Leaving Home at Any Price Lures Investors to Student Houses

Property investors love students like Luke Redhead.

The 18-year-old will begin a course at the Liverpool Institute for Performing Arts this month, renting a room in a downtown student residence operated by Unite Group Plc (UTG) for about 100 pounds ($160) a week. He’ll also spend thousands of pounds on tuition fees during the academic year after the government tripled the maximum amount universities are allowed to charge.

“Taking on more debt worries me a bit, but I’m hoping to follow my dreams and that this course pays off,” said Redhead, who will embark on foundation studies in acting.

Students prepared to pay a premium to live with their peers in city-center locations are proving a bonanza for companies like Unite, the U.K.’s biggest provider of student accommodation. That in turn is fueling acquisitions in an industry where yields are higher than other parts of the British property market. Dutch pension fund manager PGGM NV yesterday bought 60 percent of the U.K.’s second-largest student-housing operator in a deal valued at 840 million pounds ($1.4 billion).

“There’s a real focus by big financial institutions on alternative real estate assets that are less cyclical and more defensive,” said Philip Hillman, the London-based head of U.K. student housing at property broker Jones Lang LaSalle Inc.

Photographer: Frantzesco Kangaris/Bloomberg

A studio in the Nido tower in London’s Spitalfields costs as much as 370 pounds a week to lease. Close

A studio in the Nido tower in London’s Spitalfields costs as much as 370 pounds a week to lease.

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Photographer: Frantzesco Kangaris/Bloomberg

A studio in the Nido tower in London’s Spitalfields costs as much as 370 pounds a week to lease.

Spending Spree

College dormitory rents are rising faster than inflation, encouraging firms including Mansion Student Accommodation Fund and operators backed by buyout firms Oaktree Capital Management LP and Carlyle Group LP to invest about 800 million pounds on student homes in the first half, Jones Lang estimates. That was more than double the figure from a year earlier.

PGGM bought the stake in UPP Group Holdings Ltd., a company that manages about 27,000 beds for 13 colleges, from infrastructure funds managed by Barclays Plc. (BARC) The deal, the biggest of its kind in Europe, will ensure that 2011’s record spending spree of 1.18 billion pounds will be beaten this year.

Unite runs housing for 40,000 students in 24 locations. In the last academic year, 99 percent of the company’s properties were occupied, up from 97 percent a year earlier, according to its first-half results. Reservations for this year amounted to 87 percent at the end of June, enabling Unite to generate rental growth of 3 percent to 4 percent.

Unite Venture

Unite announced a plan today to develop London buildings containing as many as 4,000 beds with Government of Singapore Investment Corp.’s real estate unit. Unite and the sovereign wealth fund will invest a total of 330 million pounds in the venture.

The U.K. company rose to the highest since April 2010 in London trading, bringing this year’s gain to about 53 percent and lifting Unite’s market value to 411 million pounds.

Western European dormitory sales almost tripled to 1.97 billion euros ($2.5 billion) in the 12 months to June 30, according to Real Capital Analytics Inc. That exceeded the 1.44 billion euros of deals in the U.S., the world’s largest market.

Student housing offers a “new and interesting opportunity” for investment, said Dimf Ghijsels, head of research at Bouwfonds Real Estate Investment Management. The money manager may start a 300 million-euro student residence fund in addition to its European Residential Fund’s dormitories.

Paul McCartney

Larch House, Redhead’s new Liverpool home, is a 10-minute walk from the Institute for Performing Arts, which was co- founded by former Beatle Paul McCartney in 1996. Redhead will share a lounge, kitchenette and bathrooms with three others.

“I wanted somewhere where I would feel relaxed and safe, where I wouldn’t miss home as much and could mingle with other students,” Redhead, whose British parents live abroad, said by telephone from his grandmother’s home in York, northern England, about a two-hour drive from Liverpool.

A 1962 law entitled all full-time students to a free education and a local authority grant for accommodation and other expenses. That changed two decades ago, when the government introduced fees to help pay for an expansion in higher education.

The proportion of school-leavers seeking a university place rose to about a third in the 1990s from 6 percent in the 1950s, according to the 2010 Browne report commissioned by the government. Since 2006, the annual intake by U.K. universities climbed by about 100,000 students.

Overseas Students

Since 1999, the number of overseas students has almost doubled to a total of 428,225, according to the Higher Education Statistics Agency. That’s the highest in the world after the U.S. Foreign students typically pay far more to be educated than local undergraduates.

“We were concerned about setting up a home because we don’t know how it works in the U.K.,” said Yuhan Wang, 26, who is due to arrive with his student wife later this month from Nanjing, China, to start a masters in accounting and finance at Aberdeen University. They will pay Unite 7,600 pounds a year for a studio in the Scottish city.

In 1997, British students began paying 1,000 pounds a year in tuition fees. That rose to 3,000 pounds in 2006 and, starting this month, universities are allowed to charge as much as 9,000 pounds per academic year.

Rental income from a typical student residence in the U.K. yielded about 6.3 percent last year, Savills Plc estimates. That compared with 4.3 percent for other types of homes and 5.8 percent for commercial real estate, according to the London- based property broker.

Blackstone’s Coup

Blackstone Group LP (BX) more than doubled its money in June by selling three central London student residences for about 415 million pounds. Blackstone developed 2,500-room residences, cafes, fitness centers and laundries at the Nido-branded sites before they were bought by Round Hill Capital and Coral Student Portfolio Fund.

A studio in the Nido tower in London’s Spitalfields costs as much as 370 pounds a week to lease. In Portsmouth, a city on the south coast of England, students can rent a room in a hall of residence for as little as 59 pounds.

“London is the most compelling market, although there are good opportunities in under-supplied towns outside the capital,” said Jo Winchester, head of CBRE Group Inc.’s student housing unit. “There’s no shortage of investors wanting to put money into student housing, but too little stock to buy.”

University Cuts

Private operators provided about 10 percent of the rooms rented by the U.K.’s 1.67 million full-time students during the last academic year, data from the Higher Education Statistics Agency show. University campuses and individual landlords provided accommodation for the rest of those students not living at home.

The proportion of students living in purpose-building properties may increase as colleges are forced to save money. Some planning authorities are restricting the amount of private homes that are leased to people in higher education to avoid “studentification” of some areas, Jones Lang’s Hillman said.

BridgePoint Ventures LLC, a property investment firm, is forecasting annual returns of about 20 percent from its development partnerships. The company invested 2.6 million pounds in a venture with Seaforth Properties to build a 116-bed residence near Glasgow University costing 9 million pounds.

Quality Focus

“We’re focusing on the better-quality universities, which will be less affected by the budget cuts and the impact of higher tuition fees,” BridgePoint Chief Executive Officer Eric Jafari said in an interview.

While student representatives said private operators helped raise the quality of housing and thrown a lifeline to cash- strapped universities, concerns remain about the provision of affordable accommodation as students face mounting debts.

For Redhead, the gamble is whether the investment will be as lucrative in the future as it is for his landlord now.

“It’s important and the judging panel in my audition convinced me that coming to study in Liverpool would make it work” as a stepping stone to future employment, he said. “I was pretty intent on going to university.”

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net.

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.

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