Nov. 5, 2020
It was only a few years ago when offices and retail dominated the upper end of the UK REIT market. There was little competition until SEGRO came along, overtaking Landsec in 2018 as the UK’s largest REIT. But that was just the start. The top of the public market is looking even more alternative now as Unite Group tussles with British Land for its place as the third largest listed property company. The two are neck and neck, and at the time of writing Unite is just marginally ahead in its market cap.
Unite’s place near the top illustrates a two-fold story in student housing: the market is hungry for relatively high yielding alternative assets with counter-cyclical qualities, but Unite has few listed peers because the asset class is still young and fragmented. Private equity owns most purpose-built student accommodation (PBSA) assets, many of which are single buildings or small portfolios. The good news is that these dynamics suggest the sector is ripe for consolidation, and the public market can play a key role in the next stage of its growth in the UK and beyond.
I recently spoke with Samuel Vetrak at market research firm specialized in student housing and rented residential asset classes BONARD about the question of consolidation, and he said: “I believe that companies are now reaching the size and stability suitable for IPSX or being listed.” The market might be fragmented – there are only 150 portfolios among the more than 6,000 existing and planned PBSA assets BONARD tracks, and more than half of these portfolios have fewer than 1,500 beds – but a flood of capital is driving its growth, even amid the pandemic.
Investment in student housing around the world, excluding the US, has already topped €10bn this year, with more than 65 transactions (including in the UK). Investors want a piece of the student housing pie partly because, first, it offers a strong yield spread between entry and exit of 200-300bps over five to seven years.
Second, as with hotels, investors can access a wealth of data about the local areas they’re targeting: student numbers, available beds, the mix of domestic and international students. Supply and demand dynamics are clear thanks to that data. And what does that data tell them? Even in mature markets like the UK, demand is growing and there are opportunities in areas where it outstrips supply. Moreover, unlike hotels that will take time to recover, students will come to classes sooner and in greater numbers in recession times expected, hence student housing is proving to be a relative safe haven in 2020 and 2021.
Going public would solidify the already robust investment case for student housing. If a portfolio (or part of a portfolio) were to list on IPSX, it would need to be transparent about basic metrics such as income and occupancy, helping to bolster general understanding, awareness and confidence in the asset class.
When Unite recently reported that its occupancy was 88% (only slightly below its target of 90%) it set a benchmark for the market and gave investors confidence in an otherwise turbulent year. More listed vehicles will mean more data points like this and more opportunity for the sector to outgrow its status as a small niche in a traditional market. As consolidation gains traction and private portfolios start hunting public options, IPSX is there to provide just that.