London Real Estate Sizzles Off Campus
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Version 0 of 1. LONDON — Joyce Ge, a student from China who is studying business management at King’s College, pays 880 pounds a month, or $1,310, to live in a pint-size, stylish studio apartment in the far reaches of east London, in a building with roof decks gazing toward the distant city skyline. Her rent covers water and electricity, as well as Wi-Fi and cleaning of common spaces every two weeks. Many investors are betting that there will be a lot more Joyce Ges arriving in the coming years. Their bet is a simple one: As students from the world’s growing middle and upper classes flock to London for higher education, the stark supply-demand imbalance in student housing will grow. International college students are pouring into London, deepening an extensive housing shortage. The result is that student housing is becoming another red-hot corner of the city’s property market. That has tempted international pension funds, major private equity players and real estate giants to build up or sell off large portfolios of buildings for handsome profits. The values of many of these portfolios are rising (and consequently, yields are falling) as a result of the intense investor interest. About £3.5 billion worth of British student housing deals have been done so far in 2015, according to the real estate consulting firm JLL. That’s more than double the value of deals completed in 2014. “The volume has increased dramatically, and the values per bed have risen significantly,” said Philip Hillman, the head of student housing and higher education at JLL. Among the notable transactions are the Canadian Pension Plan Investment Board’s £1.1 billion purchase of Liberty Living, previously owned by retail investors, and the Carlyle Group’s sale of its Pure portfolio of student housing to LetterOne, a group of Russian investors, for £535 million. Greystar Real Estate Partners, which is based in the United States, has completed seven deals, including buying Nido, a portfolio of student housing, for £600 million. (Blackstone sold that same portfolio to Round Hill Capital in 2012 for £415 million.) “The pool of international buyers is expanding because the returns are attractive, the cash flows are attractive and there are platforms trading rather than individual assets,” said Brett Lashley, a managing director at Greystar who is based in London. Previously, universities provided housing to students, or students teamed up to rent a house together. The university housing was suitably shabby and “customer service was not a concept here,” said one international investor. But in the 1990s, the private sector jumped in to fill the gaping hole universities could not cover. Companies that developed properties and then managed them sprouted, and grew. Some took on too much debt. During the financial crisis, private equity players like Blackstone and Carlyle stepped in to scoop up these properties, building up portfolios of student housing and creating the scale the market lacked to make it attractive for institutional investors. Britain has 1.8 million full-time students, foreign and domestic combined. But to illustrate the shortage, only about 525,000 purpose-built student housing beds are available. These can be rooms to rent, a combination of what universities can offer and what the private sector leases — either directly to students or via an agreement with the higher education institutions. About 220,000 of those beds are commercial properties, according to JLL. Rents have been rising 3 percent to 4 percent a year with occupancy rates at 97 percent to 99 percent. Even after significantly steeper university fees were introduced in 2012, the market still grew. Intake for the 2014-15 school year hit a new peak, with 512,000 students matriculating. Investors say growth is robust and nearly recession-proof. At the higher rent levels, many students are willing to pay whatever the cost. “A lot of investors want to invest where the main driver is not the strength of the economy but more demographics,” said Mr. Hillman of JLL, who has been involved in student housing for 25 years, giving him a window into how substantially the market has changed. Crucial to growth in the sector, especially at the high end, where investors like Greystar are focusing, is the flood of international students. Of the 1.3 million students who were looking for a place to live in the 2013-14 school year, 72 percent were British, 7.5 percent were from the European Union and 20 percent were from other countries, according to the Higher Education Statistics Agency. The five-year growth rate of international students has been 20.3 percent, compared with 8.3 percent for European Union students and only about a 1 percent increase for the domestic market. The government’s Department of Business, Innovation & Skills predicted in 2013 that international students in higher education would rise 15 percent to 20 percent over the next five years. In 2013, the chancellor of the Exchequer, George Osborne, said the government would eliminate the cap on the number of students a university could accept in 2015, also adding to the increase. Universities are eager to attract foreign students because they pay more in fees. And student accommodation providers say they pay a lot more for their housing, too. Another appeal for investors is that the student populations move or graduate almost every year, allowing owners to increase rents. “Rather than provide a room and a bed, we are providing a consumer experience,” said James Pullan, head of student property at Knight Frank, another large London real estate group. “It’s all about the international students.” Wi-Fi, in particular, is a major priority in amenities. “It’s like having electricity,” Mr. Lashley said. British students are disquieted by the trend. “All the new builds are high-end and expensive and marketed to international students,” said Colum McGuire, vice president for welfare for the National Union of Students. “Other students have to scrape to live in them.” He knows: Though he grew up in London, he had to leave to attend college outside the city because of the cost of housing. The National Union of Students measures affordability every few years. In its last survey, it found that the cost had more than doubled in the last decade. “That is in no way in correlation to the cost of living or inflation,” Mr. McGuire said. Those seeking to make money in this market, however, argue that they are bringing more choice and quality to the market. “It’s extremely positive to have high-quality investors putting their money in this sector,” said Richard Simpson, head of property for the Unite Group, the largest provider of student accommodations in Britain. “It will drive standards up,” he said, and create better housing stock. (Unite has “refreshed” all of its buildings in the last 12 months.) As the demand for investments in student housing rises, yields are coming down. Yields have dropped sharply, to about 5 percent in central London from 6.25 percent a year ago. But the sector of privately financed student housing has been marred by some well-publicized failures. Opal, a major student housing company, went bankrupt in 2013, and two other large student housing fund companies were forced to suspend redemptions when they could not sell property to meet the demands. Yet the Opal bankruptcy proved to be a tipping point. Greystar started to build scale, teaming up with Goldman Sachs to complete one £300 million deal. Investors from the United States, Russia and the Middle East started pouring in. British institutions, recently surveyed by JLL, want to increase their allocation to the sector. “It’s a global asset class,” Mr. Hillman said. “It’s not a quirky British thing.” If Ms. Ge of King’s College is any indication, the global investors may have to step up their game. She’s moving from her tiny studio next year to her own apartment, even though she will still be a student. “It’s too expensive for what you get,” she said, as she loaded her laundry into smart-card-operated machines. “And there are too many rules.” |