With the UK having recently triggered its two-year exit from the EU, property investors will undoubtedly be looking for defensive ‘safe haven’ opportunities to shield themselves from any potential economic uncertainty.
As we have written about previously, student housing offers many of the characteristics investors are seeking to protect portfolios against potential increases in market volatility.
In an economic environment characterised by ultra-low interest rates, there are many key drivers of student housing – including a solid demand base, attractive yields and steady rental and capital growth. There are also diversification benefits resulting from the low correlation between student housing and traditional property sectors.
However, average student accommodation yields have compressed significantly in recent years, due to increasing investor demand and a shortage of investment grade purpose-built student accommodation. With top prime London student accommodation yields now at 4.5%, compared to 3.5% for prime central London office yields, the sector is starting to look keenly priced, particularly considering the additional risk premium required for investing in a less mature sector displaying lower levels of liquidity than the well-established central London office sector. Therefore, investors are increasingly seeking higher yielding opportunities outside the capital.
For example, better value investments can be found in historic and emerging regional locations with excellent education systems, good quality infrastructure and limited supply. Historic towns with restricted supply – such as Oxford and Cambridge – offer yields of about 5.2%, while prime regional cities with mature markets and a healthy supply/demand balance – such as Glasgow, Newcastle and Southampton – offer 5.5%.
Given a recent supply increase across the UK, investors now need to think more broadly about where to invest and how to find value in student accommodation. Investing in cities where universities have plans to grow and/or relocate campuses, as well as looking at cities where the supply/demand balance is favourable, should be key factors.
For instance, Bristol University is planning to invest £300m over the next five years in a second campus, which should be able to accommodate an additional 5,000 students. Another example is Belfast, where Ulster University is building a new campus in the city centre to relocate 12,000 students from Jordanstown.
University towns like Hull, Guildford, Egham, Brighton, Swansea and Norwich could also be interesting investment targets, given the shortage of student accommodation facilities. However, planning constraints, poor official data about the local student population and high residential values are factors to be aware of.
In addition, a key concern for investors is whether the strong demand for student accommodation seen in recent years will continue, given uncertainty about the impact of Brexit on student numbers coming from the EU. There are concerns surrounding immigration controls, a possible introduction of student visas, higher tuition fees and the relatively high cost of study in the UK for foreign students.
While the longer term picture is still unclear, figures from UCAS, the university admissions centre, suggest that after modest growth in overall student numbers of 1% p.a. in 2017/2018, there is likely to be a decline in EU student numbers. This is expected to be counterbalanced to some extent by a modest increase in non-EU and domestic students, suggesting broadly flat overall student numbers beyond 2018.
Demand from students is expected to be strongest for high and mid-tariff universities, while seeing a decline for low tariff universities. Overall, it should be sufficient to sustain rental growth ranging from 2%-3.5% p.a. in 2017 and 2018, with the largest owner/operator, Unite Students, stating it is expecting rental growth at the top end of these forecasts, with continued full occupancy.
In general, rental growth forecasts are stronger for regions outside of London, particularly those under-supplied and seeing increasing student numbers. There will be big differences between various cities and regions, as well as weak and strong universities, so investors will need to carry out detailed risk/return analysis and due diligence on target towns and cities and select stock carefully.
The value of investments may fall as well as rise and investors may not get back the amount invested.
This information is for professional advisers only. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice. The contents of this article are not intended as investment advice.
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CLI00768 Expiry on 16/04/2018