The rise of alternative property assets in the UK is undeniable in 2015. As property markets gather momentum across the country, savvy investors are setting their sights on a high-yield market which is currently experiencing huge growth and demand: student accommodation. Investments worth more than two billion pounds per year are slowly easing this alternative asset into the mainstream big leagues. Here is the analysis on what is driving the popularity and why 2016 is such as important year for student property.
Growth in Demand
Investment in student property has become an impressive two billion-pound industry over the past three years. 70% of landlords let all of their properties for the 2014/2015 student year, with an expected rental yield of between six and ten percent. However, the government decision to remove the cap on university student numbers has proved to be the catalyst that the investment market needed to push this alternative to the forefront. As demand is expected to soar even further in 2016, there is now fierce competition amongst private landlords not only to acquire the properties but to also attract student tenants.
In August 2014, a record breaking 396,990 UK students were accepted into university, according to UCAS, the organisation in charge of admissions. 30,000 additional places across the country were made available last year as parts of the cap were removed and in the run up to a complete removal of the cap in 2016, forecasts have predicted that 60,000 more students will enter into the system - however, new UCAS figures published this February revealed that the organisation had received nearly 600,000 university applications before January.
Alongside this wave of British students seeking university places, international student numbers have also increased dramatically. According to a Universities UK Patterns and Trends in UK Higher Education report, non-EU student numbers has increased by 59% during the past ten years.
Business Secretary, Vince Cable, has welcomed the number of university applications this year: '“There were many who said that the reform of student finance would discourage young people from going to university,” he said, adding: “The opposite has occurred; numbers have grown, in particular those from disadvantaged backgrounds.”'
The current and future increases in demand for student housing has attracted British and overseas investors who aim to capitalise on the disparity with the construction of much needed new student housing stock across the country.
Attracting worldwide wealth
From Portsmouth on the south coast to York in North Yorkshire, the student property market demonstrates that it does not follow the conventions of the residential real estate market. Student accommodation offers many attractive benefits to the investor that defy the regular norms of the UK property market. One of the main reasons why the asset class has outperformed others since 2011 is due to its regional demand outside highly competitive London. In 2013, 88% of the £2.1 billion total investment went to regional schemes in cities such as Swansea, Coventry and Newcastle.
Commercial real estate specialists JLL (Jones Lang LeSalle) rightfully predicted that £2 billion of student housing assets would be bought as an increase in deals would mark the end of Q4 in 2014. Head of student housing investment at JLL, Philip Hillman said at the time: “We are predicting a flurry of deals to near completion before the year draws to a close, with strong university enrolments and robust occupancy levels across the sector proving to be a key driver...and an increase in forward funding transactions, particularly in the regions.”
However, like the mainstream property markets, the UK student housing has integrated wealthy, overseas investors into its melting pot. The rise has increased from 23% total investment in 2011 to 52% in 2013. Indian investors have joined the likes of North American and Russian investors to become the latest group who are targeting the market with the help of the Indian government. In January 2015, legislation changes were enforced to increase the overseas real estate threshold from $75,000 to $125,000 per individual, per financial year. As the rental market offers little return for investors in India, their next target is the booming UK student accommodation market which offers long-term investment opportunities where rental prices are a lot higher than in their home country.
Preparations for 2016
The number of new projects, either proposed or under construction, with a deadline that ends before September 2016, is testament to how influential the UK student housing sector has become. Large-scale projects across the country will either replace dated accommodation with fresh living spaces, renovate commercial buildings into private student halls of residence or create entirely new accommodation sites that are managed by outside developers. These three examples are all currently taking place in Newcastle, Portsmouth and York respectively.
Now that the student market has moved into the mainstream, a higher percentage of luxury flats will be provided to maximise yields. The days of cold rooms, basic furnishings and an image of the archetypal resourceful student may soon be replaced with flat screen TVs, premium views and wealthier students who can afford these comfortable conditions. Europa House in Portsmouth is undergoing a transformation into quality, luxury flats for students while recent headlines have also brought to light a £535 million deal between the Carlyle Group and three Russian billionaires who have their sights set on several luxury student blocks in London. Questions have been raised about the socio-economic gap that would surely widen amongst students and the opinions that will arise from luxury student housing standing alongside low-income housing for students and non-students alike.
Whatever your stance on the type of accommodation that will be created before September 2016, one thing is for certain: 2016 will prove to be a year that will be crucial to developers. Those who do not deliver by the deadline will be left out in the cold while others collect their winnings around them. The removal of the cap on student numbers is likely to change university culture and the way that higher education is perceived. With this asset class now a billion-pound industry, higher education has become a fully-fledged business with students becoming the unwitting holders of power.
Analysis and discussion on the future of student housing will be taking place in London's Congress Centre at LD Events' upcoming Student Housing Conference. This annual event provides leading players in the sector with future investment knowledge and high level networking opportunities. If you have any queries or requests regarding this event, please email us at [email protected] or call us on 0208 887 0088.