By Nori Touati on 25th September 2017
Can UK’s student accommodation market prove a fertile ground for income-hunters despite Brexit headwind?
Nori Touati, founder and CEO, Ankor Property Group, argues the investment case for the UK’s huge student accommodation market.
Property has long been renowned as one of the best sources of income for investors, be they direct buyers or those accessing the asset class via some form of investment vehicle such as an investment trust.
The security of owning a tangible asset, coupled with the rents that can be achieved, have proved to be an attractive combination, especially in London which has developed into one of the best performing markets anywhere in the world.
However, since the UK’s decision to exit the EU in the middle of last year, the outlook for London’s property market has changed significantly.
Data from research firm LonRes found that 58% of properties taken off the market in the first half of the year were withdrawn rather than being sold. Properties removed from the market also exceeded those which achieved a sale over the last year — the first time this has happened for seven years.
Overall, transactions in the first six months of 2017 are down 11% from a year earlier, and by 37% compared with the same period in 2013.
However, some areas are bucking this trend, none more so than student accommodation. While the broader London market has struggled, the Purpose Built Student Accommodation (PBSA) market has powered ahead.
According to statistics from global real estate services provider Cushman & Wakefield, the PBSA has seen year-on-year rental growth of 2.9%, buoyed by overseas capital entering the market to take advantage of the reduced value of sterling against foreign currencies.
As a result, in the first half of 2017 alone £2.4bn of deals have been transacted across the sector, up 24% compared to the same period in 2016.
Estimates are for this to be repeated in the second half, with a final projection of £4.8bn of transactions for the whole of 2017, up from £3.9bn in 2016.
For income hunters this is great news. Student accommodation provides an attractive yield well above the paltry rates being offered from other asset classes, as well as other parts of the UK property market.
With yields around the 5% mark, student accommodation funds (as measured by MSCI) were markedly above the 2% yields being paid by London office funds, for example.
Transactions in the PBSA market have also shrugged off a 3.7% drop in university applications year-on-year, primarily because the yearly rental cycle (with students typically moving on from one house to another) supports ongoing rental growth, unlike other types of property where rents can be agreed for longer periods.
It is a dynamic that is showing no signs of abating, enabling the PBSA sector to shrug-off Brexit concerns.