Collapsed UK operator’s problems are not symptomatic of wider malaise, reports Doug Morrison
Debt will be uppermost in the minds of thousands of tenants taking up residence in the coming week in the student accommodation blocks developed and, until recently owned, by Opal Property Group.
Opal’s founder, Stuart Wall, can teach them all a salutary lesson on the pitfalls of taking on too much debt. Wall’s very own version of the student loan allowed him to turn Opal into one of the UK’s leading student housing operators, only to see a lifetime’s work turn to dust when the banks pulled the plug in March.
Manchester-based Opal fell under the burden of more than £900m of debt owed to a string of banks and now its 20,000 student rooms across 16 cities are in the hands of administrators.
The portfolio has been broken up into four chunks for sale (see panel below), to create some order out of the chaos of Opal’s numerous loans and 60-plus special-purpose vehicles and operating businesses. Before the winter term is over, most of the students will be paying rent to a new landlord, probably American.
The received wisdom in as messy and muddied a corporate failure as the property sector has seen for years is that the debt alone did for Opal, while most of the underlying assets are fine.
“Feeding frenzy” for Opal assets
Wall himself is understood to have bid for some of the properties but even a proud developer could hardly have envisaged the strength and breadth of investor demand: UK and overseas institutions, private equity, hedge funds and Opal’s principal competitors, from leading operator UNITE down.
“There’s been a feeding frenzy around Opal,” says Bob Crompton, chief executive of Knightsbridge Student Housing, the Oaktree Capital Management-backed operator. Knightsbridge and UNITE were in the market for individual properties that would have fitted their existing portfolios.
But like all domestic operators, they have been outgunned by US investors whose access to cheap capital has enabled them to bid for entire portfolios as a means of breaking into the UK market.
“We all had a go but we couldn’t come close to the newcomers,” says Crompton.
US operators lead the pack
New York-based private equity firm Avenue Capital Group and Greystar Student Living, one of the leading US operators with 200,000 rooms, have emerged as the frontrunners on the three portfolios on the market so far. But Chicago-based private equity firm Harrison Street and operator Campus Crest Communities are also reportedly interested in the assets. Instead of firesale prices, some believe the total Opal haul will top £1bn.
“Where we have looked at particular assets we liked and got to bid levels at or around guide prices, the feedback from agents, which you take with a pinch of salt, was that the whole portfolios are going for 5% to 10% higher than the guide prices,” says Joe Lister, UNITE’s finance director.
“We’ve been surprised by the strength of demand – it’s pretty strong pricing. What is good is that there is interest from UK institutional capital, but it seems that the highest prices are coming from US private equity players.”
Crompton adds: “We all thought we’d get it cheap but the American guys have seen us off. I wouldn’t be surprised if they catch a cold on a couple of assets, but is it the end of the world if you buy something and it only gives an internal rate of return of 8% or 9%, rather 12 or 15%?”
Either way, the Opal sell-off has boosted an already vibrant investment market, which might seem counter-intuitive following such a big corporate failure. But Bruce Clark, partner at consultant Lawson & Partners, says: “If Opal had gone into administration because of operational performance, that would have been a major issue and a blow to the market, but the cause of the administration was the debt side.”
Clark, who advised one prospective UK institutional buyer, adds: “The interest was very strong because it effectively provided a very rare opportunity to get scale very quickly. It has created a huge pool of money coming into the sector and what I’m interested in is the competitive nature of it. It’s really widening the global focus on student accommodation in the UK.”
James Hanmer, an associate director of Savills, which is acting for administrators on one of the Opal portfolios, says: “There is significant demand for student assets, particularly from US investors, who are seeking stabilised portfolios of scale.
“The UK offers investors a renowned and mature higher education market benefiting from a track record of strong growth in student numbers, especially from overseas. Growing interest in the sector is demonstrated by the recent trend for increasing transaction volumes; from approximately £800m in 2010 to £3bn last year and a similar forecast for 2013.”
Investors, especially those from overseas, have shrugged off last year’s fears over rising tuition fees and A-level entry qualifications. They have clung instead to long-term growth in the number of students in higher education – from 1.99m to 2.53m over the past decade, says the Higher Education Statistics Agency.
As a result, according to CBRE, student housing provided total returns of 9.6% in 2012, outperforming all mainstream property asset classes bar West End offices, although these figures mask wide variations in occupancy levels.
Voids in Opal’s regional portfolios
Indeed, glaring voids are evident upon closer scrutiny of Opal’s performance.
Information supplied to prospective bidders by DTZ on behalf of administrator PwC reveals that occupancy rates have been just 45% for blocks in Birmingham and Leeds, and as low as 39% in Newport.
Retail investors in the Brandeaux Student Accommodation Fund are less sanguine about wavering performance than their institutional counterparts. Lower than usual occupancy rates, and therefore returns, in Brandeaux’s Liberty Living business last year prompted a rush of redemption requests. By July, Brandeaux suspended the fund, putting a stop to redemptions and new subscriptions.
Brandeaux claimed that it could not generate liquidity through asset sales because Opal’s administration had created “uncertainty” and “an overhang” of property in the market – a statement that baffled many of its peers.
Then again, some in the sector believe overseas investors that fail to get what they want out of Opal could attempt a similar break-up of the 16,000-room Liberty Living portfolio.
For the time being, at least one new student housing business is sure to emerge from the ashes of Opal. It seems that in UK student housing this year, one operator’s loss is an overseas investor’s gain.
Avenue and Greystar lead the race for Opal’s assets
Portfolio one: first blood to Avenue Capital
New York-based private equity firm Avenue Capital Group is set to become the first successful bidder for former Opal assets, with the purchase of a 2,239-bed portfolio for about £100m.
Avenue beat stiff competition from leading US operator Greystar Student Living. There are
understood to have been up to six bids from the US for the entire portfolio.
Due to be completed this month, Avenue Capital’s acquisition involves a private rental block and four student housing assets with a total annual rent roll of £11.05m, in cities including
Manchester, Liverpool and Nottingham. The portfolio also includes 2.05 acres of development land in Sheffield.
This was the first portfolio to test demand in the market after administrators at KPMG, acting for lender Lloyds Banking Group, appointed Savills to sell the assets in April, a month after the collapse of Opal.
Portfolio two: three bidders make shortlist
Avenue Capital and Greystar are also understood to be on a three-strong shortlist for eight Opal assets on the market through administrator PwC for a total of £245m.
The 4,539-bed portfolio produces £16.87m per year, in locations such as Liverpool, Manchester, Leeds, Birmingham, Newport and Nottingham. The largest single asset
is the £78.5m, 824-bed McMillan Student Village in Greenwich, south-east London.
PwC originally acted on behalf of lenders Santander, Bank of Ireland, Barclays and
National Australia Bank (NAB), but NAB’s debt was traded to US hedge fund manager
Davidson Kempner in the summer.
The administrator and its agent, DTZ, are due to announce a preferred bidder for the assets
Portfolio three: another US showdown
Avenue Capital and Greystar are again vying for 19 Opal assets being marketed by administrator Ernst & Young (E&Y) on behalf of Royal Bank of Scotland.
The two US bidders are understood to be the frontrunners for the portfolio, which extends to 7,200 beds in nine locations throughout the UK – Bradford, Dundee, Huddersfield, Leeds, Leicester, Liverpool, London, Manchester and Wolverhampton.
E&Y is expected to conclude the sale before the end of the year.
Portfolio four: IBRC offloads assets
The final Opal portfolio includes eight student accommodation buildings, two hotels and two private rental properties, mainly in the north west.
The lender here is Irish Bank Resolution Corporation (IBRC), which brought in administrator KPMG in March. KPMG’s agent, Jones Lang LaSalle, has still to place the portfolio on the market, however.
Yet IBRC was among the first lenders to show impatience with Opal; last year it instructed JLL to sell the firm’s 512-bed London scheme in Shoreditch for £37m, which would have reflected a 5.8% yield.
IBRC failed to find a buyer and the scheme is now part of the portfolio in administration.
UPP brings unprecedented degree of safety to student housing investment
University Partnerships Programme (UPP) had kept out of the limelight throughout its life, as befits a corporate model that promoted the brand of its university partners above all else.
All that changed in September 2012 when Dutch pension fund PGGM paid Barclays Infrastructure Management Fund £840m for a 60% stake in UPP – still the largest single institutional investment in UK student housing.
UPP came in for renewed attention earlier this year following the sale of the remaining 40% of equity in the company for £550m to Gingko Tree Investment, an investment fund backed by the Chinese government. UPP manages student properties with more than 28,000 rooms, making it the largest private operator on campus and the second largest overall behind UNITE.
UPP’s model involves transferring financial risk from the universities, such as York, to UPP on student accommodation and campus infrastructure schemes, invariably on 40-year-plus agreements.
UPP is a special case. It started operating in 1998 as part of support services group Jarvis and its strategy is as much university infrastructure investment as it is a student housing one.
Even so, this combination, allied to the duration of its university agreements, makes it about as secure an investment in the sector as is possible.
By contrast, operators such as UNITE – and Opal – bear the financial risk through directly let
student housing, although many negotiate university agreements to match students with rooms on some of their stock.
Opal’s collapse into administration overshadowed the Gingko deal but the change of ownership at UPP nonetheless indicates the growing institutional appetite for UK student housing over the past year.
According to CBRE, PGGM helped investment volumes in the sector reach a record £2.7bn in 2012 – up 125% on 2011 volumes and higher than in the US. A similar tally is expected this year following the Gingko deal and break-up of Opal.
These are extraordinary deals – arguably one-offs – yet a more dogged and measured pursuit of student housing has been evident from Legal & General Property, which last month announced the acquisition of two student housing schemes for a total of £130m, bringing its total commitment to the sector over the past two years to £750m.
L&G has also provided debt finance to the sector, including a £121m facility to UNITE last year. But when it comes to equity investment, L&G is careful to secure long-term partnerships with top universities; the latest involve 534 rooms and 1,000 rooms on 35-year leases to Newcastle and Aberystwyth universities respectively.
Perhaps the most interesting deal this year, however, was the flotation of GCP Student Housing, which raised £70m in May. The company’s sole asset is a 588- room block in east London, but two more blocks for the capital are in the pipeline.
In stock market terms, it is a minnow, yet GCP has done what numerous established players have failed to do: become the UK stock market’s first residential REIT.