The student housing sector has undergone huge change in recent years, with tenants now demanding better accommodation than ever before. Despite the positive forecasts for construction activity, it is a challenging market in which to operate. What do contractors need to know to thrive in this tricky sector?
- Major international investment
- High costs and expectations
- Different models
- London strength
- Good university, good location
- Wide range of clients
- Rising price headache
- Certainty crucial
Student housing has undergone a radical change over the course of a generation.
“Forget about when you were a student 20 years ago,” says Stewart Moore, commercial and marketing director at student accommodation manager CRM Students.
“The days of The Young Ones no longer exist. We were not as worldly-wise as students are now.
“They have expectations that are vastly higher. You would struggle to let any room that was not en-suite.”
Student accommodation once meant tiny rooms in student halls or terraced houses let for multiple occupation by dodgy landlords.
Now it is a recognised property asset class that attracts global investors.
Major international investment
In March this year Canada Pension Plan Investment Board paid £1.1bn to acquire Liberty Living’s 16,700 student rooms in the UK.
Figures from property consultants Savills suggest that £4.2bn was spent by investors on buying existing buildings and development sites in the first five months of 2015 alone.
Meanwhile total higher education enrolments increased from 1.9m in 2000/01 to more than 2.5m in 2010/11.
Click on map to enlarge
Over the subsequent two years the number has fallen back to 2.3m, perhaps as a consequence of the introduction of tuition fees of up to £9,000 a year for undergraduates.
However, applications to Ucas were up 3.4 per cent for 2014/15 and the removal of the cap on overall student numbers is expected to bring more students into higher education (see box).
Nick Hayes, acquisition and development director at student accommodation provider Unite Students, says that around half of the accommodation needed to house those students is provided by traditional landlords, 20 per cent by universities, 20 per cent live at home and only 11 per cent is provided by corporate operators.
High costs and expectations
According to property consultant CBRE, around 15,000 additional student bedrooms were built in 2014.
The average build cost for an en-suite student bedroom ranges from £35,000 to £45,000, so at an average of £40,000 per unit that equates to contracts worth £600m for the construction industry.
Modern student housing is not cheap to build.
“Students’ expectations now are more akin to a hotel room in terms of the quality of fittings and there is also the technology,” says Ian Orton, construction director at Liverpool-based developer-contractor Downing.
“Students’ expectations now are more akin to a hotel room in terms of the quality of fittings”
Ian Orton, Downing
“It’s not just wi-fi; they now expect connectivity between the phone, computer and TV.”
Purpose-built student accommodation is divided between university-let and direct-let development.
University-let accommodation is usually developed and built by the private sector, but let to the university which then has the right to nominate tenants, who are frequently first-year degree students.
Such schemes often consist of cluster flats of three to five rooms with an en-suite bathroom each and shared living room and kitchen facilities.
In the direct-let model the private sector operator develops and then lets the accommodation to students itself.
Direct-let tenants are more likely to be foreign or postgraduate students who can afford higher rents.
Direct-let blocks tend to contain more studios – small flats with their own kitchen as well as a bathroom and bedroom.
Involving a university to nominate tenants removes the risk of failing to let a scheme, making development finance easier to secure and raising the investment value.
“We are now focusing outside London because the regional markets are more attractive”
Nick Hayes, Unite Students
The downside for developers is that universities tend to insist on a lower level of rent.
David Campbell, managing director of specialist student accommodation developer Alumno, says that while his company continues to develop schemes in partnership with universities, increased investor appetite has allowed it to develop more direct-let schemes.
“For us that is attractive because it gives us the ability to do more projects,” he explains.
“University deals are fantastic, but it takes a long time to get the public-private partnership in place.”
Alumno is currently building 3,000 bedrooms with a developed value of £350m and has another 2,000 units planned.
London has hitherto been the strongest market for student development, thanks in part to its high proportion of foreign students.
Around 28 per cent of London’s 367,000 students in 2013/14 were from abroad.
Removal of student numbers cap will drive demand
The forthcoming academic year will be the first since the government lifted the cap on overall UK student numbers.
In 2015/16 universities will be able to recruit as many students as they like.
Government estimates suggest lifting the cap could increase the student intake by up to 60,000 a year.
The cap has already lifted for recruitment for students with good A-level grades, but all universities will now be allowed to recruit as many students with lower grades as they choose.
“It is an opportunity for ambitious universities to increase their market share,” says Mr Hayes from Unite Students.
“We see that the middle-ranked universities are best placed to capitalise on that change.
“Our growth strategy is focused on that and on the universities in the upper-quartile bracket as well.
Empiric’s Mr Hadaway adds: “It is not expected to make a massive difference to the number of British students at British universities, but the cap covered all European Union students as well as British students.
“With the cap lifted universities can market to EU as well as British and non-EU students.
“Ucas’ fastest-growing application sector by miles this year from was from the EU – up more than 7 per cent.”
However, development in the capital is increasingly challenging.
“Pricing in the residential sector led to increases in land costs that meant student accommodation wasn’t viable,” Mr Hayes says.
“There were increases in regulatory costs as well, in particular the Community Infrastructure Levy, which had a further impact.
“We are now focusing outside London because the regional markets are more attractive.”
Good university, good location
Outside London, university-led deals have been more common to date, but investors are now increasingly comfortable about applying the direct-let model in regional cities with good universities, Mr Campbell explains.
Most developers tend to focus on the Russell Group of 24 leading universities or at least on institutions in the top 50.
“If we are ticking more boxes than not then we ask whether there are brownfield sites that would allow us to bring a project forward”
David Campbell, Alumno
Mr Campbell reels off a list of characteristics that define a good market in which to develop: “A great university with lots of students; a reliance on traditional housing in multiple occupation and not much in the way of purpose-built accommodation; the growth aspirations of the university; a favourable planning environment; and a strong contractor base.
“If we are ticking more boxes than not, then we ask whether there are brownfield sites that would allow us to bring a project forward.”
Developers need to evaluate each individual market, according to Andy Whatson, director of Crosslane Student Developments, which has 4,000 bedrooms on site or planned around the UK.
“Each city goes in a cycle,” he says. “There is a lot of development in Newcastle at the moment because it hasn’t seen much in the last 10 years.
“Some cities like Sheffield and Leeds saw a large amount before the financial crash, but have not seen anything for about 10 years so they are now starting to come back.
“You have to research each centre carefully and also understand the strategy of each university.”
In locations where there is clear demand, development may be frustrated by planners.
Many local authorities are keen to prioritise family housing instead.
Some centres like Manchester have a moratorium on all student development unless it has the direct backing of universities.
“We have sites where we have been in the planning process for in excess of 12 months and little progress is being made because of lack of support for student housing at local level,” says Ryan McGarry, development director at McLaren, which is developing 1,200 student bedrooms across the UK.
Wide range of clients
Contractors in the sector may be employed by a wide variety of clients. Some, such as Unite Students, act as both developer and long-term manager of the property.
As the biggest player in UK student accommodation, Unite manages 43,000 bedrooms.
Mr Hayes says it has a development pipeline of a further 7,000 over the next two years at a cost of £445m.
However, most clients are smaller trader-developers who find sites, secure planning permission and then either look for an investor-operator to forward fund the development or build it with their own money and then sell the completed investment property to an operator.
Some use a combination of the two approaches.
Empiric Student Property, a real estate investment trust (REIT) that was floated on the stock exchange last June, acquires completed developments but can also use up to 20 per cent of its capital for development.
Chief executive Paul Hadaway says: “We have four development sites that finish this summer, six finish in summer 2016 and one in summer 2017.
“They total something like 1,100 beds, but we only have two direct developments on site in Southampton and Glasgow.
“Everything else is being done by forward funding other developers. Most is being built to our specification, but not by us directly.”
Among the more prominent players in the sector are developer-contractors such as Downing, McLaren and Watkin Jones Group.
Mr Orton says that Downing has developed, built and sold a total of around £500m of student accommodation to owner-operators.
Last year it built around 2,000 bedrooms, with the construction division turning over £57m in the sector.
“We are almost a one-stop shop,” Mr Orton says.
“Student accommodation has become a hotbed of development so you have to be competitive and styles and designs can change in 18 months”
Ian Orton, Downing
“We purchase the land, the development team take it through planning, then the construction team build it out and hand over to the property team for letting and management.
“Sometimes when we sell on we take on contracts to manage the scheme for other student operators.”
He argues that the developer-contractor model works well in the student housing sector because it allows for flexibility to change a building’s specification if necessary.
“Our student villages are 400-600 bedrooms and it can be three years from completion to when you price the job,” he says.
“Student accommodation has become a hotbed of development so you have to be competitive and styles and designs can change in 18 months.
“We can make sure there is no main contractor inflation because of variations.”
Rising price headache
Construction cost increases are a major concern for developers in the sector.
“That is causing some headaches,” Mr Campbell says. “A lot of the time you can’t just whack the rents up, so there is a real challenge for everybody in terms of how you balance that out.
“The partnership approach to lock down costs has to be the way to avoid it.”
“We give contractors line of sight into our pipeline and divide the schemes up between them. This enables us to get the contractor on board early so we can drive efficiency and reduce cost”
Nick Hayes, Unite Students
Alumno is seeking to work in close collaboration with a small number of contractors, with other developers adopting a similar approach.
Rather than going out to tender, Crosslane tends to approach a single contractor – usually a strong regional player – to form a partnership in each region.
Meanwhile Unite is aiming to stick with the same small group of contractors: Balfour Beatty, Bowmer & Kirkland, McAleer & Rushe and RG Group – for all of its projects.
“We give contractors line of sight into our pipeline and divide the schemes up between them,” Mr Hayes explains.
“This enables us to get the contractor on board early so we can drive efficiency in our schemes and reduce cost.
“It also gives the contractor a degree of certainty for future projects, which they in turn can pass onto their supply chain.”
Certainty of delivery is also crucial.
Usually contractors must complete new student housing by September in time for the new intake of undergraduates, so the summer months are particularly busy.
Many developments are on challenging sites.
RG Group director Dave Dixon says: “The nice, big, prime sites tend to go to private residential.
“Student accommodation tends to be on brownfield sites that are difficult to manage while maintaining a return for the client after construction costs.”
How long can the student housing construction boom continue before markets become saturated?
“The likes of Unite have filled the gap on the lack of first-year accommodation to a certain degree, but have scarcely kept up with demand,” Empiric’s Mr Hadaway suggests.
“Meanwhile accommodation for second and third years, postgraduates and international students has barely been developed at all, so there is a large structural deficit.”
Mr Hayes adds: “At some point in time there will be enough built, but we don’t see that happening in the short term.
“A key part of our business plan over the next five years is development.”
A combination of growing student numbers and investor appetite means that for the foreseeable future student housing will remain a valuable source of work for contractors.