A combination of stable yields, undersupply and a near-total assurance of tenant demand has lured pension funds, private capital and wealthy individuals to pour billions into student housing

THE POPULAR image of student housing – grotty accommodation, unreliable tenants and ill-attentive landlords – isn’t an obvious match for the polished world of institutional finance.

Yet the sector has become a must-have for UK and international property investors. Lured by the combination of stable yields, undersupply and a near-total assurance of tenant demand, pension funds, private capital and wealthy individuals have poured billions into student housing.

This year’s crop of undergraduates are as likely to find themselves paying rent to a US private equity group as to a local buy-to-let landlord.

During the first six months of the year, investment in student housing more than doubled compared with the same period in 2011 to hit £800 million (€1.1 billion), with much of the money coming for overseas.

The strength of interest in the sector is at odds with the prevailing trend in the UK commercial property market, where investors are increasingly concerned about the long-term value of offices, shops, hotels and industrial buildings.

“The key thing underpinning the sector’s performance since the start of the financial crisis has been the huge imbalance between the demand from students to have decent accommodation and the supply of those properties,” says Mark Allan, chief executive of Unite, the UK’s largest student housing provider by volume.

Unite, which manages a portfolio of 40,000 beds across the UK and last week reported a doubling of interim pre-tax profits to £33.5 million (€42.3 million), is one of a handful of publicly-listed student housing providers.

The vigour of the market is reflected in IPD, the benchmark property index, where Unite outperformed all other non-listed UK property funds in the last quarter, to deliver returns of 5.7 per cent.

“Even with the market maturing and a lot more players coming in, that supply shortage still remains so acute,” Allan adds.

The market’s success is due to a fundamental transition by students towards a better standard of accommodation, driven in large part by the growing number of foreign students in the UK.

Modern student housing is a departure from the tawdry university halls of old and has made way for smart studio apartments with wifi and en suite bathrooms.

The growth of this relatively upmarket, purpose-built student housing has been key to drawing in institutional investors. A host of private equity funds have already made inroads into the sector.

Last week, Carlyle raised £125 million (€158 million) to build a portfolio of 1,400 beds in central London.

In the UK capital, 35 per cent of all student housing is provided by the private sector – a figure that property analysts expect to rise dramatically during the next decade.

In Manchester, Leeds and Nottingham, three big university cities, the role of the private sector is similar, while in Birmingham almost half of all student accommodation is privately operated.

“Low interest rates have pushed many investors towards low-risk property investment.

But while there is a lack of new shops or offices to invest in, the large numbers of overseas students seeking a western education mean student blocks appear to many as the perfect home for institutional cash,” says Phil Tily, a managing director at IPD.

But, in spite of the rate of development, the shortfall of student housing continues to grow as accommodation providers have failed to keep pace with rising student numbers.

In 2010-11, there were 490,000 students living in open market rented property, compared with 335,000 in 2007-08, according to data from the UK’s Higher Education Statistics Agency.

The shortage means that private-sector student housing providers typically report term-time occupancy rates 96-99 per cent.

In spite of the apparent depth of demand, there are some people in the property industry who warn that the student housing market might face a difficult few years.

“The view is that it has weathered the recession. But there is a separate storm coming in the education sector in terms of rising fees,which might do a lot to change the way students live,” says Sarah Jones, a director of education at DTZ, the property services group.

“There is also the problem that in some university cities, such as Birmingham and Exeter, there is already overbuilding, a problem that is only going to get worse as more companies try and get into the market.” she adds. – (The Financial Times)