UK Student Accommodation Investing In A Nutshell

The student market is well and alive. Now I understand that some of you have heard horror stories about people who have invested in opportunities of this nature and are now in trouble. That is just as true too.

You see, the trouble with investments is always about the people behind the structure and the structure itself, seldom about the instrument. Gold is a great instrument. So is land banking or for that matter, oil exploration. But when improperly structured and managed, any investment can, and will, go south. Interestingly, that tends to create a bad repute for the instrument instead of the people. But the truth is the instrument is never less valid. The people and the structure are always the culprits.

Such is of the student market as well. The market is real and the demand is strong. That is well-attested by reports and research from Knight Frank, CBRE, Savills etc. Here's a couple that might be of interest to you :

• Student Property - Knight Frank
• Savills Spotlight UK Student Housing Summer 2013

According to the latest Student Accommodation Index from CBRE, the sector has shown total returns of 9.95% in the 12 months leading to September 2013, higher than IPD total returns on offices, industrial and retail property over the same period. UK education exports in 2011 were worth £17.5 billion, making education UK’s fifth largest services export sector, ahead of insurance and computer services. Rental values for student accommodation in regional towns have increased by an average 3.5% in 2012/2013, showing healthy growth across the UK. London’s rental growth was flat in 2013, at 0.61%. In total, more than £1.6 billion have been invested in UK student accommodation in the first 9 months of 2013.

While student numbers are stable, there is a continuing shortage of property in all the core university cities. For example, according to the investment company GCP Student Accommodation, there are 400,000 students in London, but only 60,000 beds in purpose-built accommodation. Similar situations exists across all other cities.

Such a market has attracted not just retail investors but also major fund groups including GIC Real Estate, the real estate investment arm of the Government of Singapore Investment Corporation (GIC), the US-based Carlyle Group and Blackstone Group. Although some of the funds have since gotten themselves into trouble such as the Brandeaux Fund and the Mansion Fund due to overzealous expansion and mismanagement, the fundamentals of the asset class has not been affected in anyway.

Then why do some of the investments fall by the wayside? Here's where we talk about the challenges...

THE CHALLENGES

So the market is good and the potential of stable and high returns do sound attractive even to world class fund groups. Doesn't that make it a low risk instrument? Well, yes and no...

Risks #1 - Developer Delinquency

While the big funds will have no problem in this aspect, smaller retail investors do have to work with regional developers who tends to be smaller and often more concern with their cash-flow than repute. That means that at the first sign of trouble, these developers are more than happy to forgo their company and start a new one for the next project. We have seen that happened too many times not just in UK but also markets such as Europe, Brazil and even New Zealand.

The key to mitigating such a situation is always look at the security and recourse when things go south. And we don't mean the market going south. That is not likely to happen in the near term. But rather when the developer goes delinquent for whatever reasons. What would you be left with? Assume the worst, so that when things does go that way you are prepared. If the rent no longer comes in then you must know how to take control to manage the asset apart from the developer. If the unit is not completed you must know your legal recourse.

Risk #2 - Quality

Developers who are more than keen to get the asset off their hands and collect on their profit often likes to structure their product cheaply. It is not rocket science here. As much as investors like to think that they are getting a bargain when they buy something at less, the less has to come out of somewhere. The most convenient place would be to compromise on the quality of the unit.

We ourselves have toured poorly constructed units that left investors with nothing but headaches and management nightmares. We have also seen how problematic buildings such as those with structural or material issue (eg. asbestos poisoning) are carelessly marketed to international investors. So when it comes to quality, yes the old adage is true. If the price is too good to be true, it probably is.

Risks #3 - Exit Strategy

Let me be direct and let the cat out of the bag. Small units don't sell. As much as the marketeers like to tell you that prices have risen, if there are no resale market then the profits are often unrealizable. Why is that the case if the market demand is high? Well, for one because of the huge shortage. There are constantly new products being launched on the market that attract buyers. These products with anything from 30 to 700 units to sell and economy of scale in terms of budget and commission to market the units. When it comes to just one unit, it is hard to get the attention of an agent to sell for a pittance commission (say 2%).

It is not an issue if your goal is simply to hold the asset for yield. But a real problem if you have to exit the asset at some point in time.

HOW WE DO IT

So while it would be most easy for us to bring a product over to market to you and absolve ourselves from any future liabilities, it would be irresponsible and irrational since due to the long-term relationship driven manner which we work with our clients. Eventually problems with any assets will always land on our desk as we are committed to help our clients to build their portfolio, not sell property.

To take advantage of the growing market without compromising returns and security of our clients, what we have done is to address the risks through 3 ways :-

1. We Develop.

We figured that with the way we work, any problems that arises will eventually land on our lap. The only thing is whether we are able to solve it with developers still in control of the common parts of the asset. The solution - take the developer out of the equation.

We have made it a point to engage with a developer in a way that upon completion they will surrender all rights to the building to RunningStream and we will solely operate the assets. All rental collections and payments will be through us and professionally conducted through accountancy firms, lawyers etc.

Essentially we want a situation where when a problem lands on our lap, it gets resolved there and then. No more bucket passing.

2. We Supervise

We appoint professionals and make regular supervision trips to ensure that the units are constructed to our standard. At every point of the construction, investors will be informed of the progress and we actively monitor and manage the units pre and post construction. Regular inspections will be made during tenancy to ensure that the building and units are kept in good condition as well.

3. We Exit

As part of the investment we will structure exit strategies including periodic buyback options and soliciting en-bloc exit wherever appropriate. This will allow investors to exit at a profit together with us. As the owner of the building and all common areas, we align ourselves with our investors by having an interest in the exit as well.

CONCLUSION

While student accommodation is a lucrative market, it is not without its perils. We encourage investors to carefully examine each opportunity to ensure that their interests are well guarded. In any situation, always know what is your recourse should something goes wrong. Remember taking a legal case as a foreigner can be an expensive exercise that makes no financial sense. Any legal rights is only as good as the ability to enforce the rights. As long as you do your homework and not get too irrationally impressed by glossy brochures, student accommodation does make good income instruments with the GBP on the rise.

At RunningStream, we structure real estate based investment opportunities for our clients in international markets. Should you have any questions or if you would like to explore investing in a student accommodation asset in the UK, do feel free to contact us at register@runningstream.com. We will be most happy to help.