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London Student Housing Insights2015

2 | London Student Housing Insights 2015

Contents

Page 3 Executive summary

Page 4 Overview of the investment market

Page 6 London student housing demand

Page 9 Supply issues – structural undersupply

Page 10 The three main supply issues facing Student Housing in the future

Page 12 Supply pipeline

London Student Housing Insights 2015 | 3

Executive summary• London’s population has hit 8.6m and is forecast to exceed

10m in the next decade, increasing the demand for housing in all sections of society, including students

• Rising house prices and constraints on mortgage lending have forced more people into rented accommodation. More students are also renting; 28% of London’s Student population are living in Houses of Multiple Occupation (HMOs)

• London’s full-time student population is expected to rise by 50% in the next 10 years, exacerbating the existing shortfall in student housing supply

• The stock of Purpose Built Student Accommodation (PBSA) has been expanding to date, but still only 9% of the 290,000 full-time students in London stay in this type of accommodation (see right hand)

• The four boroughs of Camden, Southwark, Islington and Tower Hamlets, in which half of all PBSA development since 2007 has occurred, have seen a significant drop in supply pipelines through a combination of planning policy changes and intense competition from alternative land uses. This will severely constrain future supply in these areas

• PBSA development is being opened up in emerging locations such as Acton, Wembley and Stratford aided by improving transport connections. Local authorities in these boroughs tend to have less restrictive planning policies, making the development of affordable PBSA more feasible

• These emerging markets can provide a price point that appeals to a larger section of the student population; hitherto the majority of PBSA development has been high end and occupied by overseas and post graduate students

• JLL forecasts capital flows into the sector will hit at least £5.7bn by the end of 2015, more than triple the previous year, as strong fundamentals and the weight of money are attracting international investors

• Over the last 3 years, JLL estimates that nearly 75% of the 27,500 PBSA units built in London have been transacted, reflecting the strong investor appetite in this asset class

• JLL believes the accelerated development of affordable, appropriately located PBSA or university managed accommodation is of key importance to the capital’s higher education institutions, so they can continue to attract the best global talent.

Student accommodation market in London, by type

28% HMOs (Private rented sector)

46% Other (including living at home)

18% London Universities

9% PBSA (Purpose built students accommodation)

Source: JLL & HESA


Full year 2015£5.7bn (forecast)

Overview of the investment market

Direct investment in the UK student housing market has surged over the past two years, rising from under £500m in 2010 to £3.8bn over the first half of 2015 (£1.5bn in London). JLL forecasts that volumes will exceed £5.7bn by the end of 2015 (over three times the 2014 total – Figure 1). Investors, who are increasingly global, now see PBSA as a mainstream ‘Alternative’ asset class (see page 5) with a strong demand base, a supply-demand imbalance, high occupancy and the ability to generate steady long term income streams. Indeed, rental growth of at least 5% pa has performed very competitively against conventional commercial real estate since 2006. The spike in capital flows into the sector in 2015 can be attributed to some large portfolios being transacted.

In London, these included:• Pure Portfolio – 2,170 rooms across five prime central London sites.

Sold by JLL in March 2015 for ₤530m. Net Initial Yield (NIY) c 4.5%• Nido Portfolio – 2,521 bedrooms across three central London sites.

Acquired May 2015 for £600m by Greystar / PSP (advised by JLL). NIY c4.5%

• ISL – 347 bedrooms in Outer London. Sold by JLL for £70m. NIY c5%• Paris Gardens – 253 new development in Southwark. Sold for £61m.

NIY c4.5%Investor confidence and the weight of money flowing into the sector have significantly hardened yields since 2013, as illustrated in Figure 2.

Figure 2 – London PBSA prime yields

Central London zone 1-2 Greater London zone 2-4

2012£2.7bn

2014£1.7bn

2011£1bn

2010£274m

2013£2bn

Figure 1 – Direct real estate investment into PBSA H1 2015

£3.8bn

Source: JLL

0

100

150

200

250

300

50

2002/2003 2013/2014

Yield

4.0

4.5

5.0

5.5

6.0

6.5

7.0

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

2012 201520142013

Source: JLLNote: Referenced to appropriate cash-flows and applies to best in class assets

Year


Central London zone 1-2 Greater London zone 2-4 Growth in the Alternatives sectorStudent housing is one of the largest sub-sectors within the ‘Alternative’ property asset class. Alternatives comprise all of the real estate sectors beyond traditional office, retail and industrial and includes: Healthcare, Leisure, Self Storage and Student Housing.

In tandem with student housing, alternatives are making up an increasing share of the UK real estate investment market. In 2014, 20% of all transactions were in alternative sectors, up from just 5% in 2010. JLL forecasts that this will rise to 29% of all transactions.

Investors, who are increasingly global, now see PBSA as a mainstream ‘Alternative’ asset class, with a strong demand base and the ability to generate steady long term income streams. This is highlighted by the amount of capital being deployed in this sector.

Key London Student Housing Statistics for 2013/14

There were 290,000 full time students in the Greater London area

9% of those were in private Purpose Built Student Accommodation (which equates to 27,500 PBSA beds)

28% of students in London (full time and part time) were from overseas

Typical tenancy period in private PBSA was 51 weeks

Source: JLL and HESA


Of the 104,000 overseas students studying in the capital, 34,000 come from continental Europe and 69,000 from the rest of the world.2 Non-EU students have been the fastest growing segment, with numbers increasing by 50% over ten years. A recent study by London First shows that international students bring a net benefit of £2.3bn per annum to London's economy supporting 60,000 jobs in the capital.

Since 2002, full-time student numbers in London have grown by 86,000 at an average annual rate of 3.5% (Figure 3). Over the next 10 years the London Mayor’s Academic Forum expects a further rise of 147,000 full time students, which would continue the growth trajectory of the previous decade (see Figure 4).

London student housing demand

Student demographics London has one of the largest concentrations of students in the world and numbers have been growing dramatically over the last decade. This is due to a number of factors, varying from having more world-class universities than any other city in the world, through to its vibrant culture.1

There were 376,000 students registered at Higher Education Institutes in London in 2013/14, of which 290,000 were studying full-time.

In addition, 28% of all these students (104,000) were from overseas; a proportion which has nearly doubled over the past decade. Overall these figures are likely to be under-estimates as they exclude the ‘Grey Market’, the estimated 50,000+ students studying at non-HEFCE affiliated institutions. This grey market category includes those at London campus branches of non-London universities, alternative providers and international exchange students from Study Abroad and Erasmus.

Figure 3 – Change in full-time student numbers in London, 2002- 2014 (000s)

2002/2003

204,8152013/20014

290,31 5Increase of

42%

Figure 4 – Predicted growth in full time student numbers in London over the next 10 years

1. Times Higher Education, World University Rankings, 14-152. HESA

Source: JLL and HESA

London Mayor’s Academic Forum

147,000Prediction

OECD projection of international students

120,000


Global student mobility – a key factorData from the OECD shows that tertiary enrolments have expanded significantly since 2000, rising from 65m to 165m in 2011. They are expected to rise to 263m by 2025. In tandem with this, the number of full-time students choosing to study abroad has almost doubled globally to 3.7m.

JLL’s Global Student Housing Report (2012) highlighted the reasons for this, which included: the establishment of university exchange programmes; internationalisation of higher education and labour markets; a decline in transportation costs; as well as university strategies to counter reductions in government funding by expanding into international markets.

In addition, the increased availability of information online, from researching courses to reviewing other students experiences, has reduced the risk factor for students moving abroad.

Looking ahead, the OECD predicts that the number of students studying abroad will more than double to 8m by 2025. Assuming London retains its share of international students, this would imply the number of overseas students increasing by 120,000, from 104,000 to 224,000 over 10 years. This suggests that, assuming that most international students study full time, the majority of the increase in student numbers will be attributable to international, rather than domestic, students.

The UK is the second most popular higher education destination globally (behind the US), with London receiving a quarter of all UK bound students.


Historically, undergraduate students stayed in university provided accommodation for the first year of their degree, before moving into HMOs in the private rental sector in the subsequent years. However, this has started to change significantly over the past five years.

The provision of university managed accommodation has not kept pace with the growth in student numbers and the increasing quality and quantity of PBSA stock has provided students with a welcome alternative to the rising rental costs of HMOs. Additionally, two of the fastest growing segments of London’s student population are overseas and postgraduate students, who have occupied much of the PBSA.

The attraction of PBSA to overseas students is illustrated by an empirical study that JLL conducted with prospective students in Hong Kong in 2014. This showed that students planning to study in London ranked quality and location ahead of price when choosing their accommodation. When asked what type of accommodation they preferred, 90% stated an en-suite room or studio.

There are currently 52,000 university managed and 27,500 privately managed beds in London. These are almost double the figures for 2007, with most of the increase delivered by PBSA, which has expanded provision 15 fold since 2007 (Figure 5). The result has been a rise in the percentage of students living in PBSA,

from 1% in 2007 to 9% today. A similar trend can be seen with HMOs, which now house 28% of students, compared to 19% in 2007.

The Mayor’s Academic Forum prediction of 147,000 extra students studying in London by 2026, will, they believe, result in the need for at least 3,000 additional student beds every year. JLL estimates future demand for PBSA and university managed accommodation to be much larger than this, particularly given that historically supply has not kept up with the growth in the student population.

Figure 6 shows that low affordability in the residential sales market has driven up open market rents by a third. JLL forecasts this trend will continue, with rental increases of between 3-5% over the next five years. House prices in Greater London are now 32% above their pre-recession peak, as a result of a rising population and constrained new build supply. The latest Census data also shows how this has produced a significant shift into the privately rented market over the decade to 2011, with a quarter of London’s population now housed in the private rented sector, up from 17% in 2001. This is impacting students, as more competition for limited HMO stock is causing rental values in the private sector to rise.

In addition, the availability of HMOs for students is constrained, as more local authorities enforce Article 4 directives related to this accommodation type. This requires landlords to obtain planning permission if a house is to be let as an HMO. Around 30 councils in England have already indicated they will enforce this planning rule, as a number have stated that they wish to limit the proportion of residential homes occupied by students.

Figure 5 – Number of PBSA beds

Source: JLL

Figure 6 – 2015 Rental growth, annual % change since 2009

LONDON

CENTRAL LONDON

GREATER LONDON

120% 140%

PBSA

136%

Source: JLL, HESA and ONS

1,8852007/2008

27,5002013/2014

Increase of

1,460%

London student housing demand


Supply issues – Structural undersupply

The four core London boroughsHistorically, the majority of purpose built student accommodation has been concentrated in four boroughs: Islington, Tower Hamlets, Southwark and Camden (Figure 7). As a result of the supply deficit within the PBSA sector, many of these developments have been occupied by overseas or post-graduate students, some of whom have been ready to pay a premium for the quality and location of their accommodation (Figure 8). Not all students can afford premium PBSA, hence the need to cater for the wider market and offer a better mix of PBSA.

Both the location and type of PBSA has now begun to change, as a key challenge facing student accommodation development across London is profitability relative to residential developments. There are also challenges in securing planning consent. Key locational requirements for student accommodation often align closely with residential development. Given the high house prices in the capital, student accommodation developers are having difficulty outbidding residential developers for sites.

It is unlikely to be commercially viable to build even the conservative estimate of 3,000 new beds being required every year (projected by the Mayor's academic forum). This is expected to accelerate the spread of PBSA development into other areas of London, such as Wembley, Stratford and Acton (see map on page 17 of this report).

These areas in outer London are key to addressing the shortfall in PBSA stock, allowing universities to expand by providing more low to mid market PBSA that will appeal to a wider market of students. It is of note that three universities are currently developing new campuses at Stratford.

The map, on page 17 of this report, is broken down by London boroughs and shows the concentration of full-time students living in all forms of accommodation, relative to the general population.

Figure 7 – PBSA Student bed completions, 1999-2012

Source: JLL

4,673 4,2133,015 2,848

Islington Tower Hamlets

SouthwarkCamden

Figure 8 – % of Direct let PBSA which are premium accommodation (£300p/w+)

Source: JLL

Islington Tower HamletsSouthwark Camden

10

20

30

40

50

60

0

24% 29% 36% 55%


1. Booming residential marketIn 2015 London's population has exceeded its previous peak in 1939, hitting 8.6m. It is projected to exceed 10m by 2030. Household rates – which translate into demand for housing – are actually higher than this as household sizes have become smaller (Figure 9).

Over the past decade, an average of 37,000 new households were established in Greater London every year. This is significantly higher than the average 20,000 new homes built per annum. Indeed, the gap between household formation and home building is set to widen, as forecasts suggest population growth will accelerate. Currently, the supply deficit is 150,000 homes and this is likely to rise to almost 300,000 by 2020.

The lack of supply, combined with London’s position as a global destination for residential real estate investment, has led to average house price growth of 8% over the last five years. As a result, the average house price in the capital now exceeds £500,000.

The 2015 budget introduced some changes to the planning system, which if approved by MPs could help accelerate the pace of house building. Under the new proposals, planning permission would be granted automatically for all suitable brownfield sites under a new zonal system. Another change would seek to scrap the need for planning permission in London for developers who want to extend buildings to the height of neighbouring properties.

The Mayor's London Plan proposes that it will not be necessary to conform to the new planning requirements or CIL if the developer/operator agrees to a nomination agreement with a university, although the extent of the minimum commitment required is uncertain.

2. Changing planning policy Recently proposed changes to the Mayor’s London Plan include introducing the provision of an element of affordable housing to newly developed PBSA schemes. There is no specified maximum amount of affordable housing for student accommodation schemes or a cash contribution equivalent, this is subject to borough considerations of viability. The plan’s guidance highlights the percentage of students receiving the means tested maintenance grant, which is 33% for London. This will have a detrimental impact on the development of student housing, and combined with other factors such as Community Infrastructure Levy will increase the supply gap in the PBSA market. Based on an average scheme of 300 bed spaces, the impact of an affordable provision laid out by the Plan on income could be in the region of £500,000 pa equating to £1,700 pa per bed space. This is the equivalent of the total running costs of a similar scale scheme outside of London.

3. Community Infrastructure LevyAnother reason for the widening geography of PBSA development is the restrictive planning related costs in inner London boroughs. The CIL is a planning charge, introduced in 2010 as a tool for local authorities in England and Wales to help deliver infrastructure to support the development of their area. Many inner London boroughs have hiked CIL rates for student housing development to exceedingly high levels. Combined with land values, this is making PBSA development unfeasible in those areas. Indeed, the four boroughs of Camden, Southwark, Islington and Tower Hamlets now all charge a higher CIL for student housing than for both residential and office development, in some cases almost double.

Consequently, London locations which might previously have been considered marginal for mainstream student housing development are now viewed as attractive opportunities.

The three main supply issues facing Student Housing in the future


■ New homes built ■ Household formation Supply deficit (RHS)

000's of homes

Figure 9 – Housebuilding vs Household formation in Greater London

0

10

20

30

40

50

60

0

10000

20000

30000

40000

50000

60000

-50000

0

50000

100000

150000

200000

250000

300000

0

50000

100000

150000

200000

250000

300000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Cu

mulat

ive de

ficit i

n num

ber o

f hom

es

Source: JLL & ONS


Applications submitted

Planning consent

Under construction

Supply pipeline

PipelineThe current pipeline contains 16,600 PBSA beds, either under construction or with planning permission, with another 1,800 awaiting planning consent (Figure 10).

The most optimistic scenario, in which we assume all 18,400 beds will be delivered within the next 10 years, still leads to London being 10,000 beds short of the conservative need determined by the Mayor’s Office. This shortfall becomes even greater once new beds, which will be simply replacing older stock, are removed. Indeed, although the student per bed ration has almost halved to 3.5 since 2007, there is a legacy of undersupply which further adds to these requirements. Even if all of the schemes consented or under construction are built, the projected growth in student numbers will cause the student per bed ratio to start climbing again, particularly given the likely proportion of students that will be from overseas. Constraints in supply referenced elsewhere in this paper will make it difficult to close the gap.

Universities in London are unlikely to step into the breach by constructing significant new university managed accommodation. They already have the challenge that many of their existing 52,000 university managed beds are in need of upgrading to keep up with domestic and international student expectations. Future investment by universities in their campuses will be focused on developing and expanding their academic, rather than their residential, estates.

Greater competition from young professionals and a reduction in HMO provision is likely to create even greater pressure on the PBSA market. There is an urgent need to accelerate the rate of construction of PBSA and university managed accommodation, which is likely to be concentrated in the emerging hotspots of London.

Figure 10 – Total London pipeline of PBSA

New hotspots for PBSA

• Acton – The new Crossrail connection has made Acton even more accessible from central London. Existing stock includes the 730 bed ‘Costume Store’ and ‘The Lyra’. Whilst universities are also building university managed accommodation, such as Imperial College’s 693 bed ‘Woodward Hall’ which opens this year

• Wembley – One of the key areas identified in the Mayor’s London Plan for regeneration, the local authority has identified 30 sites for redevelopment. This area has 118,000 full-time students studying within a 30 minute radius and the number of beds in Wembley is approaching 1,000

• Stratford – A beneficiary of the Olympic legacy, this area has seen a lot of redevelopment since London 2012 and has great transport links into central London. Included in the government’s infrastructure plan, a new hub is planned for Higher Education, with the opening of the University of the Arts London. Loughborough and UCL are also planning campuses in the area. Developments include Unite’s ‘Stratford One’ – with another 500 beds in the pipeline and Alumno’s 26 storey, 470 room PBSA tower

The common themes in all these areas are affordability outside of zones 1 & 2, but with regular transport links providing prompt access into central zones. They also have a large student population within a short travel radius, and their connectivity will be aided by upcoming infrastructure projects such as Crossrail. If the travel time from the student accommodation to the relevant university is more than 30 minutes, universities will be concerned about the time their students spend travelling.

18,4000

8,4008,2001,800

Source: JLL


Jargon Buster – Property related acronyms

Purpose Built Student Accommodation (PBSA) Housing specifically built for students by private commercial developers. This includes both direct let and nomination agreements with universities. This does not include university managed beds or the Private Rented Sector (PRS).

House in Multiple Occupation (HMOs)A House in Multiple Occupation is a property rented out by at least three people who are not from one ‘household’ (eg a family) but share facilities like a bathroom and kitchen. It's sometimes called a ‘house share’.

Article 4 An article 4 direction is a direction under article 4 of the General Permitted Development Order which enables the Secretary of State or the local planning authority to withdraw specified permitted development rights across a defined area. Many local authorities are adopting this to regulate changes of traditional dwellings to HMOs.

The Grey MarketJLL estimates that there are 50,000-100,000 students who enrolled at non-HEFCE affiliated colleges or universities, but who require accommodation within London.

The Community Infrastructure Levy (CIL)The Community Infrastructure Levy is a fee charged by local authorities based on £ per m2 on net additional (internal) floor space. Fees can vary by geographic area or use or size and are used to help pay for infrastructure needed to support new development.

£


High land values, coupled with restrictive planning polices in central London are severely limiting the potential for PBSA in Core areas in the capital.

London locations, which might previously have been considered marginal for mainstream student housing development, are now viewed as attractive opportunities.

Supply issues and challenges map

ENFIELD

WALTHAMFOREST REDBRIDGE

HAVERING

BARKING ANDDAGENHAM

BEXLEYGREENWICH

LEWISHAM

BROMLEY

CROYDONSUTTON

MERTON

KINGSTONUPON

THAMES

LAMBETH

SOUTHWARK

WANDSWORTHRICHMONDUPON

THAMES

HOUNSLOW

EALING

HILLINGDON

HARROW

BRENT

BARNET

HARINGEY

NEWHAM

HACKNEYISLINGTON

CAMDEN

CITY OFWESTMINSTER

KENSINGTON

AND CHELSEA

HAMMERSMITH

AND FULHAM

TOWERHAMLETS

RATIO OF STUDENTS(2011 CENSUS) 10.1% – 15.0% 15.1% – 20.0% > 20.1%

4 core boroughs Emerging boroughs

StratfordWembley

Acton

Source - ONS

Contacts

jll.co.uk

© 2015 Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to Jones Lang LaSalle and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of Jones Lang LaSalle and shall be kept confidential. Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of Jones Lang LaSalle. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.

Philip Hillman Chairman Alternatives +44(0)20 7087 5133 [email protected]

Huw Forrest Director, Student Housing Alternatives +44 (0)117 930 5889 [email protected]

Himanshu Wani Associate Director UK Research +44 (0)20 7087 5142 [email protected]

Martin Hadland Head of Higher Education Alternatives +44 (0)20 7087 5135 [email protected]

Richard Taylerson Director, Student Housing Alternatives +44 (0)20 7087 5128 [email protected]

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