A positive month with a landmark deal, lifting of Material Uncertainty Clause, and positive applicant statistics for the 2020/21 academic year – the sector remains cautious, but increasingly more optimistic.
The world is fast approaching the six-month marker since COVID-19 was declared a global pandemic. In March 2020 when the declaration was made, there was great uncertainty around what impact COVID-19 would have on investor sentiment and the investment market for all sectors.
For the PBSA sector, 2020 started with a bang with one of the most significant deals (and largest private real estate transaction ever) and coupled with some strong macro student metrics the market was in rude health. March witnessed a stark change however, as the impact of COVID-19 has unfolded, market activity has continued in these new conditions. In this blog we look at the evolution of the UK student accommodation investment market in this new landscape, and the current outlook.
Transactions Since March
Initially and inevitably, with the uncertainty surrounding the impact of COVID-19, the student accommodation investment market did slow with some transactions delayed, put on hold, or pulled completely while investors monitored the world events. However, activity is underway and as we entered July a total of eight UK student accommodation transactions had taken place since March 2020, totalling an investment volume of £280 million with many other transactions agreed and progressing.
The evidence and sentiment from emerging deals suggests that the market has developed an approach to pricing. Key observations regarding how things have changed (or not) to those in a pre-COVID environment are set out below:
Rental Guarantees are the new norm
There has been an evolution of the structure of some deals to protect the investor in the short term. Rental guarantees for the 2020/21 academic year have been used as a mechanism to de-risk the potential uncertainty of the upcoming academic year leaving the gross price of the deal and yields unchanged.
Deals completed have all benefited from a guarantee, and pricing has stayed in line with pre-COVID expectations. This is also a feature of all the deals we are aware of in the pipeline.
If no rental guarantees are in place, we would expect to see a capital deduction equating to a proportion of the income for 2020/21. Most valuations have consequently seen a 3% to 5% reduction in value. This is clearly less than some of other markets such as retail, leisure and hospitality, but greater than industrial and supermarkets understandably.
Yields are stable
Yields have remained stable. Sentiment for London, Super Prime and Prime Regionals has all stayed at the same benchmark prior to March (which had been trending stronger since December), but we have seen yields in secondary locations soften. This is a continued theme of polarisation between stronger and weaker locations fuelled by changes in student application trends and speculation over the financial health of some universities. There has been increased focus on the financial health and stability of universities in the UK, with several reports detailing estimates on potential losses that may be sustained within the sector. However, it is currently unknown the extent to which any losses will be incurred. The sector, its participants and observers will know more in September once students have enrolled for the 2020/21 academic year.
Appetite from overseas investors remains
The recent acquisition of Symons House, Leeds and Crown House, Sheffield was acquired by a Malaysian investor. Overseas investors continue to show strong interest in the sector despite the uncertainty around the student population for the 2020/21 academic year. CBRE’s EMEA Sector Outlook has indicated investors in this post-COVID landscape are moving towards sectors that exhibit countercyclical behaviour, of which student accommodation is well known for.
Major sector stakeholders have been active post-COVID including Scape and Unite Students.
Unite Students raised £300 million through an equity placement at the end of June 2020. Richard Smith Chief Executive Officer of Unite commented in the press release that the equity raise was “…further evidence of the strong investor support for Unite, [its] future prospects and the attractive fundamentals of the student accommodation sector”. The success of the raise also demonstrated to both existing participants and watchful eyes of the sector that belief in the long-term sustainability of the asset class remained present.
Like all sectors, the student accommodation market has experienced challenges around availability of debt. However, signs of activity are returning as can be seen by the announcement that Scape secured debt from Investec in the form of a £17.5 million senior loan to fund the acquisition and development of its Thanet Street scheme in Bloomsbury, London. While acknowledging the uncertainty in the near term for the sector, Investec are firm believers that this is offset by not only the micro-dynamics of London, with its favourable conditions for student accommodation development, but also the characteristics of the sector in general making it a highly attractive asset class to both domestic and overseas investors. This is a positive and welcome lending story to tell, importantly there are others too with many lenders actively seeking to deploy capital into the sector.
On the back of the deals completed, there are positive noises for new deals which continue to meaningfully progress, and on scale with several portfolio trades on the cards. We estimate there is over £500 million likely to transact prior to September, with all deals understood to include a rental grantee for the 2020/2021 academic year. Not the record £8bn forecast at the start of the year, but on the back of the iQ transactions 2020 could still witness a significant volume, especially given the weight of capital, old and new, seeking to diversify from other sectors.
Material Uncertainty Clause
Based on the market activity and sentiment set out earlier, it was clear that uncertainty over approach to market pricing which existed in March was no longer applicable. This led CBRE to putting forward the proposal to lift the MUC valuation clause. This was unanimously agreed at the RICS who recommended the release of the clause for “Student Housing of institutional grade, which is professionally managed” – this is effectively managed PBSA as opposed to residential houses in multiple occupation.
Whilst values may change over the next few months especially, the approach it appears at least has now been established.
June Applicant Statistics – Some extra good news?
Despite not knowing what will happen in September, the latest available datasets published by UCAS on 10th July 2020 regarding undergraduate applicants for the forthcoming 2020/21 year showed a 2% increase in applicants overall including a 10% increase in applicants from Non-EU countries and 2% increase in UK 18-year old applicants year-on-year. This is notwithstanding the UK being at the base of a dip in the 18-year old population and international students facing extremely challenging travel circumstances.
Drilling into the data release further, Non-EU applicants are the highest they have ever been, now standing at over 89,000, increasing by 58% over the last ten years. This includes year-on-year (2019/20 – 2020/21) increases in applicants from China by 24% to nearly 25,000 and India by 23% to 7,600. This suggests, that despite the international student population being widely acknowledged as a risk to the financial stability of the sector, there remains sustained appetite to come to the UK to study.
In summary, promising student applicant sentiment, transactions that have taken place since the global pandemic, a growing list of transactions in the pipeline, yields broadly holding firm, coupled with investor and lender appetite for student accommodation combined demonstrates the sector is standing firm against the COVID-19 headwinds. The outlook beyond 2020/21 is looking very positive should the sector show the resilience that the statistics suggest.
Tim Pankhurst leads CBRE’s UK Student Accommodation Valuation and Advisory team, with the largest student accommodation team in the UK, regularly valuing assets in excess of £30 bn every year. The team works with some of the best and longest serving participants in the sector and is one of the longest running student accommodation valuation teams in existence.
Within the Valuation and Advisory team, Kirsten Dyer leads the team’s data insight and advisory work. Data and analytics underpin all valuations and an increasing part of our work includes is providing bespoke insight such as detailed demand and supply reports for planning applications, loan securities work and bond issues. For any valuation or advisory enquiries please contact Tim or Kirsten.
Oli Buckland leads CBRE’s Student Accommodation Investment team working with active investors, institutions, developers and Universities on operational assets, portfolios and some of the largest & highest profile forward funding transactions in the sector. For any transactional and brokerage enquiries, please do not hesitate to contact Oli.
Sources: CBRE Research
, Herald Scotland
, Bridging Loan Directory