In normal circumstances, students would be flocking to universities across Europe around now. But with proposed smaller class sizes, virtual lectures and social ‘bubbles’, higher education is yet another walk of life hugely disrupted by covid-19. Against this backdrop, real estate lenders need to reconsider their willingness to finance student housing.
The institutionalisation of the sector in recent years has attracted lender interest. However, the pandemic has cast doubt on student accommodation’s future performance. Individual universities have been forced to work out a blend of in-person and distanced learning, making it unclear how many students will be willing to pay for a room located near their place of learning.
Those developers of schemes aimed at wealthy overseas students now face the prospect of travel restrictions hurting their take-up. According to the UK’s Universities and Colleges Admissions Service, 13.2 percent fewer students from the EU have been accepted to study in the UK in 2020, although non-EU international students have increased by 2 percent.
Despite the challenges, real estate debt specialists we spoke to this week argue lender sentiment towards student accommodation remains positive, with many expecting only a temporary impact on occupancy.
There are reasons to be confident in the sector’s resilience. Consultancy Knight Frank, in an April report, pointed out between 2007 and 2010, when UK economic growth contracted by 4.5 percent following the global financial crisis, applications to UK universities jumped by 30 percent. Covid-19 is creating a tough jobs market, just as the GFC did, meaning young people are likely to turn to academia to boost their employability.
Lenders seem to be keeping faith with the strongest student locations. In August, UK bank HSBC provided Global Student Accommodation Group and Harrison Street with acquisition finance for two schemes in Bristol. This month, Investec Structured Property Finance agreed to provide US investor CA Ventures with a £64 million (€69 million) development loan for 888 student beds across Glasgow, Edinburgh and Sheffield – all regarded as strong university cities.
A cautious approach to financing student accommodation is warranted, particularly because there is no uniform response to covid-19 across Europe’s universities. Lender appetite is likely to be focused on the most experienced sponsors and on core locations for the time being. According to one debt advisor, lenders will also be seeking protections such as partial recourse in loan terms.
One consultant told us this week margins for development loans in the sector have fallen since the pandemic began but remain 20 percent above pre-covid levels. The source also referred to a financing deal closed this summer by a UK student housing operator in which the loan margin was around 120 basis points higher than would have been expected before the pandemic.
Going forward, the popularity of this niche among lenders will be determined by the number of students that physically attend universities this autumn, as well as by the number of universities that manage to open in a meaningful way in the coming academic year. Lenders will need to keep a close watch on how the pandemic shapes the way students get their higher education in this most unusual of academic years.
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