By Shayla Walmsley
Time was when student housing meant either a concrete Colditz or an infested suburban squat overlorded by an Alexei Sayle lookalike. Now it means a low-risk, liability- matching, countercyclical investment with better returns than you can get from gilts.
“If you went into the market over seven years ago, it was difficult to persuade investors that real estate had bond-like characteristics. Now they think real estate is only a bond.”
Richard Tanner
At least it does to pension funds and insurers. How they get to it depends on a couple of factors. Size is one of them. When Dutch pension fund manager PGGM last autumn closed an agreement to acquire 60% of on-campus housing provider, University Partnerships Programme (UPP), the rationale included the latter’s 12-asset operational portfolio and long-term partnerships with universities, a typically 30-year concession-based model, and a platform to acquire new deals.
PGGM, which manages the assets of the €118bn Dutch healthcare pension fund, acknowledges that there are few such platforms around. There aren’t that many PGGMs, either. One of the few with comparable capital clout, Singapore sovereign wealth fund GIC, currently participates in two UK joint ventures with UK operator the UNITE Group: the £400m UNITE Capital Cities vehicle and a 10-year vehicle that targets assets in London. For those with neither the size nor the in-house nous to set up a joint venture, in April Gravis Capital Partners launched the UK market’s first student accommodation real estate investment trust (REIT), seeded with a single London asset and targeting a 5.5% annual yield. Although partner Tom Ward acknowledges UK pension schemes’ habitual reluctance to invest in listed real estate because of equity volatility, he believes they will overcome their aversion because student accommodation tends to be less volatile than most other real estate.
Is it a bond? No, it’s a building
If you look at pooled funds – the most obvious route to exposure – relatively few target student accommodation exclusively. The £1.2bn UNITE Student Accommodation Fund (USAF), which includes the Universities Superannuation Scheme (USS) among its investors, is one that does; Cordea Savills’s student hall fund, launched in 2006, is another.
Since 2008 they have faced increasing competition from funds dedicated to long-lease assets, including student accommodation. Yet institutional investors may be underestimating the risks associated with student accommodation – and, for that matter, with long-lease assets more generally.
Richard Tanner, managing director at AEW UK, believes the comparisons with fixed income have in some cases been overplayed. “If you went into the market over seven years ago, it was difficult to persuade investors that real estate had bond-like characteristics. Now they think real estate is only a bond,” he says. That can lead investors to underplay risks such as obsolescence and covenant changes. Actuarial assumptions of bond-like yields for super-long leases are not what investors get when they sell the student housing asset 20 years down the line.
“In student accommodation, the problem is that if you know who the counterparty is and what the credit rating is, you’re still faced with uncertainty in 20 years’ time compared with a bond,” says Tanner. AEW has attempted to mitigate these risks by operating on the basis of adverse assumptions and agreeing prices that reflect them.
Yet pricing for prime assets is keen to the point of aggressive – even if, as Prupim senior research analyst Emma Harding points out, it is still better value than other types of London properties such as West End office.
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