It’s often said that student accommodation and the build-to-rent (BTR) sector have a lot in common. Both involve renting out purpose-built flats, both are predominantly aimed at a younger, urban demographic and both use branding and amenities to attract customers.
But which is a better investment prospect right now? Last week, Investec Structured Property Finance and Mishcon de Reya gathered experts on both sides of the fence at Investec’s offices in the City to thrash out the pros and cons and decide which comes out on top.
Fighting the corner for BTR, Fizzy Living managing director Harry Downes identified demand as one of the main differentiating factors. “Student numbers aren’t growing in the same way that the general population is growing,” he said, predicting that the value of BTR could eventually reach £50bn. “We’ve got a huge problem with new homes in this country. The end game will be anarchy on the streets if we don’t build more.”
BTR has the advantage of being a fledgling sector with a huge amount of market share to chase, argued Tony Brooks, joint managing director of BTR developer Moda Living.
“BTR is still very embryonic; there is tons of space in the market,” he said. “In the US, 29% of people rent and in the UK it is less than 15%. And even at that level the rental market is still 10 to 20 times the size of student. It’s year-round and it is not predicated on the success of other businesses.”
Brooks also argued that BTR is insulated from the fallout from Brexit, which could have a negative impact on the student sector if tighter controls on immigration hit student numbers. “BTR is a domestic product for a domestic market - it is protected from international geopolitical shifts, and student [accommodation] is more susceptible to that,” he said.
Responding, Alex Pease, investment director at student accommodation developer Watkins Jones, said a weaker economic climate could actually boost student numbers. “It is a counter-cyclical sector: there is an inverse relationship between GDP and student numbers,” he said.
Bob Crompton, founder and chief executive of student developer ThreeSixty, added that he thought the UK government would eventually be forced to exempt students from the UK’s net immigration targets.
As for the returns investors can expect to achieve, Crompton also argued that the student accommodation sector came out top. “Student is trading at 6%. BTR is a fantastic asset class if you want a 3% return,” he said.
Furthermore, Pease claimed there was still plenty of room for growth in the purpose-built student accommodation (PBSA) market.
He pointed out that universities were still the largest landlord in the student sector and that 75% of their stock was built before 1999 - leaving room for developers to step in.
Then there is the issue of which sector investors feel most comfortable with. Mark Bladon, co-head of origination at Investec Structured Property Finance, argued that while student accommodation was today regarded as a mature asset class, BTR still has to prove itself.
“On BTR, we have got to be careful and take a view due to the lack of comparables,” he said, adding that 2017 would be an important year for BTR as purpose-built stock was beginning to come through in substantial numbers.
The immaturity of BTR is also an issue in terms of knowing what locations are likely to prove most profitable, according to Pease. He said that while locations for student accommodation were straightforward - university towns - there was “still a lot of uncertainty about which markets will work [for BTR]”, and that large swathes of the regional market were still largely untested.
But Brooks argued that the regions “present the best opportunity for growth” due to low land values and predicted that rental growth on Moda’s schemes would be 4-5% above inflation “for the next few years”.
Despite the rivalries, there was agreement that the student and BTR sectors could benefit each other. Downes argued that it was in BTR developers’ best interests to support the ongoing success of PBSA.
“You’re not going to come out of a very snazzy student building and go down the scale,” he said. “When young people think now about their first flat, they think it should have lots of amenities.”
On the question of which asset class provides a better bet for investors, the jury is out. What is certain is that investors will be following progress in both sectors with great interest.
18 May 2017
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