Why student accommodation is evolving so rapidly

Probably not — since 2001, IPD data suggests that about 10% of property generally changes hands each year — but that is exactly what is happening in the UK student accommodation sector.

Since early 2012, there have been about £6bn of transactions, and, as of today, there are around £3bn more in the pipeline. The total sector, excluding university-owned stock, is valued at about £15bn.

So what is happening? Well, what we are probably seeing is the recapitalisation of a sector on a grand scale; a sector whose predictable, non-cyclical credentials have been proven against the toughest of backdrops over the past six years. The fundamentals of the sector have always been strong but before the financial crisis the lack of an established track record for the sector led entrepreneurs towards increasingly available debt rather than apparently expensive equity for their funding needs.

In 2006, the student accommodation sector was probably geared in excess of 75% loan to value. Today it is probably much closer to 50% and falling. Investor interest is significant and has a much more long-term, institutional and international flavour than it did before.

While this recapitalisation has been taking place, yields haven’t moved too much, which is perhaps not surprising. For the majority of student property, net initial yields are somewhere between 6% and 7%, not bad for a sector that has delivered above-inflation rental growth for each of the past five years and looks set to continue in a similar vein.

Compare this with another alternative, emerging asset class — the private rented sector. In the past year, a number of funds have been set up to target the PRS and no doubt more are planned. Lack of capital will not be the issue here, it will be lack of product with a culture and planning environment in the UK that are just not set up to support volume growth of private rented housing. As a result, net initial yields for the PRS seem unlikely to be much higher than 5%.

The PRS and student accommodation meet fundamentally the same need - professionally managed, purpose-built rented housing in a country with a housing shortage - and both enjoy a positive rental growth outlook in line with or ahead of inflation. In the US, multi-family (PRS) trades at around a 5.25% initial yield and student housing at about 5.75%, a 50 basis points spread. In the UK it looks as though this spread is more like 150 basis points and that is hard to justify on fundamentals.

It will be interesting to see how investment in the PRS and student accommodation in the UK evolves and to what extent the valuation gap to the US closes. When the current rate of transactional activity in the student accommodation sector slows, as it must, and a greater proportion of stock is held by long-term investors rather than motivated sellers, we could see values strengthen significantly.

Mark Allen is chief executive of Unite Students.