Oct. 16 (Bloomberg) -- Britain’s biggest construction company Balfour Beatty Plc, whose shares dropped 6.6 percent in the past 12 months amid sluggish demand at home, is targeting a new market to grow abroad: student housing in the U.S.
“Increasingly we are seeing that universities have an absolute need through their estates to improve the quality of their accommodation,” Chief Executive Officer Andrew McNaughton, who took over in March, said in an interview at the company’s London headquarters. Balfour Beatty is in particular targeting the U.S., where more students live on campus compared to other markets, he said.
Increasing enrollment numbers have helped university housing to outperform other types of real estate in the U.S. and U.K., providing total returns of 11 percent to 15 percent, according to real-estate services company Jones Lang LaSalle Inc. Since it moved into that market in 2012, Balfour Beatty has secured or been named preferred bidder for six developments in the U.S. and four in the U.K.
“Student housing is attractive because it is backed by committed spending,” said Andrew Gibb, an analyst at Investec Securities Ltd. in London. “It seems to be getting a bit more attention as some of the more traditional sectors provide less profit. It’s a clear opportunity at a time when there is not as much opportunity as there was elsewhere.”
Balfour Beatty, which in August reported a 67 percent drop in first-half operating profit led by weaker performance in the U.K. and Australia, has won work this year on U.S. student housing projects worth about $276 million, including contracts to develop campus projects for the Universities of Iowa and Nevada, Tarleton State University and Texas A&M University. The company was also named preferred bidder on a $500 million contract with the University of West Florida.
“We are a new entrant into what is an emerging market,” McNaughton said. “Student housing sits in the sweet spot of our business,” he said, adding that “the scale at what we’re looking at in the U.S. is quite fascinating.”
Demand for those projects is particularly strong in the U.S. because of the country’s position as the top destination for international students and the requirement from most universities for first-year students to live on campus. Construction projects are often not limited to housing, with some including retail space and sports facilities.
Global tertiary-education enrollments rose 68 percent between 2000 and 2011 to about 165 million and are expected to exceed 263 million by 2025, according to Jones Lang LaSalle. Universities have struggled to keep up with rising demand for housing, providing openings for private developers and institutional investors.
“Student housing is a contained market with a predictable earnings stream from steady demand,” said Howard Seymour, an analyst at Numis Securities Ltd. in London. “Balfour Beatty is able to build on its experience developing military housing in the U.S.”
Even as Britain’s economic recovery is now gathering pace and home prices in the U.K. rose 3.8 percent in August from a year earlier, McNaughton said it’s not clear yet whether all parts of the construction industry will benefit.
“It’s disappointing that the government is now heralding growth in construction as if it’s the whole market, when in fact it’s only house-building that’s growing,” he said. “I’m quite cautious at the moment about construction market growth across the U.K. and I’m concerned at the absence of major infrastructure.”
Balfour Beatty shares rose 3.1 percent to 283.40 pence today. The stock’s 6.6 percent drop in London trading in the last 12 months compares with a 12 percent gain for the U.K. FTSE 100 benchmark index. Since McNaughton, who previously was chief operating officer and responsible for the global expansion into higher-growth sectors, took over on March 31, the stock has climbed 21 percent, valuing the company at 1.95 billion pounds ($3.1 billion).
The U.S. accounted for 36 percent of Balfour Beatty’s revenue last year compared with 50 percent in the U.K. The CEO declined to comment on how much the builder generates from student housing projects.
Balfour Beatty is not the only builder targeting the lucrative campus housing business.
In the student accommodation sector, the company faces competition from a range of property developers and real estate investment trusts such as Sydney-based Campus Living Villages Pty Ltd., which bids for university partnership projects, to American Campus Communities Inc., the largest student housing developer in the U.S.
Other international construction companies such as Bouyges SA and Sir Robert McAlpine Ltd. also have made moves into the sector, said Martin Hadland, an analyst at Jones Lang LaSalle.
“During the recession a lot of the construction companies had bid teams sitting around doing nothing, so started to focus on the student accommodation sector as a way of securing construction work,” Hadland said.
Still, the sector faces threats from government policies that limit the inflow of new students, such as those that increase tuition fees or make it difficult for international students to obtain visas, as well as natural limits to its size. High demand for student housing will eventually reach a balance with supply, particularly in smaller markets like the U.K., Hadland said.
McNaughton, a chartered civil engineer, said the move into U.S. student housing is part of a wider strategy for international growth to counter the effect of a slowdown in government infrastructure orders in the U.K., currently Balfour Beatty’s biggest revenue market.
The company reduced its full-year forecast for profit in the U.K. construction business by 50 million pounds in August after the U.K. order book for the unit fell 6 percent in the first half, compared with 15 percent growth in the U.S.
“The U.S. is at a different place in the economic cycle compared to the U.K.,” McNaughton said. “The recovery is not wholesale across the country, but we are seeing signs of investment, particularly from the private sector. The country will be a real root of growth for us over the next few years.”
To contact the reporter on this story: Natasha Doff in London at firstname.lastname@example.org
To contact the editor responsible for this story: Simon Thiel at email@example.com