It’s a bit like London buses. Student housing has seen an extraordinary splurge of foreign investment this month, with £2.4bn of US, Canadian and Russian money spent on transactions in the first half of March - equalling the total for 2014 altogether.
There could be more - and not only for student accommodation.
More than 22,000 beds changed hands in just five deals. The largest saw Canada Pension Plan Investment board pay £1.1bn for Brandeaux Student Accommodation Fund’s Liberty Living portfolio (16,700 beds). US rental housing company Greystar paid £600m for the Nido portfolio, taking its total holdings in the UK to more than 13,000 beds, and billionaire Mikhail Fridman and fellow Russians completed nearly £700m across three lots, focused on prime London addresses.
The yields this apparent largesse implied have not been made public, but a director at one agent who has been particularly busy of late suggested that 4.6% may not be far off the mark for London’s zone 1 - almost 100 basis points lower than might have been the norm a year ago. Yields on smaller portfolios in London’s fringes have probably shrunk from 6% to 5%, he reckons.
This yield compression is probably not over. One can assume that on each deal there were three or four unsuccessful bidders that are probably sharpening their pens to even finer points. Another 20-odd ‘bips’ could be eroded on future deals.
These may come quite quickly. JLL’s Philip Hillman suggested to a conference I ran last month that £5bn is a feasible total for the year. Major funds want critical mass, he said - deals upwards of £500m, for which the bidders are prepared to pay a “portfolio premium”.
But any thoughts that this flow of money could start feeding into new development in London, rather than buying existing stock, are likely to be ill-founded. Market leader Unite, speaking at the same event, stated bluntly that building in the capital is “not currently viable” due to land prices private developers are prepared to countenance.
So what do the institutions see in buying existing units? Yields are certainly an attraction. In these days of negative yields on Swiss government and even corporate debt, anything with a plus sign in front of it warrants attention. But student deals, trending to below 4.5%, are getting close to the 4.25% that might be expected on the highest investment grade private-rented sector assets. That’s not much of a spread to justify the (at least stereotypical) fear of latter-day The Young Ones reincarnations trashing their rooms.
But achieving an unexciting but dependable yield (underpinned by the removal of the cap on student numbers) might not have been foremost in all these investors’ thoughts. In central London, the prospect - however remote - of redeveloping the blocks for private sale may have been an enticing prospect, I’m told.
A site for student flats on the outer fringes of zone 1 could stack up financially, with a total development cost below £1,000/sq ft. With a change of use, they could sell for around £1,500/sq ft and still make an acceptable return, even after section 106 commitments (usually for affordable housing), which are not normally required for student accommodation.
But surely no local authority would acquiesce to replacing students with yet more luxury blocks for sale. Several would not only countenance it, but would, I am led to believe, jump at the chance. Somewhat surprisingly, it is left-leaning inner London boroughs that would seemingly most welcome the opportunity - Islington and Southwark have been cited. From a purely political perspective, it is securing those affordable housing commitments that would swing the decision.
Labour councils might call on support from homeowners sharing less sympathetic political allegiances but with entrenched Nimby tendencies. There has been a growing opposition to “studentification” - the downmarket equivalent of gentrification. From an economic viewpoint, councillors question the attractions of students choosing not to spend their money locally, but to head onto the Tube to drink large quantities of over-priced beer in central London. Local homeowners are presumably even more concerned about the prospect of rowdier elements depositing that beer on street corners while zigzagging their way homewards (sorry, no more stereotyping).
The current wave of investment flooding into UK student housing partly reflects the fact that it’s the rental asset class where there is the most available supply of relatively new and well-situated stock. Foreign investors, particularly North Americans, it would appear, will readily consider buying build-to-rent stock when it becomes available in sufficient quantities and has achieved what is described in the US as “stabilized” income levels.
This is some way off but, amid the billions of investment in student housing, Legal & General made a relatively small, but long-anticipated first step into buy-to-rent, with the £25m purchase of a site for 300 market-rented homes in Walthamstow. Another in the North West is tipped by Property Week to be announced shortly as part of a total £1bn investment plan.
Just as the London buses analogy applies to the secondary market in student housing, L&G’s move could spark a rush of previously sluggishly progressing buy-to-rent proposals off of the drawing boards and onto sites.
Alastair Stewart is building and property analyst at Progressive Equity Research