Investors choose student accommodation

Rental growth and high occupancy rates continue to attract investors to the student accommodation sector, though the limited availability of appropriate investment vehicles risks frustrating attempts by individual investors to benefit from the sector, according to a new report from Savills Research.

“High demand, low supply growth, rising rents and high occupancy rates make student accommodation an investment vehicle of choice during uncertain economic times, and suggest that the sector will remain relatively low risk for the foreseeable future”, says Jacqui Daly, director of Savills Research.

“An underlying supply/demand imbalance point to a robust outlook for the sector, while the fundamental strengths of the business model mean that capital values have not fallen to the same degree as other commercial or residential real estate.”

Nationally, average rents for Purpose-Built Student Housing (PBSH) grew by 5% between 2007/8 and 2008/9, and 7% in London. While private rented sector rents offer higher rental growth (+8% nationally and +10% in London), this is without the certainty of high occupancy rates. Demand for PBSH shows no signs of falling and this will underpin future growth. Undergraduate student applications are up 9% for 2008/9, with growth in student numbers outpacing the new supply of accommodation by a factor of 10 nationally and 15 in London.

However, despite the benefits, Savills Research believes that the current financial climate – in particular the withdrawal of developer debt-funding – will limit the scope for investors to grow their interests. As a result, the past 12 months have seen consolidation of stock, with operator activity focused primarily on buying and selling existing stock from universities and private operators, as well as refurbishing old university stock, rather than organic growth through new developments.

As a result, and in the face of rising student rolls, demand will continue to rise. This is particularly true in London, where planning constraints are severely limiting the ability of operators to grow their portfolios and increase the level of new supply in the market.

Marcus Roberts, head of student housing at Savills, says: “our forecast of ten years ago that student accommodation would be a counter-cyclical investment is proving to be accurate. The scope for individual investors to access this market is rather limited against a backdrop of constrained credit availability, particularly as lenders have tended very recently to tarnish student accommodation with the same brush as buy to let investments which have proven very much higher risk in the market downturn. There are, however, investment vehicles (for example, retail funds) which allow individual investors to invest indirectly in the sector.

"As credit becomes more available, however, we would expect to see investors exploiting the sector’s potential. One such model would be the creation of clusters of student accommodation, which given rising demand and a frustrated supply channel, would offer a relatively secure investment model for the foreseeable future.

"At the institutional level the counter cyclical dynamics of the sector are boosting investor interest. After risk adjustment, this is a sector that is still showing rental growth, clearly setting it aside from other commercial investment vehicles. The model is based on many individual students regularly paying small amounts of rent, meaning that the risks of large scale default or voids are extremely negligible, with or without a university guarantee."