Student housing passes the test

At one time, student accommodation was not noted for its quality. Today, institutional-grade property is being provided across Europe and lenders are taking note, finds Lauren Parr

No longer viewed as a niche investment, the student housing sector is now firmly within many banks’ comfort zones. In the UK, especially, the market has evolved into a fully-fledged institutional asset class and while yields have compressed, continued demand for accommodation is encouraging lenders to back providers.

As the UK market has matured, investors have begun seeking higher returns in new jurisdictions across Europe. Student accommodation remains an emerging asset class in many continental countries, although there has been significant growth in places such as Germany and the Netherlands.

Germany is Europe’s second-largest student housing market. Described by one debt fund lender as being “like the UK market five years ago” due to its rapid growth, the level of professionalism around the supply of private sector student accommodation has improved since the market began to open from 2011.

Investment volumes in German student housing stood at €1.2 billion in 2016, up from €400 million a year earlier, according to JLL. Last year’s investors included the UK’s Global Student Accommodation Group, which bought a €110 million portfolio of 1,500 beds last July and formed a joint venture with Singapore’s GIC in October to expand in the country further.

“There is a lot of activity in the construction of micro-apartments,” says Markus Kreuter, team leader of the debt advisory division at JLL in Frankfurt. These are compact living spaces equipped with kitchenettes and bathrooms, located close to universities. Former hotels, office buildings and residential properties are being converted into student homes, financed in the development phase with high loan-to-value debt from alternative lenders and with bank debt and owners’ equity in the investment phase.

Kreuter argues that German banks have got to grips with the sector: “In the early days it was considered to be more of an operational risk akin to serviced apartments, linked to the capacity of an operator to fill a property with students. That has changed. It’s now seen along the lines of residential that attracts classic banks, from Pfandbriefe lenders to investment banks. Today they know deposits can be used as risk mitigation and it’s no longer considered a problem if a student moves out after six or 12 months.”

While most lenders are prepared to finance operating assets in Germany, Kreuter says that not all will finance student housing, making it a window of opportunity for some in a generally over-banked market.

“If you understand the risk, being that someday in the future the count of students might be lower and you could have the wrong product compared to local competition, you can charge a slightly higher margin. It’s a nice thing to add to your lending basket,” Kreuter says.

The pricing premium can be up to 1 percent compared with core office margins, which are pricing at around 80 basis points.

There are some additional risks posed by the sector’s nature. Students can be very vocal on social media, for example, meaning that operators need to be wary of bad publicity from disgruntled tenants.

Bank lenders take precautions to protect themselves. They typically finance student housing with moderate loan-to-value ratios on bullet structures with no amortisation, and may force excess cash to be swept into a reserve account. Of upmost importance is the location and quality of an asset, as well as an operator’s track record.

Dutch market matures

The Dutch market has attracted a great deal of international money. With local lenders still focused on longstanding clients in more mainstream sectors, the financing of student housing development has attracted alternative lenders.

A notable addition to the market has been the arrival of “willing new players with the ability to take on more risk”, says Robert-Jan Peters, head of debt advisory in the Netherlands for CBRE. “We’re seeing more opportunistic lenders, mostly from the UK, targeting the segment.”

The likes of DRC Capital and GreenOak Real Estate are said to be among those directing funds at investments that Peters says they can achieve a “decent coupon” on.

The conversion of obsolete offices into student accommodation allows lenders to achieve high double-digit returns. It is a part of the market local banks will typically only finance if there is already zoning and a permit in place, and a familiar sponsor.

“The financing of transformation projects has become easier; sponsors without a perfect track record and longstanding banking relationships with Dutch lenders are now getting traction with a number of debt funds,” notes Peters. “Standing investments are attracting the usual suspects that want to finance core transactions.”

German Pfandbriefe lenders are particularly competitive.

Like in the Dutch and German markets, the lending opportunity in France is being driven by a shift towards institutionalisation.

AEW Europe and Natixis Asset Management’s real estate debt fund includes French student housing in its target sectors. Cyril Hoyaux, head of AEW’s European debt platform, says: “Until now units were mostly sold to individuals under condominium ownership as a means of tax incentive. This kind of deal structure prevented the real development of this asset class. We’re now seeing big operators and investors coming into to this market. It’s a way for us to deploy our money on the lending side.”

Around €345 million was invested in the French student housing market in 2016 to the end of August, according to Savills estimates, at that point already 91 percent of 2015’s total volumes. The majority of this investment was into purpose-built facilities, with French investors dominant.

As Europe’s student housing market develops, lenders are keen to see investors build a track record in order to make the market more financeable. “It’s important to be able to achieve critical mass; you need a talented management team. On the financing side, interests are aligned,” says Gilles Polet, head of real estate finance, CIB at BNP Paribas.

Equity funds have a significant role to play in helping to build institutional grade stock of student housing in Europe, while financing opportunities for traditional lenders will grow as the sector advances further towards mainstream asset classes.

UK sector comes of age

According to one institutional lender, although yields in the UK student housing market have compressed “as far as they can”, there is still an opportunity for accommodation to be built and let.

“The way the sector has evolved is that purpose-built student accommodation with a modern specification, whether that’s cluster flats, studios or twin rooms, is what is most sought after,” says Ashley Goldblatt, head of real estate lending at Legal & General Investment Management.

Particularly when supported by university nomination agreements, the asset class appeals to a gamut of lenders; from clearing banks to overseas banks and alternative lenders.

“Opportunities for lenders will be around development finance which is not as readily available as investment facilities against performing assets,” says Lisa Attenborough, director of debt advisor across specialist markets at CBRE. “Likewise, top operators have good access to funding but less experienced developers do not.”

Attenborough thinks of student housing as “a defensive sector to play in” which is therefore well placed to benefit from increased investor appetite in times of market and economic uncertainty.

A continuing trend among insurance lenders is the provision of long-term finance to the sector. TH Real Estate, using parent company capital, issued a circa £136 million (€157 million), 10-year loan to finance the purchase of a student accommodation complex in Birmingham by Unite Students and Singaporean sovereign wealth fund GIC in January. “The sponsorship was excellent and due to their medium-to- long-term hold business plan, it suited us well,” says Christoph Wagner, director of debt strategies at TH Real Estate.