In Ben Harvie’s latest discussion piece, the Head of GSA Coral highlights student accommodation’s enduring appeal to alternative investors.
Capital flowed into UK student accommodation throughout 2016 and, if anything, the sector will become more prominent on investors’ wish lists this year against a backdrop of continuing political and economic uncertainty.
According to preliminary figures from property consultant Cushman & Wakefield, investment in the UK sector topped £9bn in the last two years, making it the second highest year on record. With a further £1bn of assets up for sale, says C&W, 2017 is likely to be another strong year.
The underlying growth in student numbers in higher education is clearly a key factor in attracting investors to the sector but this remarkable run of transaction activity should also be viewed in the context of real estate investment generally.
So-called alternative assets such as purpose-built student accommodation offer a measure of diversification and stability of income returns when core property – offices, retail and industrial – looks expensive and vulnerable to the uncertainty created by Brexit.
That’s why we can reasonably expect a greater commitment by mainstream institutional investors in this prolonged buoyant investment market for student accommodation, which to date has been dominated by well-funded overseas investors, owner operators and private equity firms.
Indeed, student accommodation looms large in the latest edition of Emerging Trends in Real Estate Europe*, an annual forecast published jointly by PwC and the Urban Land Institute. The spectre of Brexit undoubtedly weighs heavily on the minds of the near-800 senior property professionals interviewed and surveyed for the report, indicating that the industry will apply a “risk-off” strategy to investment this year.
These industry leaders believe that alternative assets – led by student accommodation but including healthcare and hotels – are less risky propositions than core property, and therefore offer the best prospects for 2017. Some 44 percent now say they would like to invest in such sectors, an increase of 16 percentage points over the previous two years.
They are coming off a relatively low base, of course. The volume of capital flowing into alternatives is relatively low – the £3bn total for UK student accommodation in 2016, for instance, compares with as much as £50bn of investment activity in traditional commercial property. Even so, the survey results suggest real estate is approaching a tipping point when nearly half of European industry participants want to venture beyond the traditional asset classes. Bear in mind, these are, by and large, industry generalists, not specialists in student housing or any other alternative.
The true significance of this shift of capital, however, is that it appears to be far-sighted rather than simply a post-Brexit panic attack. During the last cycle, investors made a beeline for alternatives due to the yield premium over offices, retail and industrial. It was little more than a speculative play. Nothing wrong with that but as soon as yields recovered, those same investors returned swiftly to their core property comfort zone.
And yet the search for higher yields is only the fourth most common rationale cited in the Emerging Trends survey, behind stable income returns, diversification and demographic drivers. The latter is top of the list by some margin, with 69 percent of respondents acknowledging the fact that alternatives such as student accommodation reﬂect how society is changing and are worth getting into for the long term.
In this uncertain, post-Brexit climate, however, there is something reassuring about the growing numbers of investors upping their allocations to student accommodation, and their reasons for doing so.