Student housing sees ‘immense’ investor appetite

A recent flurry of major student housing deals in the UK has put the asset class firmly in the spotlight and more is on the way, according to Philip Hillman, lead director of student housing at JLL.

There’s immense investor appetite for the sector, it’s been driven by interest in alternative investment markets,’ Hillman said during a panel discussion on student housing at Mipim earlier this month.

Diversification
‘Investors are increasingly wanting something different to offices, shops and industrial. I think they like the fact that the sector is driven by demographics rather than boom and bust. And I really do think that we’re going to see a number of very substantial transactions for the remainder of this year,’ Hillman told the panel, which was organised by PropertyEU.

He described the last two weeks in February as ‘an extraordinary period’ in terms of UK deal activity. ‘There’s been more deals in the last two weeks in the UK than over the whole of 2014,’ he said, referring specifically to CPPIB’s takeover of Liberty Living for £1.1 bn (€1.5 bn) and the sale of the Carlyle Pure Student portfolio in Central London to Russia’s LetterOne for £532 mln (€732 mln). ‘There were £2 bn of transactions in the UK in 2014. We’ve seen £2.5 bn of transactions so far this year and another £1.5 bn is under offer or pending so we’re going to see at least £3.5 – 4 bn of transactions this year.’

The CPPIB and LetterOne deals underscore the strong international investor interest in the sector which has come a long way in the past two decades, said Hillman, who has been involved in the UK student housing market for the past 25 years. ‘We’ve seen the sector grow from almost nothing to a major global asset class. Some 80% of the investment in UK student housing has come from overseas. We’ve seen a lot of investment from North America, with the likes of Goldman Sachs and Canadian pension fund PSP investing heavily and working with Greystar. We’ve seen investment by Russian money, in the guise of LetterOne. And we’ve seen investment from Gulf investors so it really underscores how global the market is. I think we’re going to see continued diversification as we move on.’

Big premiums
Yields achieved on the latest deals also illustrate that investors are prepared to move up the risk curve to direct-let student properties, Hillman pointed out. The sale of the Carlyle Pure Student portfolio in Central London to LetterOne reflected a net initial yield of 4.5%.

This was followed by two single-asset deals of over £100 mln and £70 mln in central London – both reflecting NIYs of around 5%.

Hillman: ‘We’re seeing a big premium for portfolios, in the order of 50-60, sometimes 70 bps. People are playing the game of wanting scale and critical mass. Some are saying that’s too expensive and are focusing on single-asset puchases – but in general there’s a broad swathe of overseas money targeting the sector and I think that’s going to be a continuing trend.’ Both the Russians and the Canadians have the appetite to do more, he added.

Research by JLL shows that investment by UK pension funds in alternative real estate assets will amount to 20% or more by 2020 compared with 3-5% at present. The firm also predicts that around 30% of all commercial property transactions in the UK will involve alternative assets by 2020.

Watch the video interview with Philip Hillman