During the past 10 years, there has been a rush to invest in purpose-built student accommodation in the UK. With student numbers swelling, including international students, and a need for better-quality accommodation and services, investment in the sector has been an attractive proposition.
A wide range of banks and alternative lenders have clearly agreed, resulting in an inflow of debt capital to the sector. Within a few years, the UK student accommodation sector has morphed from an alternative asset class with few institutional players to being almost mainstream.
The sector remains appealing and debt funding is readily available, but the UK market is now reaching maturity. Cities with stronger universities continue to offer solid returns and, as always, quality is key: the number of players in the sector means developers and operators need a real understanding of the market and a first-rate product to attract students.
However, some cities have become more challenging. Brexit and the lack of certainty over UK immigration policies for students, combined with a near-term decline in the number of 18-year olds, are factors creating headwinds for investors.
In Continental Europe, however, the situation is very different. The markets there are, in many ways, similar to the UK 10 years ago, with institutional interest in student housing only just beginning.
Transaction volumes across the continent increased significantly in 2017. According to Cushman & Wakefield, in Spain, for example, there were more than €600 million of transactions, up from around €100 million the previous year. Yet local banks, particularly in Southern Europe, are still getting to grips with student accommodation as a sector. There is some lending and debt providers have an appetite for more exposure, but they are constrained by their lack of knowledge and experience in what is still a niche area.
Spanish domestic banks, for example, are prepared to lend but currently prefer operational properties over development loans. Depending on the location and sponsor, loan-to-value or loan-to-cost ratios tend to be somewhere between 55 percent and 65 percent, while pricing generally sits at Euribor plus 1.75 percent to 2.5 percent. An increasing number of banks are happy with non-recourse lending.
There is also some appetite from French and German lenders for student accommodation assets in Spain, but this is currently largely limited to operational assets. UK alternative lenders, meanwhile, will lend on both operational and development assets at higher levels of gearing – up to 75 percent LTV/LTC – but are significantly more expensive.
In the Italian market, domestic banks also prefer lending to operational assets rather than development projects. LTV ratios offered by Italian banks can be within 60 to 65 percent, depending on location and sponsor, while loan pricing is higher than in Spain, at Euribor plus 2 to 2.5 percent. UK alternative lenders seem to have limited appetite for Italian student accommodation assets currently, due principally to enforcement difficulties and legacy issues.
While sourcing debt finance for student accommodation across Continental Europe remains difficult compared with the UK, funding is available for those with a strong track record and quality schemes in sound locations. Some banks – much like investors – can see the potential. Our decision to open an office in Madrid and target a €300 million capital investment programme across Iberia was driven by the fact the region has nearly 1.9 million full-time students but only 105,000 beds.
Demand for purpose-built student accommodation across Europe significantly outstrips supply and much of the existing stock is of poor quality and lacking in terms of operational management. This is a market still very much in its infancy and those entering it at this stage of the cycle will benefit from both rental growth and yield compression over a medium-term investment horizon.
What the sector needs now is for banks and alternative lenders to understand the opportunity and support the delivery and development of new product that will transform the market in Europe.
Raj Kotecha is co-founder and managing director of Amro Real Estate Partners.