barely need this. The colleges have nearly enough of their own accommodation. Instead, the PBSA is occupied by students attending the former polytechnic Anglia Ruskin and the numerous other colleges not part of the more prestigious university.
This helps to explain why market penetration of PBSA will struggle to get much beyond the current third of overall student accommodation it currently accounts for. With student numbers static, the market has hit saturation in a number of cities.
In hotel terms, the focus has to move away from net unit growth which leaves either royalty rates or revpar as areas to increase revenue. In the weakly branded and owner-operated environment of much student housing, royalty rates have less application and so driving up the equivalent of revpar is the main route to grow.
In saturated markets, rates are hard to raise which means better occupancy is needed. Renting out student accommodation for just 30 weeks a year leaves an obvious opportunity to do something with the other 22 weeks, particularly over the summer when many students will have moved out anyway.
In addition to this yield management play, Samuel Vetrak, CEO of data providers BONARD, reckons there are two super trends in global student accommodation: increasing demand for amenities and a continuous blending of student housing, micro-living and co-living offers.
This all points to a commonality with hospitality investors and developers. And more evidence of the hotelisation of real estate.