In last week’s Jersey Evening Post Finance Review, our Head of European Fund Services, Jon Trigg, discussed the rise of international students attending British universities and the subsequent appeal of UK student accommodation as an alternative asset class opportunity for investors. Here’s what he had to say…
As the summer holidays draw to a close, for most of us it is the last week of enjoying relatively sedate and stress-free journeys into work without the trials and tribulations of either undertaking or being a participant in the ever-manic school run.
For many proud parents the next few weeks will mark significant events in the journey of parenthood; be that their child’s first day at school or an offspring leaving the island to go to university. I know from my experience with my own children that time passes so quickly and those proud tears of joy around the first day at school are quickly replaced by tears of pain as the financial outlay of a UK university place hits home.
British universities remain a popular choice for Jersey students; however it is not just Jersey boosting international student numbers in the UK. Its global reputation for higher education excellence helps to
explain why the UK is such an attractive place for people to study, with only the United States attracting more students from around the world. Students (and their parents) have not been deterred by the mammoth increase in tuition fees and bright young undergraduates from across the globe continue to boost the UK’s position as one of the leading destinations for higher education.
There are currently around 500,000 international students at British universities, representing approximately 18% of the total UK student population and a 13% share of the global student market. Reports and data suggest that the number of international students in British higher education is set to continue to grow materially over the next five years, with UK government policy supportive of such growth. In fact, the government predicts that the number of students entering higher education will increase by 60,000 year-on-year.
To counteract the historic decreases in government funding, universities in the UK took a conscious strategic decision to expand their markets to seek international students. Unfortunately, what became abundantly clear was that universities were totally unprepared to react to the rise in enrolments and the need for adequate student housing, resulting in a demand/supply imbalance. This issue has become exacerbated with the growth of globalisation and the recognition of English as an international business language. The results of a survey conducted earlier this year by Times Higher Education named London as the city with the largest number of highly regarded universities in the world, further underlining the strength and appetite for British higher education.
The pressure on student housing needs has further increased as international and domestic students have evolved into sophisticated consumers demanding superior standards of accommodation – including high-speed internet access, en-suites, security communal areas and on occasion swimming pools!
Students are no longer willing to accept outdated on-campus facilities, and with the alternative and popularity of private rental accommodation having declined due to stringent licensing requirements, the focus has turned towards commercial purpose-built student accommodation that fulfills modern day student needs.
This new professionally managed purpose-built housing has unsurprisingly become hugely popular with students, who enter into direct all-inclusive rental agreements with the developer/operator. However, it is not only students who have recognised the benefits of such superior accommodation; investors have also realised the potential of investing in this asset class, which carries a rental premium over alternative student housing options.
Initially, investors were the operators and developers who identified the returns that could be obtained from developing accommodation in key university towns, but over the past ten years a number of funds have attracted significant investment from institutional and retail investors.
Typically a fund appoints a specialist manager with a strong track record in the sector, who acquires, develops, renovates and also manages the properties. This alleviates the risks and aggravation associated with an investor acquiring and managing a property themselves.
Despite the success of a number student accommodation funds, some have not been so successful. 2013 in particular was a significant year as it saw a number of high profile fund managers suspend their funds to new investors and prevent investors redeeming their holdings due to liquidity issues within the structures. That said, appetite for investing in student accommodation has continued to grow year-on-year with over £2.5bn worth of deals being completed in 2014 and in 2015 it is predicted we will see transaction volumes surpass £5bn!
As the recognition of the asset class has increased, so has the investor profile. Indeed, there has been an explosion of Sovereign Wealth and Institutional activity, with the asset class being seen as a long-term investment and an essential part of a balanced investment portfolio. This continued growth in appetite for investment in the student accommodation market has been driven by investors attracted to the current and future demand/supply imbalance, relatively stable yields of 5% to 7%, and the lack of correlation with other markets or macro-economic events. The investment thesis also remains largely uncomplicated.
Strong historic performance returns and an improved profile in the sector have established student accommodation as a recognised alternative asset class. In the past few years we have created a number of Jersey property unit trust structures for sovereign wealth and private equity groups seeking exposure to the UK student accommodation sector. Advantages of a Jersey domiciled unit trust include tax transparency, the ability to receive and distribute income gross and the fact that it is not subject to UK capital gains tax.
Jersey firms have a strong history of servicing real estate structures and remain well placed to provide services to managers looking to structure offshore student accommodation funds. I am not sure how much consolation it offers to all of those parents supporting their children through university, but it appears that student accommodation as an alternative investment choice is here to stay.
(This article has been reproduced by kind permission of the publication.)