The Letter – Europe | 1 | June 2015

Another year, another set of final school exams, another student cohort, another new student accommodation block. One

batch of students leaves their first-year-away-from-home home, older and wiser but not necessarily richer. Another batch arrives for their first year away from home, burdened already by hefty stu-dent loans and the need to pay the first term’s rent upfront but wide-eyed and eager to plunge into the pleasures of student life. They arrive laden with possessions — some necessary, many not — and move into their student accommodation. It wasn’t always so straightforward. As any parent will tell you, it used to be, well, different — not worse, not better, just different. Every parent who went to col-lege will tell you a tale about their student days, often involving a private-rental landlord.

Supply-demand dynamicsStudent accommodation has been put alongside hotels, healthcare, nursing homes and self-storage facilities as a niche property investment sector but the easy investment reality is that it is primar-ily about matching limited supply to rampant demand. There are more students across Europe than there is accommodation, simples, and uni-versities and colleges everywhere have problems funding newbuilds and rebuilds of existing pur-pose-built stock. That fact brings in developers of, and investors in, direct-let private-rental student housing who can see the implications for supe-rior performance and returns.

Despite the seemingly continuing unstoppable growth in student numbers, there are some sug-gestions that supply is moving nearer to meeting

Making the gradeStudent accommodation is receiving serious attention

from real estate investors

by Richard Fleming

Apache Capital Partners recently sold Paris Gardens, a 253-unit direct-let student accommodation asset in London’s Southwark district, to LetterOne for £61 million (€82 million).

The Letter – Europe | 2 | June 2015

demand, and that the superior performance and returns of recent years will fall a natural victim to the new balance. The easy money may have been made but it is the durable nature of the less-easy money that is now attracting new investors. These investors have a lower cost of capital and can now obtain the scale that they are looking for.

Richard Jackson, co-founder and managing director of Apache Capital Partners, says that activ-ity in the student housing sector is being driven by the supply-demand situation and institutional inves-tor appetite for quality long-term income streams. “You have to have the right scheme in the right loca-tion, and you have to maintain good occupancy. In conjunction with your location, this can only be achieved through combining the highest speci-fication with the best level of service to students. That will enable you to compete with the inevita-ble increase in supply and competition from other schemes in the future.”

The two main markets in Europe that have caught the attention of both student accommoda-tion developer/operators and the wider institutional investor community are Germany and the United Kingdom, although every country with a desire to see its younger generation gain the benefits of higher education has the same supply-demand dilemma in student housing. There are just too many students for the level of available student accommodation, and the uncomfortably high percentages of youth unemployment currently in many European coun-tries — which help persuade school-leavers that maybe, just maybe, they should work at gaining some serious qualifications — serve just to exacer-bate that disconnect.

Recent weeks have seen several notable deals announced in the European student accommoda-tion sector, principally in the United Kingdom; fur-ther details can be found in the box story on pages 26 and 27. These watershed deals — which have provided welcome pricing evidence — point to the increasing maturity of the sector, and the new willingness of mainstream institutional investors to allocate in scale to assets that have been proven to provide an assured income stream. It’s another man-ifestation of the hunt for yield, and one that comes with less risk — a building that has hundreds of tenants is always seen as a better risk than one with just a single tenant.

“There is a significant value proposition in the UK student accommodation market,” says Michael Bickford, founder and CEO of Round Hill Capital. “When you look at current residential rental yields in the United Kingdom, especially in London, you’re probably looking at 3 percent plus or minus, and we are looking here at a sector with a 5 percent yield. To me, that differential in yield for similarly-located student housing versus residential, from a value per-spective, is just too big. As a firm, we look for stable recurring cashflows from high-quality assets that we drive with active, hands-on asset management in

order to deliver excellent risk-adjusted returns. Stu-dent housing fits that exact strategy.”

It also helped, Bickford explains, back in 2012, when Round Hill purchased the Nido portfolio from The Blackstone Group, that few people considered student housing to be an institutional asset class. “It really wasn’t on a lot of people’s radar. Perceptions have now changed.”

Paul Hadaway, CEO of Empiric Student Property Plc, agrees that institutional investors were previ-ously not that interested in direct-let student prop-erty. “It came overnight almost in summer 2013,” he says. “It finally dawned on everyone that student housing is a very reliable income stream and that values don’t move very much compared to other asset classes. If these properties are well located, offering the right thing to tenants in good univer-sity towns, every year, year after year after year, it’s almost an annuity. Students are going to come and pay the rent.”

Institutional appetite both for direct investment and equity investment has been growing since sum-mer 2013, says Hadaway, and hasn’t stopped.

“Major UK institutions are making allocations toward student accommodation,” says Jackson. “If it is not classed as an institutional asset class yet, it’s pretty close to being so.”

High-end facilities and premium pricing “There are two student accommodation markets,” says Matthew Ryall, CEO of Crosslane Fund Man-agers LLP. “The United Kingdom and continental Europe, and they are quite different. The main point of difference between the markets is that the United Kingdom is established, while continental Europe is in its infancy.” The United Kingdom’s place in the student market owes much to the country’s role in the global use of English as a business language and global lingua franca, and to the worldwide reputa-tion of its higher education facilities; universities as well as more vocational institutions.

International Campus AG is proceeding with development of THE FIZZ Frankfurt II, its second student accommodation block in Frankfurt. Located in Gutleutviertel on the north bank of the River Main, the 390-apartment building is part of the Sommerhoffpark residential complex and is due for completion in early 2017.

Photo: M

agnus Kam

iniarz & C

ie Architektur

The Letter – Europe | 3 | June 2015

“British universities are now becoming a global brand,” says Ryall, “and we are seeing higher numbers of foreign students moving into the UK market.” International students — and their sponsors/parents — have the pick of the world, and often they pick the United Kingdom. Famously, international students have a different mindset to domestic students — not for them the not-so-hard-work, hard-play rousing engaged in by British undergraduates; more a common feature of a hard-work, keep-working-outside-college attitude. International students are often older, more mature and just want to get on with their studies and pay their way.

“Europe is one of the cultural centres of the world, especially from an educational perspective,” says Bickford. Jim O’Neill, of BRIC fame and speak-ing recently at the INREV annual conference in Barcelona, remarked that the number of Chinese students wanting to study in Europe is likely to double to some 800,000 per year in the medium term; “and their parents are happy to pay.” “We see an increasing demand from foreign students,” agrees Chris Blanchard, portfolio manager, global real estate securities, at Presima. “The number of foreign students in the United Kingdom is expected to double by 2025,” adds Hadaway.

International students have greater demands for their accommodation needs, especially as they are more likely to be around at weekends and out-of-term. This is their abroad-home, not their home-from-home. Developers and operators are well aware of this premium market and much of the new

construction that is taking place is aimed at interna-tional students; premium accommodation featuring superior facilities comes at a premium price, and both parties are happy with the arrangement.

“Student accommodation has evolved from just being a bed,” Bickford suggests, “to being a student experience. We are creating a platform for students, a launchpad for the rest of their lives, where they can meet people who will be friends for life, where they can study on their own or with people, and have a more complete university experience.”

“We find the stable growth in rent very attrac-tive,” Blanchard comments. “It goes back to the supply-demand fundamentals, and we have seen even over the financial crisis that student accommo-dation providers can grow their rents by 2 percent to 3 percent on an annual basis, which is something that over the long term is very attractive.”

“A lot of existing stock is now seen as obsolete, or is becoming increasingly obsolete,” Ryall points out. “What students are demanding today is very different from when I was at university, when you got a room and shared a kitchen and a bathroom with everybody else on the floor. Increasingly, today’s students are looking for a higher quality of accommodation, they are looking for en-suite bath-rooms, and they are not wanting to share kitchens with 20–30 other people. We are seeing an increas-ing number of students looking for a product that wasn’t available 20 years ago.” That augurs well for student housing developers.

“The reason why people are now developing in continental Europe,” says Bickford, “is because

Examples of recent student housing deals, developments and investments

Single-asset deals•Advised by JLL, BBVA has sold two student resi-

dences in Barcelona to The Student Hotel. The Melon District Marina and Melon District Poble-sec comprise a total of 600 rooms over 16,700 square metres, plus 3,140 square metres of retail space and 150 parking spaces.

•Apache Capital Partners has sold Paris Gardens,a 253-room asset in London’s Southwark district, to LetterOne for £61 million (€82 million) It has also acquired the existing share of its joint venture equity partner McLaren in the student accommoda-tion/office development on Paul Street in London’s Shoreditch district for £108.6 million (€147 million); this development will have 456 rooms and 4,000 square metres of office space. In Kingston-upon-Thames, Apache Capital has teamed up with Inves-tra Development on an off-market 210-bed student

housing scheme valued at £40 million (€54 million). The Kingsgate House scheme will also include 400 square metres of retail space.

Portfolio deals•Canada Pension Plan Investment Board has

acquired 100 percent of the UK student accommo-dation portfolio operating under the Liberty Living brand from the Brandeaux Student Accommoda-tion Fund. CPPIB also acquired 100 percent of the Liberty Living management platform, Liberty Living Management Two Ltd. The total cost of the portfolio and management platform was approximately £1.1 billion (€1.5 billion). Liberty Living has 40 student housing assets in 17 UK university towns offering a total of more than 16,700 rooms.

•The Carlyle Group has sold Pure Student Living,its London student accommodation business, to Let-

The Letter – Europe | 4 | June 2015

there is very little stock available from a direct-let perspective to actually go and buy. The market is significantly underserved in Europe, especially the direct-let market and for international students looking for accommodation. In addition, the exist-ing student housing stock is ageing and it needs a developer to come in and renew the existing stock, which might be on campus or nearby.”

A further development over students of the past is that students are staying at college for lon-ger. We have all heard of “perpetual students”, stu-dents who seem to make a career out of being a student. It is increasingly the case, though, that a first degree these days is not enough to make a student stand out from the crowd. Competition for jobs is fierce, even for those jobs that repre-sent the bottom rung of the ladder in a particular field; the answers for many undergraduates is to enhance their employment prospects by undertak-ing a postgraduate course or research. “About 24 percent of students across the United Kingdom are doing some form of postgrad degree,” says Had-away, “about double the number of 10 years ago. It’s not just a case of student numbers increasing but the length of time that they spend at university also increasing.”

Low-paid or unpaid internments are the route to poverty. Getting the master’s is seen as a neces-sary evil; it will prolong the student life and add to the student debt burden, but it is another reason why student accommodation providers are con-fident that the supply-demand equation will not move against them in the medium term.

Blanchard points to the property management aspects of student accommodation. “We don’t talk enough about the challenges with student accom-modation, which is highly management-intensive,” he says. “As an asset class, you have to have an excellent management team in place to look after the asset and to make sure that the asset is main-tained and well run.”

Here today, still here tomorrowThat student accommodation’s place in the real estate investment scheme of things is down to supply-demand dynamics is not rocket science. There are more students than rooms, and there are more budding students than there are rooms in the pipeline. You don’t need to be even a young Einstein to sniff the opportunity.

It will always be the case that where a demand is identified, then suppliers will step in to meet the demand, and student accommodation markets across Europe, but especially in Germany, the Netherlands and the United Kingdom, are no exception. And it will also always be the case that institutional inves-tors seeking that so-elusive yield will react favourably when presented with assets and portfolios that offer them good prospects for long-term stable income. v

Richard Fleming (r.fleming@irei.com) is editor of The Letter – Europe. He is based in Kimberley, United Kingdom.

terOne Treasury Services for £532 million (€719 mil-lion). Pure Student Living has 2,170 rooms across five sites in central London.

•Nido London Sàrl, advised by Round Hill Capital,has sold its 2,375-bed London student accommoda-tion portfolio to Greystar Real Estate Partners for £600 million (€811 million). The portfolio comprises three assets in the King’s Cross, Notting Hill and Spitalfields districts. Round Hill Capital acquired the Nido student housing portfolio from The Blackstone Group for £415 million (€561 million) in May 2012.

Developments/investments•International Campus AG is currently proceeding

with two THE FIZZ developments in Frankfurt and one in Hannover. The Hannover-Nordstadt site is due for completion in October and will feature 296 single and seven double apartments. Other features include 200 bicycle stands, 37 car parking spaces, four lifts, a cooking area, a study and seminar room, a laundry facility, a lounge area and a green land-scaped courtyard. International Campus aims to have 20 THE FIZZ developments in operation within the next five years.

•EmpiricStudentPropertyPlchasacquiredthefreeholdsof development sites in Nottingham and Bristol, United Kingdom. 95 Talbot Street in Nottingham has planning consent for a 67-bed student accommodation scheme, and William & Matthew House on Host Street in Bris-tol’s Clifton district will be developed into a 75-bed stu-dent accommodation asset by Urban Creation.

•MPCCapitalAG,whichhasastudentapartmentplat-form joint venture with Sparinvest Property Investors, has established the STAYTOO brand for student hous-ing projects in Germany. Its first two developments will be an office conversion in Bonn-Duisdorf and a further property in Nuremberg.

•InternosGlobalInvestorsandSomerstonGrouphaveacquired a 27.5 percent stake in German student accommodation specialist Deutsche Real Estate Funds Advisor SARL. “This investment is in line with our strat-egy of investing in buildings where populations rest their heads,” says Andrew Thornton, CEO of Internos. “There is still a significant opportunity to increase institutional investment into student housing in Ger-many, and we very much see this as a long-term strategic shift that we would like to exploit.”

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