Students enter mainstream
Investors eye opportunities in Scottish education sector, writes Peta Tomlinson
Glaswegian homeowners are struggling to sell their properties in a market still mired in recession mentality. According to latest data from the Registers of Scotland, residential property sales have dipped to the lowest volume since records began in 2003, and amount to less than half of the number of properties sold in Scotland during the market peak of 2007-2008.
Prices keep falling: following a further dip of 2.3 per cent, the average cost of a residential property is £159,310 (HK$1.991 million). While Glasgow had the most sales, nudging ahead of Edinburgh, average values there dropped 5.1 per cent.
Student housing is one area of unmet demand. For a university town renowned for its tertiary, further education and special education institutions, Glasgow, home to Britain's second-largest student population, has a shortage of beds.
According to Jones Lang LaSalle, Glasgow's four main university residences have only 6,531 bedrooms for more than 50,000 full-time students. With private sector operators providing an additional 4,174 beds, just 8.3 per cent of total student numbers, the Jones Lang LaSalle report deduces that 78.7 per cent of students in Glasgow must find accommodation elsewhere - either in shared houses, or for local students, at home with parents. The upcoming pipeline will do little to ease the shortfall, the report says.
Savills research confirms that policy changes and financial cuts within higher education will mean that the best universities in Scotland, Wales and Northern Ireland are likely to face a severe shortage of purpose-built student accommodation, while continuing to grow. Peter Allen, head of Savills development in Scotland, says: "Scotland has a real ongoing supply/demand imbalance. Edinburgh and Glasgow universities are still hitting the top 10 for investors in British student accommodation, and Aberdeen remains a popular choice, albeit narrower in its appeal because of its specialisations."
Student accommodation is gaining investor credibility. JLL says the market is emerging as "a significant mainstream global investment category", attracting more than US$3 billion in Britain this year - more than double the 2011 level - and US$2 billion in the United States. "Although sometimes described as an 'alternative' investment sector, in these markets student housing is increasingly sought after by mainstream institutional investors," the Jones Lang LaSalle report finds.
Yolande Barnes, director of residential research at Savills, agrees, saying: "Student accommodation can be an ideal income-producing investment as it is let and managed for the investor, delivering a strong net yield from a corporate operator. Demand is assured, and as strong as the ability of the institution to attract new students, particularly from overseas and postgrads." Analysis shows Glasgow to be reasonably strong on these fronts "and likely to enjoy continued demand due to lower tuition fees than England", she says.
Ray Withers, chief executive of Property Frontiers, says Britain's student accommodation "has never been more attractive to investors". It's easy to see why: Central House, in Glasgow, an existing building being refurbished into 66 self-contained studios designed for students with communal entertainment and a games room, landscaped outdoor terrace, laundry rooms, a concierge, CCTV and broadband throughout, is being pitched with a net yield of 9.2 per cent assured for three years, with full management by the developer. In London, returns from this sector have nearly doubled, Knight Frank data shows, jumping from 8.4 per cent in September 2010 to 15.1 per cent in September 2011. Limited supply and rising global interest in Britain's educational excellence, are cited as drivers.
Philip Hillman, lead director of student housing and higher education at Jones Lang LaSalle in London, agrees that Glasgow is a good location for student accommodation investment, although one that until now has been largely overlooked.
"A number of major Chinese investors are looking in detail at the student sector in Britain at the moment, the main attractions being London and the big varsity cities with top-tier universities that attract a high proportion of international students - locations such as London, Oxford, Cambridge, Bristol, Durham, York, and Bath come to mind," he says. "Glasgow is not a high priority location for overseas investors in the student sector, but there will certainly be some good opportunities there. It is a market we believe Hong Kong investors should be looking at if they are interested in the student sector."
Jones Lang LaSalle cautions that, generally, student housing is perceived to carry a slightly higher risk profile than core property assets, such as residential and offices, due to its operating risk.
The firm's report notes: "Student housing gives investors an opportunity to earn higher returns in exchange for these risks, which can be mitigated through partnerships with well-established operators." Given the student housing sector's relatively small size, the sector "has the potential to realise greater returns by seizing on market inefficiencies."
But Hillman urges would-be investors chasing quick returns from the student sector to do their homework. More than 70 per cent of students in Britain occupying commercially-provided accommodation are from overseas - investors should be confident the numbers will still be there given a substantial increase in tuition fees.
"I don't think the government has succeeded in getting the message across that the cost of higher education is an investment in your future career and prospects," he says. "We believe from the experience of introducing higher fees in Australia and the United States that eventually people get used to paying higher fees. However, it could be a difficult year or two as the market adapts."
Savills notes, though, that the top-tier universities should continue to attract demand, while charging maximum fees. "This will maintain the competitiveness of the teaching on offer at these institutions. We anticipate that funders, developers and investors will wish to target future portfolio growth in these locations. Investment is possible in most locations, but initial returns have to be significantly adjusted in view of future growth prospects for different towns and cities," says Marcus Roberts, Savills head of student investment.
AT A GLANCE
What you can buy for £53,500 (HK$668,756)
A refurbished, self-contained studio in Central House, Glasgow, close to the train station, university campuses and the River Clyde. Includes communal facilities that are purpose-designed for students.
What you can buy for £32.95 million (HK$411.879 million)
New Carnegie Court, a block of student accommodation at the University of Aberdeen, providing 520 beds arranged in cluster flats. The property was recently acquired by PRUPIM, the real estate management arm of M&G Investments.