There has been no let-up in the wave of foreign capital steadily flowing into the UK property sector this year but one sector in particular seems to be standing out from the crowd. Although central London offices continue to dominate activity in the investment market, the volume of student housing transactions is also making headlines. Has the sector finally been accepted as a mainstream investment?
A further examination of investment data showed me a number of interesting things. Firstly, £4.1bn of UK student housing has transacted so far this year, and a further £83m was under contract in August, which makes 2015 by far the most active year on record for this sector. Secondly, of this investment, 84% can be classified as cross-border (see charts below). Thirdly, American and Canadian investors have been the dominant players, accounting for 79% of investment.
So what is behind the sudden flurry of capital into student accommodation? Although UK real estate remains in high demand from both domestic and global investors, competition for the best assets in the best locations is extremely high. Middle Eastern and Far Eastern investors continue to increase their share of the market, and although US investors remain the dominant overseas player, the marketplace has become crowded.
Enter student housing. The sector offers an opportunity to diversify away from traditional core real estate and, whilst yields for prime property continue to fall, student accommodation offers good quality assets with relatively high yields. Additionally, the sector is undersupplied in many parts of the country and there is a steady student demand which shows no signs of abating. The map above shows the Deloitte bedspace ratio: our measure of the number of full-time students to each purpose built-bedspace. Across the country as a whole, there is an average of 3.3 students to every purpose-built bedspace. This ratio could worsen, even as new student accommodation continues to be built - UCAS reported earlier this year that student applications in the UK have reached record highs.
Over the last 10 years, we have seen the launch of student accommodation funds and REITs, and have watched this sector develop and mature. The record investment levels reported this year suggests that student housing has finally graduated to a mainstream investment.