(Bloomberg) – Private public companies are increasing their investment in the UK student accommodation market, pumping hundreds of millions of pounds into a resilient sector, facing high rental returns in the UK after Brexit and Covid.
More than a third of student property transactions in 2021 have been funded by private equity to date, compared with around 15% total between 2016 and 2019, according to real estate consultants Jones Lang Lasalle Inc.
With student applications expected to rise 8.5% this year and purpose-built accommodations oversubscribed, real estate remains attractive to private equity firms. You are sitting on more than 300 billion US dollars for real estate investments alone and want to expand your assets beyond offices, retail and hotels – all of which are badly affected by Covid-19.
Major deals this year include Ares Management Corp’s first UK real estate investment. based in Los Angeles. The $ 197 billion alternative asset manager spent £ 158 million ($ 217 million) on two newly built residential units in February and hopes to build a UK portfolio valued at £ 400 million to £ 500 million, the co- Head of the European real estate industry, Wilson Lamont, in an interview.
Ares is not alone. A recently launched fund by Sunway Bhd and MBU Capital Group Ltd. already amounts to £ 110 million and is aiming for almost double that. Meanwhile, veteran real estate lenders Daljit and Randeesh Sandhu have established Precis Capital Partners, backed by TowerBrook Capital Partners, and will lend more than £ 50 million to finance real estate projects including student accommodation.
The high investment ambitions for 2021 contrast with student experiences during the pandemic, many of whom had to pay full rents while living in a lockdown far from university residences. Rent can go up to £ 2,000 a month in London.
Private equity investors now own 55,000 student beds, according to a Jones Lang LaSalle analysis of the ten largest landlords in the sector. That’s 8% of the UK total.
That number was increased a year ago when Blackstone Group Inc. bought iQ Student Accommodation – the UK’s largest private real estate business – for £ 4.7 billion. Blackstone said at the time the iQ deal was a vote of confidence in the UK
According to Tim Pankhust, senior director at CBRE Group Inc. overseeing student accommodation services, the total return on student property for the twelve months ended September 2020 was 4.9% and was only outperformed by commercial property over five and ten years.
Still, the sector needs an additional 310,000 beds to accommodate all freshmen and international universities, who typically live in purpose-built accommodation, according to student accommodation provider Unite Group Plc. The construction work cannot significantly close this gap at the moment.
Some landlords shared a measure of their tenants’ pain over the past year from bans related to Covid. Unite, the UK’s largest provider of accommodation with 76,000 students across the UK, posted over £ 100 million success in mid-March this year after offering rental discounts during blackouts.
Smaller providers are even more vulnerable as companies that own two accommodation providers collapsed in administration last month, according to Bisnow magazine. The two developments, both located in the city of Luton north of London, were once valued at £ 35 million, Bisnow said.
Current prices are 10% to 15% below what they would have if it weren’t for the pandemic, which opens up new opportunities, Ares’ Lamont said. Unite’s shares are still around 20% below their pre-pandemic highs.
Still, according to the National Union of Students, more than a fifth of students were unable to pay their rent in full in the four months ended January this year. “The government has left students to rely on nonprofit handouts from universities, major accommodation providers and private landlords in the form of rent reductions and hardship funds,” an NIS spokesman said in an email response to questions.
Lured by the income
The appeal of traditional UK private school and university education has long ensured a steady supply of overseas students and boosted balance sheets for institutions and accommodation providers. This is now being called into question after Brexit. According to the admissions figures, applications from students from countries of the European Union have decreased by 40% compared to 2020.
Nevertheless, investors continue to see long-term opportunities. CBRE’s Pankhurst notes that while the pandemic has hurt occupancy in high-end London, which is particularly dependent on overseas students, investors are looking beyond short-term issues to a growing potential pool of new students.
Buyers are banking on an imminent university-age student demographic spread in the UK and a government strategy to encourage overseas enrollment post-Brexit. The supply bottlenecks also support rents.
Companies like Ares monitor student cities outside of London. Together with Generation Partners, the company bought two recently completed developments in the cities of Cardiff and Exeter with 1,359 beds. The Cardiff, Wales site was formerly part of a hospital and has a gym, yoga studio and private courtyard.
This is part of a broader trend to professionalize the ownership of shared living space, including student accommodation and retirement homes, said Randeesh Sandhu of Precis Capital. “Ultimately, people look at properties that have income and are institutionally well-run,” Sandhu said.
“The US was way ahead of the UK in these areas and the UK is catching up.”
© 2021 Bloomberg LP