One way around it is to finance development, rather than acquire assets. Insurers, especially, see debt finance as a means to gain exposure while avoiding potential overpricing. Legal & General last year loaned just over £120m to UNITE to refinance a bank loan. At around the same time, M&G pooled investors’ money to fund the £266m acquisition of Blackstone’s Nido portfolio. In recent weeks it agreed to provide £32m to Swansea University and its development partner St Modwen’s to developing new accommodation on a 45-year post-completion lease.
Either way, investors in student housing will be taking on counterparty and operational risk because in most cases they are acquiring not assets but operators – explicitly in PGGM’s case, implicitly when they invest indirectly.
“Returns are intrinsically linked to the quality of the operator — including whether they have a sales and distribution network in China, their links to the university, and whether they can use Facebook effectively to stimulate demand. You have to treat student accommodation as a specific business. You have to know what you’re doing,” says Dan Bowden, head of alternatives at Axa Real Estate.
“In 13 years working in the sector, there are a handful of operators we can trust. My concern would be with the old-school developer who found himself in the building that he’s turned into student accommodation because he couldn’t get planning permission for an office.”
The arrangement between PGGM and UPP, works in three ways. UPP leverages its partnerships with its own partners ( universities) to gain preferred housing provider status. “The overarching risk is that we’re taking the risk of the university continuing to attract students, even if we’re not letting directly. The universities we work with have to ensure that students go to them and, when they do, that they get them into beds,” says UPP director of strategy Jon Wakeford.
Once the deal has been closed, its terms cover the concession’s entire duration. Those terms involve restricted covenants – which limits the amount of new supply that can be brought into the university – the rent agreement, the performance mechanism and the upside revenue-sharing.
“The biggest risk is a deterioration of the mid- and long-term attractiveness and position of UPP’s partner the universities, the main driver behind demand for student accommodation,” says PGGM senior investment manager Vincent Gerritsen.
The undergraduate dilemma
There are related sector-specific risks, too. The government’s removal of the cap on university fees paid by domestic students has not had the predicted catastrophic impact on tertiary student numbers – at least not yet. After a drop in applications in the cycle following the announcement, they recovered somewhat in the most recent round. But according to Bowden, which invests in student accommodation as part of its long-lease and residential funds, the new fee structure will polarise an already maturing market. Students who pay more, the argument goes, will be more discerning.
(In fact, several investors interviewed located student accommodation not within residential real estate but within hospitality. The comparison, especially given that investors are targeting high-end universities targeting middle-class students from India and China, is with hotels.)
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