On a walk around East London the other day, I observed an unusual amount of steel and glass skyscrapers currently under construction in the area. I made the usual assumptions regarding what they would become… Bank offices? Luxury flats? Instead, I discovered that these high-rises are soon to be brand new accommodation for (often foreign) students in London seeking luxury student accommodation.
These sky-rises represent the lucrative new sector (or perhaps, bubble?) that is not just expanding in the capital, but across the whole of the nation, dominated by the universities in the student towns. As it has become well known that student accommodation can provide attractive buy-to-let rental yields, the investment has shifted from individual landlords buying individual properties for their children to large corporations constructing multi-million high-rises for hundreds of students.
What are the figures of investment?
This year has already seen record figures for investment in student accommodation. The changes in the figures are quite astounding when compared to previous years – by April 2015 figures represented a 70% increase on 2014’s figure of over £2.5bn. Investment for the first three quarters for large deals of over $7.5 million is now $6.5 billion, so it can be assumed that total investment in the sector is comfortably above these levels. A report from World Student Housing shows that a high proportion is from foreign investment, with North American deals leading the pack.
Why is investment in student accommodation growing so fast?
There are multiple reasons why this trend is occurring. The first reason is that the growth of a global middle class, especially in Asia, has created a much larger pool of students that wish to study in Western institutions, which hold great esteem worldwide. These students have a higher propensity to stay in more luxurious accommodation and as a result have created a market for luxury student accommodation. According to the Financial Times, the average rental payment of a foreign student in London is as much as £28,800 a year, around £2,000 more than the UK average wage. In Central London, it is believed that foreign students comprise as much as half of the total student population, yet they only make up about 18% of total students in the UK.
‘the growth of a global middle class…that wish to study in Western institutions’
This increased pool of foreign students seeking to go to university in the West, especially to the UK, means that universities have increased demand for their educational services. This year has seen widescale university expansion all over the UK, which is a prerequisite for increased demand in student accommodation. This is a direct consequence of the government removal of the cap on student numbers, which took place this year. Government predictions state that they believe 60,000 new students will study in the UK every year. As universities announce expansion, this is quickly followed (or perhaps pre-empted) by announcements by private real estate corporations that they are to construct new multimillion student accommodation developments.
‘university expansion all the UK…as a consequence of the government removal of the cap on student numbers’
Finally, global investors have a growing appetite to diversify their property portfolios with different forms of profitable return investments. These investors are represented by both individuals and corporations, both domestic and international. On an individual basis, wealthy parents are often willing to pay a premium for refurbished properties that their children can live in comfortably as they study for a degree, whilst also seeing annual asset value growth over the period of study. Furthermore, corporations and high-net worth individuals are investing huge amounts into building purpose-built private accommodation for students, in order to break into this market themselves.
Only in the news over the past week, it does not take much to notice the trend in university expansion and large new projects for private accommodation. The University of Reading have just announced the expansion of one of their halls to cater for 700 more students, as part of a 5 year plan to invest £275 million into student accommodation. In Belfast, 7,000 rooms have been planned for new students, all provided by the private sector. In Bristol, new accommodation for 241 students has been announced in a project worth £18m. In Leicester, private developers are pushing the council to accept plans for a new development to house 279 student flats. In Coventry, the old Royal Mail sorting office is being knocked down to make way for a £73m shopping and student accommodation complex. In Exeter, a development 150 luxury student flats have been proposed to the council. In Lincoln, an auction for 500 student flats has been offered from the private sector. It seems every city with a university is currently seeking multi-million pound investments into accommodation, often to the ire of local residents.
The Future of Student Accommodation
The evidence only serves to show that every investor with any liquid capital seems to be allocating it towards student property. Even though the removal of student caps in the UK will lead to a surge in student numbers, investors need to be certain that their local market is not saturated before they build high-end student accommodation. Arthur recommend that investors properly research the quality, location, and price of the existing supply in a region. People must not act on rumours of ‘easy, high yields’ from student properties before they fully understand the market they wish to enter. As Joe Kennedy once said, ‘when the shoeshine boys are giving you stock tips, it’s time to sell’. Whenever everyone is getting into a market, then that can be a warning to research it carefully before investing into it.
Article Courtesy of: Sam Dooley. Arthur Online Property Management Software