Rising student accommodation values: secular or cyclical?

Operating and investing in emerging property sectors adds an extra dimension: what proportion of any valuation movement is secular, resulting from investors fundamentally re-pricing risk and allocating capital for the long term as their understanding improves, and what is just cyclical, driven by investors’ search for short-term yield when the traditional sectors start to look expensive?

This is the dilemma facing the student accommodation sector. For a long time, yields were 6%-6.5% and you got around 3% rental growth every year, making for a steady and predictable 9%-9.5% total return.

This was towards the top end of long-run average property returns but perhaps understandably so, given the emerging nature of the asset class.

But then in early March, we saw nearly £2.5bn of student accommodation change hands at yields nearly 100 basis points inside the 6%-6.5% norm. Rental growth prospects remain strong but not significantly more so than in recent years. So what is behind the shift - is it secular or cyclical?

On balance, the evidence points to a largely secular shift for three reasons. First, the incoming investors seem to be longterm in nature, intent on operating diverse portfolios and using little or no debt to fund their investment. Compared with some of the highly leveraged or other unsustainable structures they replace, this is a welcome recapitalisation that can only enhance the credibility of the sector.

Second, more than 60% of the entire student accommodation sector has changed hands in a little over three years and most of the 40% that hasn’t was already in the hands of long-term players anyway. It seems unlikely that there can be many more significant portfolio deals so transaction volumes in the sector are likely to fall, with those that have established a presence looking to add incrementally to their portfolios and investor demand likely to outstrip supply.

Finally, when you compare the spread between student accommodation and all property yields with the spreads that other emerging sectors experienced as more ‘permanent’ capital began to invest, there was - and is - plenty of room for inward movement. Business parks (into the early 1990s), retail warehouses and leisure (into the late 1990s) and supermarkets (into the late noughties) each saw premia to all property yields of more than 150 basis points disappear over five or so years leading up to maturity as long-term investors sought exposure. Student accommodation yields, even allowing for the recent transactions, are still nearly 100bps higher than all property yields. On that basis and with robust above-inflation growth prospects, we could easily see more inward movement of yields without having to be too worried about how sustainable the moves are.

Fortunes will certainly be made and reputations forged in the student accommodation sector over the next few years. Whether it will be the buyers or the sellers who fare best remains to be seen but, for the moment at least, there does seem to be room for decent returns without having to worry too much about being caught out by the cycle.

Mark Allan is chief executive officer of Unite Students