When is residential real estate considered a commercial asset class? When it has solid income streams and strong covenants, says Investec’s Mark Bladon, commenting on the bank’s increasing role in funding student residential projects in the UK.
‘We classify student housing as commercial, because it’s valued on the income stream,’ Bladon tells PropertyEU. ‘What we like about it is the detailed supply and demand data available from the major valuation agencies. You can really drill down into how many students are living at home, how many are in halls of residence, how many in purpose built, how many in HMOs (houses in multiple occupation), so you can compare schemes and pricing points,’ he explains. ‘As a banker, that means you can really buy into the supply demand imbalance – and all the schemes we’ve financed so far have been fully let by the start of the academic year.’
Maturing sector
With the operational landscape around this asset type maturing in recent years, institutional players have been moving in greater volume into investment and development opportunities in the sector.
Recent deals have seen Investec's Structured Property Finance team loan sums in the range of £20 mln (€24 mln) to the likes of Balfour Beatty and McLaren Property Holdings to build brand new schemes in Glasgow and Cardiff respectively, developing 550 and 350 beds for university students.
‘We as a bank provide more leverage than the traditional high street lenders, and we’re starting to build a reputation in the sector for providing quite competitive terms and understanding our clients needs,’ Bladon explains. ‘We’ve done around £300 mln (€350 mln) in development finance in the last three years, which is around 8000 beds, across 14 university cities.
'There are another three deals that we’re hoping to complete within the next 4-6 weeks, representing around £100 mln (€118 mln) of development finance,’ he adds. ‘All the deals tend to be for purpose built, brand new stock, reflecting the trend of UK students finally moving away from sharing terraced housing and living in purpose built products. There are several good operators and developers out there, while many universities are taking on leases or providing nominations agreements for stock.’
Investec's history
Investec started as a small finance company in Johannesburg in 1974, which grew into a network of international businesses. Via several key mergers in the 1990s, Investec cemented its place in the UK market, renaming as Investec Bank UK Ltd in 1997. Today the bank has representative offices in Australia, Hong Kong and South Africa, plus business interests in the US, Ireland and India. In 2014, it sold its UK intermediated mortgage business Kensington Group to funds managed by Blackstone. Today, much of Investec’s real estate banking activities are focused in the UK. ‘We would consider following our clients into continental Europe, but we’re not there yet,’ confirms Bladon.
Investec Structured Property Finance was founded in 1994. With financing typically ranging between £5m to £75m, during 2016 Investec lent in excess of £500 mln and anticipates a similar level of activity in 2017.
As well as commercial real estate lending, Investec operates in the residential sector and has executed several high-profile loans in London recently, for projects including Linden Homes £42.5 mln residential scheme in Hammersmith, and Cain Hoy’s The Stage Shoreditch for which it provided a £109 mln debt and equity funding package.
Student residential's first class prospects
As the student residential sector becomes more institutionalised, the product continues to evolve, notes Bladon, with aspects such as the quality of broadband leading the way, as well as matters of layout. ‘Trends have changed in recent years away from valuing large common-rooms to better and bigger study spaces,’ says Bladon. ‘Feedback from students has filtered through the operators and developers are taking note.’
Purpose-built student residential units also suit a particular kind of overseas student, suggest Bladon, who like being able to make a virtual tour of the property online, and book their room with a single upfront fee that covers all utilities. ‘When they turn up, they’re given a key, they can walk into their room, hang their clothes up, turn on their Wi-Fi and they’re done,’ says Bladon. ‘If anything, I would expect to see a continuation of that trend. Councils are also trying to encourage students to let purpose-built rooms to release HMO properties back into the market for lower income families.’
Even Brexit shouldn’t dampen the outlook for the sector, Bladon says. ‘CBRE published a paper right after the UK referendum noting that only 6% of students in the UK come from Europe, so we’re not concerned about student numbers fluctuating in the short term,’ he notes. ‘Demand is so high at the moment that if you’re in the brand-new, purpose built space, within walking distance of a university, you basically have a strong asset. 15-year old properties are more likely to suffer. In the long-term, the only potential issue we can see is with the Russell Group universities, which currently receive considerable EU funding, perhaps conceding ground in terms of their gold-standard reputations,’ he concludes.
