Student accommodation: Investing successfully in a booming sector

The purpose-built sub-sector was effectively created by Unite Group 28 years ago. Before Unite, students largely relied on converted houses or flats to live in during their time studying.  In the years since, Unite has grown into the largest REIT in this specialist area with a portfolio of 75,000 throughout the UK and assets valued at more than £7 billion.  Purpose-built student accommodation is valued at c.£50 billion in the UK today¹ and as domestic and international student numbers increase, with huge growth in applications from countries such as China, so too does demand for suitable accommodation to house them. 

Ultimately, continued and rising need for accommodation to house the c.1.8 million students in full-time higher education in the UK means demand often outstrips the supply of beds in crowded university cities, particularly in London, Bristol and Brighton. There is an increasing divergence of investment returns between those cities with an undersupply of student housing resulting from restrictive planning and/or limited land availability, and those with less restrictive planning regulations. Severe undersupply in London and the South East means that it remains substantially behind the UK average in terms of the number of beds per student.  The combined region is home to over one-quarter of all students in the UK – with one third of international students choosing to study there – leading to the demand for rooms outstripping supply by a considerable margin.

The newly launched VT Gravis UK Listed Property Fund (GULP), seeks to invest in REITs with exposure to this robust and growing sector, benefitting from the supply/demand imbalance, with buildings located in the key areas where student accommodation is most needed.

The extent of undersupply is likely to be compounded by the slowing pace of the delivery of new student accommodation developments and is one of the reasons that London is the primary focus of funds such as GCP Student Living – The UK’s first dedicated student accommodation REIT to trade on the London Stock Exchange. The company is now a member of the FTSE 250 with a market cap in excess of £700 million. 

Focused, expert exposure to student accommodation such as that offered by GCP Student or its larger peer Unite, which aims to take advantage of these severe supply and demand imbalances, can offer dependable, growing dividends and capital appreciation for investment portfolios. Student accommodation is also an area less affected by the ups and downs of the economic cycle than most other property sectors. 

Seeking out the companies that both own and operate these purpose-built student blocks is an important consideration for the VT Gravis UK Listed Property Fund. Some companies and funds only own the assets, with little – if any – active involvement in the running and management of the buildings and its tenants. We believe the best opportunities lie with the owners and operators that improve the experience for students, managing everything from rental contracts and cleaning to security and pastoral care. 

As the first of these ‘owner-operators’, Unite has built its brand by acquiring assets and running them close to capacity, ensuring the students keep coming back to stay. It is an excellent manager of student accommodation blocks, but also benefits from consistently high levels of occupancy that is 60% underpinned by using nomination agreements – where a university commits to a block of accommodation solely to be used by its students. Nomination agreements secure income over a set time, usually several years, and present strong barriers to entry for other players in the student letting space, strengthening the long-term business case for Unite’s accommodation. 

GCP Student, while not an operator itself, partners with Scape – an operator of high-quality purpose-built student accommodation largely focused in London and the south. By being involved in the operation of the accommodation, the larger players such as GCP Student benefit from being able to utilise a trusted brand, known for offering safe, high-quality and purpose-built housing. 

Importantly, the direction of travel for government policy is strongly supportive.  The International Education Strategy seeks to increase the number of international students studying in the UK by more than 30% by 2030². Boris Johnson, the Prime Minister, has also announced plans to allow international students to remain living in the UK for two years after graduation in order to secure work, making the UK a far more attractive prospect for overseas students wanting to begin careers here.

Major events such as Brexit should not, we believe, have a major impact. Demand from students from outside the European Union remains strong, while the popularity and quality of UK universities will remain a draw for students. For example, international students housed in GCP Student properties are predominantly from countries outside the European Union (69%), attracted by the high-quality and student-centric developments. In 2018 only 13% came from EU countries³. 

Investment into the purpose-built student accommodation offers an exciting, vibrant addition to a portfolio as well as key diversification benefits through exposure to assets largely unaffected by the vagaries of economic market cycles. With a strong pipeline of interest from international students, and increasing government support, we believe it is a sector that is set for strong future growth – with the best, highest-quality opportunities likely to be found in the areas where demand continues to outstrip the available supply.

Author: Matthew Norris CFA, Head of Real Estate Securities, Gravis 

¹ Knight Frank Research

² Gov.uk 

³ GCP Student September 2019 Factsheet

This is a Gravis Paid Post. The news and editorial staff of the Financial Times had no role in its preparation.