Next stop for capital chasing student housing is the continent, reports Doug Morrison
Nick Porter, founder of leading UK operator Unite and one of the founding fathers of UK student accommodation as an asset class, has made no secret of what he likes best about the sector: to build a business from scratch, establish a brand, then move on to the next challenge.
So there was little surprise when Porter sold his interest in his latest brand, Urbanest, in December, after presiding over its growth to 8,000 rooms in just six years.
Global Student Accommodation (GSA) Group, Porter’s main investment vehicle, sold its stake to its co-investor in Urbanest, M3 Capital Partners’ Evergreen fund, which now assumes full ownership of a portfolio split between Australia and London, at a time when the UK sector is booming.
The question is, what next for Porter, and where? GSA already has sites in Dubai, Dublin, China and Japan in various stages of development but its stated aim is also to pursue a number of “strategic locations in key European markets in 2015”.
Tim Mitchell, GSA’s director leading the European expansion, says the group is researching a long list of university cities in Germany, Scandinavia, France, Spain, Italy, Austria and Poland.
In the next three to six months, the list will be whittled down to 10 “vibrant destinations for the growth of the knowledge economy”, each one capable of supporting student accommodation with at least 1,500 purpose-built study bedrooms over the course of a five-year business plan.
Mitchell, who also worked for Porter in the early years at Unite, declines to be drawn further, other than to say: “It’s most likely we’ll be spending quite a bit of time in Germany and northern Europe and on opportunity-led situations elsewhere in Europe.”
UK dominates sector
GSA’s move to mainland Europe is significant if only because up to now, in most countries, the sector’s investment volumes have ranged from modest to miniscule when compared with the UK. According to the latest data from Real Capital Analytics (RCA), deals involving standing student accommodation investments totalled €1.78bn in the UK in 2014.
The next biggest market was Germany, at €232m, followed by Sweden and the Netherlands, each with €120m (see chart).
The UK tally is down on the 2013 total of €2.2bn and 2012’s €2.81bn, but this apparent decline is a little misleading. Three imminent sales – the Brandeaux Student Accommodation fund, a Knightsbridge Student Housing portfolio and Carlyle Group’s sale of its Pure Student Living business – are expected to raise a total of about £2.5bn.
These deals are due to be completed in the first quarter of this year, reinforcing the UK’s position as the most mature and liquid student housing investment market outside the US.
The comparison with the rest of Europe is stark, but there is relatively little purpose-built investment stock – something GSA wants to change through development.
One of the underlying strengths of the UK investment market, which Porter was among the first to identify at Unite, has been steadily rising numbers of students, particularly students from overseas willing to pay for good accommodation.
In support of its investment case, GSA cites UNESCO, OECD and British Council numbers showing that Europe has 39% of the current international mobile students, which represents about 1.44m higher education students. By 2024 it is forecast that Europe should host a further 507,000 international students, bringing the total contingent from overseas to nearly 2m.
Mitchell says there are various funding options open to GSA, including co-investing with other investors through its Global Student Accommodation Fund or through a large, segregated market joint venture, similar to its Urbanest partnership with Evergreen. GSA also acquired a 50% stake last year in the Coral Student Portfolio, a UK-based retail investor fund.
He adds: “It’s about being able to lead institutional investors into our brand opportunities around the world. The heart of that is generating our [development] pipeline. Our model for Europe is not necessarily going to be direct development, but is going to be about providing capital, expertise and our operations business as a forward funding model.”
GSA is not alone. Other investor/operators that have established a UK presence before heading to the Continent include the Oaktree-backed Knightsbridge Student Housing, which has acquired development sites in Spain, and Crosslane Fund Managers, which has acquired sites for development in the Netherlands.
Stuart Osborn, student accommodation specialist at JLL, suggests that US investors Greystar and Avenue Capital, which have built large-scale businesses in the UK through portfolio acquisitions over the past two years, are unlikely to stop there. “The UK is top of their list but it’s also a stepping stone to go over to Europe,” he says.
JLL is advising clients on student housing schemes or acquisitions in the Netherlands, Denmark and Spain. “There is a demand for it. I wouldn’t say we’re getting hounded by investors wanting to invest [in Europe]. It’s more opportunity led. We’re finding more and more opportunities in mainland Europe, but there’s a huge issue with Europe as a whole. There are so many barriers to entry.”
Italy’s market is “horrendous politically”, according to Osborn. “There are other markets where the demand/supply imbalance is a no-brainer, like Vienna for instance, but you’re just not going to get in there to build anything of significant scale because the planning is so restrictive.”
Investors stick to main markets
JLL was also working on a potential scheme in Budapest, but it fell through. “We think there are real opportunities but the parties we spoke to, from a fund point of view, are restricted by the fund set-up – they have an agreed set of countries they want to target and anything outside that is not worth the aggravation for them,” Osborn says. “They want to keep to the main markets.”
There are high hopes for the Netherlands, although purpose-built student housing is subject to the same complex system of rent controls that besets the wider residential rental market.
Another potential obstacle to new investors is that local housing associations have traditionally held a high stake in the sector. Such a backdrop to investment has not been particularly appealing, says Jeroen Jansen, Savills’ head of Netherlands research.
“It didn’t scare investors, but they needed to adjust to the situation here in the Netherlands,” he says. “It took them a while, but they are now up to speed and are all looking for new developments and acquisitions, and we expect a lot of them will follow this year and in 2016.”
Savills estimates that there is a shortfall of 40,000 rooms given student projections for the Netherlands, which the firm argues makes this market a promising development play. One newcomer is Germany’s Bouwfonds, which entered the Dutch market by buying a 9,000m2 office in Amsterdam for conversion into student housing. Redevelopment of empty offices will be a major theme in this market, says Jansen.
Taking time to develop
He adds: “The market is maturing, but for the coming years it will depend on developments, and they take time. However, I can imagine that there will be five or six international investors, each owning five or six blocks of purpose-built student housing, and then it will become a market in itself.
“It will be around 15,000 units in total. Between five and 10 years from now we’ll definitely get to that kind of figure for international investors. Even then, you would still consider it a niche market, because it will be significantly smaller than the traditional commercial markets – but it will be an interesting one.”
Savills estimates that in Germany, the shortfall of student beds is as much as 100,000, which explains why it is likely to feature prominently in GSA’s expansion into mainland Europe.
Mitchell says: “We’ve always seen student accommodation as an asset class in its own right and in the late 1990s it was quite difficult to get a group together to agree with you. But it is accepted as an asset class now and a lot of the features of the UK asset class carry over into a lot of new markets.”
He adds: “As you’ve seen the UK sector mature, a lot of investors investing in this space are American or European. These are very sophisticated investors now and they understand the asset class very well. The major constraint is access to stock and pipeline, and that’s the thing to remember: the UK has taken 15 to 20 years of heavy lifting to move critical-mass portfolios into the investment domain.”