Lizzie joined Savills in 2007 and is involved with the acquisition and disposal of both London and National investment and development opportunities as well as providing consultancy advice for a variety of universities, institutions, investors and developers.
Dorothée Queyroux (DQ): Student accommodation has performed well during the downturn in comparison to other commercial asset classes and this is reflected by the enduring appetite amongst most lenders to consider offering finance against this security. Do you see this performance continuing and what are the key challenges the sector faces?
Lizzie Whetman (LW): Student housing may be considered a maturing sector but it has performed well over the last five years, showing average annual total returns outperforming many commercial property asset classes. Not surprisingly, demand from investors for high quality stock in safe locations has been increasing in the light of this performance along with the number of equity investors looking for sound, long term income streams. We anticipate this will continue and in the longer term, we see prospects for increased investor demand with investment yields moving in for long dated income streams. Meanwhile, the demand-supply imbalance in the sector should ensure rental growth although the capacity to drive substantial rental growth in lower tier markets will be limited by student affordability.
DQ: In our experience the banks' lending appetite is very much dependent on location. What are the key cities which are undersupplied in the UK and Europe?
LW: Supply growth is severely constrained despite a relatively healthy flow of development activity during the downturn in prime locations and so the market will remain undersupplied at current levels in relation to both the historic growth in student numbers and latent demand from students currently housed outside the sector, as banks disappear from the debt and development markets. We expect demand to be strongest in London and those UK cities with internationally respected universities while across Europe demand will be strongest in Dublin, Amsterdam, Rotterdam, Eindhoven, Paris, Toulouse, Grenoble, Lyon, Madrid, Barcelona, Milan, Rome, Lausanne, Zurich, Munich, Hamburg, Frankfurt, Copenhagen and Malmo.
DQ: It is well known the world over that the UK has some of the best university educations to offer. To what extent are overseas students – who have always had to pay full tuition fees –come to form the cornerstone of demand for places? Is the abundance of overseas students healthy for the market?
LW: At a time when global student mobility is increasing and a forecast for global higher education students to double to 262 million by 2025, the prospects for additional demand at UK institutions from overseas students are good. Recent data from UCAS highlights this, with applications by EU domiciled students increasing by 4.9% and applications from other international students increasing 9.6% compared to 2012. However, there is a risk to future demand by the government drive to limit net migration as seen at London Metropolitan University last year but the risks are minimal at higher quality universities.
DQ: What will be the impact on student accommodation with the tuition fees? I understand that students will not be required to pay back loans until they earn more than £21K but surely this acts as a significant deterrent for those prospective students who are not certain university is right for them?
LW: Although there was a fall in application numbers during 2012, we have seen demand from UK based students stabilise in 2014 with applications increasing by 2.8% to 475,000.
DQ: We have worked on a number of student accommodation requirements during the last two years. What proportion of the properties you are involved with make use of debt funding and what other approaches have you seen?
LW: Taking out institutional deals we'd say about 85% / £1.6bn of the deals were debt backed.
There is a strong likelihood that universities will increasingly seek to avoid calls on capital and revenue arising from their own ageing accommodation and will look to generate capital receipts (and improvements to their accommodation) from investors through stock transfer. This offers unprecedented opportunities for investors in high-quality university locations not otherwise available to them due to lack of newly built supply. We have analysed where the best opportunities lie.