London Student Accommodation Market

Transcription

1 London Student Accommodation Market 2009

2 Executive summary 1 Introduction an investment opportunity 2 Central London student demographics 2 The universities 4 Overseas students 5 Postgraduate students 8 London developers / operators & investors 8 Private sector bed numbers and development pipeline 11 Planning environment 13 London rental market 13 Rental growth in the student accommodation sector 13 Other factors for consideration 14 Outlook and conclusion 15 King Sturge student accommodation group 16 Contacts 16

3 King Sturge: London Student Accommodation Market 2009 Executive summary There are currently approximately 250,000 full time students in higher education in London of which only 1.5% are able to access commercially operated private sector accommodation; 18% of all students in the UK study in London. London student numbers are projected to increase by 18% for overseas students and 14% for postgraduates between 2006 and Commercially operated direct let accommodation is currently trading at 99%+ occupancy. Average rental growth in 2008/2009 was circa 10% with further growth predicted in 2009/2010. IPD based forecast for All UK Commercial Property Index (student housing is not included) dated December 2008 predicted -6.7% in Capital values in the sector have been remarkably resilient in the capital when compared to the IPD All Property Index which declined 27.1% in 2008; this is the best performing property asset in the UK. With falling residential land values of 70% and decreasing commercial site values developers and universities have a unique window of opportunity to acquire land which would otherwise be unaffordable. At December 2008 Sterling had depreciated by 21% against the Euro and 26% against US$ over a 12 month period. The resulting weakness has made the UK a more attractive proposition for students but also for overseas investment in UK Real Estate. Many Higher Education Institutions (HEIs) struggle to provide sufficient bed spaces for first year and overseas students. King Sturge predicts that between 50% and 75% of university housing stock in London is deemed dated by modern standards. HEI support is increasingly important for obtaining planning consent and funding of private sector schemes. The total development pipeline of almost 3,500 bed spaces accounts for less than 1.5% of current full time student numbers. The planning framework is likely to be increasingly restrictive, limiting the development pipeline of new student stock. The traditional shared student house (House in Multiple Occupation (HMO)) has seen strong competition from other residential user groups. 1

4 King Sturge: London Student Accommodation Market 2009 Introduction an investment opportunity The London market is seen as the key investment opportunity for specialist developers, operators and investors in the sector of student accommodation. There is a major demand / supply imbalance of private sector student accommodation which is set to continue in the medium term. The current economic and credit turmoil in the global economy will exacerbate this problem over the medium term as development activity eases and student numbers increase. and King Sturge predicts more strategic alliances with key operators with new overseas and existing investors. In this paper we provide an overview of the London market and discuss a number of the main factors influencing the market currently. As options for students continue to increase globally, if London is to remain competitive, then there is an urgent need for additional good quality accommodation Paddy Jackman, Imperial College, London Central London student demographics The map, above right, illustrates the Bloomsbury/ Mid Town dominance of a high concentration of HEIs which has been a key focus for private sector investors who seek accessibility to a significant proportion of London students. Woburn Place Unite Group plc London represents a significant market with nearly 250,000 full time students. Yet the university and private sector only provide accommodation for 17% of full time students currently. This presents a considerable opportunity for developers and operators to provide accommodation to the 80% who cannot obtain either university or private sector accommodation and therefore reside in Houses in Multiple Occupation (HMOs) or live with their parents. Private sector development to date has principally been focused on the area identified on the map with only a relatively limited number of housing association style investment deals across the wider area. There remain key opportunities with universities through strategic relationships directly with the HEI. Historically there has been a tendency for developers to seek leases or nomination agreements on their accommodation. This was due to the added security provided for private sector schemes for a guaranteed rental income stream. However, over recent years more operators seek to directly let their accommodation to students to take benefit of the greater rental growth prospects. It is this rental growth that is still projected over the foreseeable future and the reason that the sector stands out as an investment opportunity. Barriers to entry are high Three Colts Lane Hive Student Residences Undergraduate and postgraduate student numbers London has more students than any other single location in the UK with approximately 250,000 2

5 London Contemporary Dance School Conservatoire for Dance and Drama Central School of Speech and Drama Royal Academy of Music Royal College of Nursing Institute University of the Arts Imperial College Heythrop College London Business School The Institute of Cancer Research Royal College of Art Royal College of Music London Metropolitan University Royal Veterinary College Kings College London Courtald Institute of Art Chelsea College of Art and Design City University Central School of Ballet London School of Economics Guildhall School of Music and Drama London South Bank University London College of Communication Queen Mary College University College of London Royal Academy of Dramatic Arts Birbeck, University of London London School of Hygiene and Tropical Medicine University of Westminster London College of Fashion Trinity Laban College of Music Goldsmith College University of Greenwich School of Pharmacy Institute of Education School of Oriental and African Studies University of London Central Saint Martin College of Art and Design University of East London King Sturge, 2009 Total undergraduate and postgraduate students Total UG FT & PT Total PG FT & PT *University of London Birkbeck College* Brunel University Central School of Speech and Drama* The City University Conservatoire for Dance and Drama Courtauld Institute of Art* The University of East London Goldsmiths College* The University of Greenwich Guildhall School of Music and Drama Heythrop college* Imperial College The Institute of Cancer Research* Institute of Education* King's College London* Kingston University University of the Arts, London London Business School* London Met University London South Bank University LSE* London School of Hygiene and Tropical Medicine* Middlesex University Queen Mary and Westfield College* Ravensbourne College of Design and Communication Roehampton University Rose Bruford College Royal Academy of Music* Royal College of Art Royal College of Music The Royal College of Nursing The Royal Veterinary College* St George's Hospital Medical School* St Mary's University College SOAS* The School of Pharmacy* Thames Valley university Trinity Laban University College London* The University of Westminster Source: HESA data 2006/07 interpreted by King Sturge 3

6 King Sturge: London Student Accommodation Market 2009 full time students and a total of 41 HEIs including the University of London which itself is made up of 19 institutions (18 of which are located within London). The main London institutions are listed in the table on the previous page and we illustrate the number of full and part time students with reference to both undergraduate and postgraduate study. Out of 41 HEIs, 16 educate in excess of 15,000 students across the whole metropolitan area. Of particular relevance is the proportion of postgraduate numbers at these centres, and it is these students that universities are keen to increase. Postgraduate students participate particulary on 12 month study programmes and for whom bespoke accommodation options are extremely limited. The universities Main universities Earlier in this paper we listed the main universities within London. In the table below we show the top 20 universities which are ranked within The Times Good University Guide London Rank UK Rank University 1 3 Imperial College of Science, Technology and Medicine 2 4 London School of Economics University College London King s College London School of Oriental and African Studies Royal Holloway and Bedford New College Queen Mary and Westfield College Goldsmith College The City University Brunel University University of the Arts, London Roehampton University Kingston University The University of Westminster Middlesex University The University of East London University of Greenwich Thames Valley University London South Bank University 20 N/A London Metropolitan University 1. Denotes a college of the University of London. University positioning in ranking systems is a key indicator of the institution s academic reputation Applicants per place for overseas and mature students Overseas students Mature students Applicants per place Imperial College of Science, Technology and Medicine London School of Economics University College London King's College London School of Oriental and African Studies Royal Holloway and Bedford New College Queen Mary and Westfield College Goldsmith College The City University Brunel University University of the Arts, London Roehampton University Kingston University The University of Westminster Middlesex University The University of East London University of Greenwich Thames Valley University London South Bank University London Metropolitan University 0 Source: King Sturge 2009 / HESA interpreted by King Sturge 4

7 together with other performance criteria. It is rankings such as Times Higher Education (THE) that strongly influence a student s choice over rivals. As is clearly illustrated London s HEIs average 6.5 applicants for every university place which is a healthy level. World rankings of London universities In addition to a strong domestic performance London is home to five universities which are ranked within the THE World s Top 200 Universities The table below shows the London universities and their rankings: University Imperial College, London 6 5 University College, London 7 9 King s College, London London School of Economics Queen Mary, University of London Source: The World Top 200 universities Universities within the World Top 200 list attract significant numbers of overseas students wishing to study at a highly acclaimed institution and is another reason why this global centre is so popular against other Anglophone destinations. As can be seen the London universities have slipped slightly down the league from last year. The main US institutions have seen the most progress up the rankings. According to Organisation for Economic Co-operation and Development (OECD) spending on HE in the UK as a proportion of GDP is below average and roughly half the US. At the same time the OECD state that with the weak Sterling British universities should benefit from an increase in student numbers against other Anglophone systems. Overseas students Projected numbers of overseas students The graph below shows the number of projected overseas students in the UK. Specific London data is not available but it is anticipated that a large proportion of these students will study in London. Projected increase of international students from 2007/08 Percentage increase in students 25% 20% 15% 10% 5% 0% 3.30% 5.10% % 7.13% Undergraduates Postgraduate taught Postgraduate research Source: HEFCE 21st January 2008 interpreted by King Sturge 6.08% 5.92% The graph above shows the projected numbers of undergraduate and postgraduate overseas students up to the 2010/2011 academic year together with the annual projected percentage increase from the 2007 figures % 10.97% 10.66% 19.36% 15.18% 15.05% CGI Imperial College s new Eastside building Top locations for international students Three Colts Lane Hive Student Residences The graph on the next page shows United Nations Education, Scientific and Cultural Organisation (UNESCO) data which illustrates the top six international locations for students to study in. The United States is the most popular choice for students followed by the UK and then France. According to i-graduate the UK has now overtaken the US as the most popular study location for international 5

8 King Sturge: London Student Accommodation Market 2009 students. The popularity of the UK as a foreign destination for students is of great importance. This means that the UK is a global leader in the provision of education to citizens of other countries. UNESCO does not have specific London data available but we anticipate that a large proportion of students choose London as their favoured destination due to the number and quality of institutions available. Research undertaken by i-graduate found that qualifications from UK universities are, alongside those from the USA, considered to be the world s best, which contributes to the popularity of the UK as a foreign destination to study in. British Council predict continued growth in Indian students travelling to the UK. The projected rise in Indian students will help to increase the number of overseas students in the UK and as a result will place further pressure on the limited student accommodation available. Top 6 international student destinations Russian Fed. 5% South Africa 4% Japan 9% United States 42% France 17% United Kingdom 23% Source: UNESCO 2006/2007 interpreted by King Sturge Study London state that over 90,000 overseas students study in London from over 200 different countries. They advise that as at 2006/2007 the top three countries were China (7,865 students), United States (5,615 students) and India (5,265 students). Study London advises that the number of overseas students are increasing year on year and there has also been a rise in US study abroad programmes since the 2001/2002 academic year which are not accounted for in these figures as is the case with the huge number of summer language courses offered. Indian students are also recognising the UK as a popular place to study due to the quality of the education available. The British Council have found that wealthy Indian students who are unable to get into their own high quality universities look to the UK universities to provide their education. The Piccadilly Court, London - Unite Group plc The British Council Vision 2020 forecasts global demand continuing to rise. The increasing number of overseas students further enhances demand for student accommodation within London. Overseas students also require accommodation often for relatively short periods. Study London states that 52% of US study abroad students stay for less than eight weeks, 5.5% stay for the full academic year and 37% stay in London for a semester. Study abroad figures are usually not accounted for in the numbers of overseas students due to the short periods of time they are in the UK. Demand for flexible accommodation is heightened as these students also require accommodation. Who is living in the halls The graph, above right, shows the nationalities of students for the direct let accommodation at the 6

9 Nido Kings Cross scheme. As is clearly illustrated the domestic market accounts for a relatively small proportion of overall numbers. Overseas students are confident in their preference to book branded commercial accommodation rather than trawl the HMO sector with the orientation and language issues they would face. Nido Kings Cross student demographics 2008/ % 25% 20% 15% 10% 5% 0% 25% 23% US UK Source: Nido 7% India 5% 5% 4% 4% 3% 3% 3% China Greece Spain Canada Italy Cyprus Pakistan The Prime Minister s Initiative 2% 2% 1% 1% 1% In addition to the above the Prime Minister s Initiative for International Education is a five year strategy created to secure the UK s position as a top provider of international education. It sets out a number of targets which are to be achieved by The main targets are: Achieve an additional 70,000 international (non- EU) students in UK higher education and 30,000 in further education. Double the number of countries sending more than 10,000 students per year to the UK. Achieve significant growth in the number of partnerships between the UK and other countries. Improve the student satisfaction ratings in the UK. It is anticipated that the Initiative will aid further increases in numbers of students coming to study in the UK. It should also assist in maintaining the UK as a top location where students choose to study. Overseas students spend Whilst the principle focus of this report has been on the supply and demand imbalance of bed spaces in the London market it is important to consider France Turkey Brazil Germany Russia 11% Other the fact that a lot of this demand is fuelled by EU and non EU students. Under current university financing provision EU and UK students essentially cost universities more than the tuition fees and HEFCE funding they receive. It is principally for this reason that all universities are keen to drive their international recruitment which has been recognised by the Mayor s Office. In addition to the direct revenue benefits to the universities we must also consider the net gain to the British economy. As we have conveyed in this report the importance of good quality accommodation is vital for the future of London as a global destination for both the universities and the economy. EU and non EU students add to the UK economy by spending money on tuition fees, accommodation fees and general living costs. The Higher Education Policy Institute (HEPI) in their report dated July 2007 examined the economic costs and benefits of international students. The HEPI have calculated that the UK benefits from approximately 3.3bn of net direct cash from fee income and living expenses from non EU students alone. There are no specific numbers quoted for London but we conservatively estimate this amount to be between 600m and 1bn per annum. This calculation ignores EU non UK students and post graduate employment from both groups. As an important revenue source for universities and London, additional investment is required at both academic but mainly residential level to ensure the overall package is attractive to the competition. As detailed earlier, i-graduate states that the UK is now the most popular destination for overseas students even though it is perceived as the most expensive location. Market research undertaken by i-graduate in its Student Pulse survey 2007 found that two-thirds of students select the university first before thinking about which country they will study in. The research concluded that even though the cost of tuition and cost of living was the number one concern for prospective students, the UK has maintained its appeal by scoring highly on teaching and research, quality reputation of qualifications and security. Overseas students perceive their education as an investment for their future. London has a large number of highly rated institutions which attract overseas students. 7

10 King Sturge: London Student Accommodation Market 2009 to study in. Postgraduates also vary in that they often prefer to remain in the accommodation for longer tenancy periods. In London private sector accommodation is often provided for 51 week tenancies which suits postgraduate students. However, in the more fringe London locations and regions it is common for tenancy lengths to be shorter and this often is less preferable for postgraduate students. Opal 1 London, Pitfield Street Postgraduate students Projected number of postgraduate students Study London predicts that the numbers of postgraduate students will continue to increase in the future. Postgraduate student numbers have been rising nationally over the past few years and the UK projections show a further increase as demonstrated in the graph below: Projected full time postgraduate student numbers - UK Full time postgraduate students 210, , , , , , , , , , , Academic year Source: HEFCE 21st January 2008 interpreted by King Sturge The rise in postgraduate and overseas students will place additional pressure on student accommodation within London. Postgraduate students requirements As shown above the numbers of postgraduate students have been rising and are forecast to continue increasing over the next few years. Postgraduate students often prefer studio flat accommodation as well as the option for family accommodation. Postgraduate students are less likely to opt for large cluster flat type accommodation as they prefer their own space and quiet areas There is a significant challenge for all institutions in ensuring that their accommodation meets the needs of students especially in urban environments. Our sale of a significant proportion of our accommodation to Liberty this summer, started the process of meeting this challenge and in a second phase we are seeking to re-develop the remaining halls with a commercial partner. Frank Toop, City University London developers / operators & investors Direct let accommodation There are currently a limited number of operators who have student accommodation schemes within London. We provide in the table and graph below the top five operators and developers for direct let schemes which are operational at the current time. Top 5 direct let operators in London Liberty Living % IES 302 9% Nido % Source: King Sturge 2009 UCT 252 8% Unite Group plc 1,853 55% The top three direct let operators and developers in the market are the Unite Group, Nido and Liberty 8

11 Living. The figures in the pie chart above only include direct let bed spaces. Where there are schemes which are partially direct let or leased, we have only included the direct let bed spaces above. The private sector provides 3,611 bedrooms in direct let accommodation within London and an additional 3,251 bedrooms which are held under nomination agreements and leases. The direct let and accommodation held on agreements each represent just over 1% of full time student numbers respectively. University accommodation provision The chart below shows the current provision of bedrooms each university in London provides. The table illustrates how the universities combined can only provide accommodation for 15.5% of their students. Provision of beds % 40% 35% 30% Quality of university residential accommodation University provided accommodation is generally considered to be in poor condition nationally with around 25% of the non-residential estate having been built before In the last few years, universities have recognised that student accommodation is a key component in the overall lifestyle choices students make when choosing a university. There is a growing recognition among universities that students do have choice and that the universities need a product that is attractive to prospective students. If HEIs are to attract international students there will be pressure on them to provide a range of accommodation for all budgets. With pressure on funding on core academic estates the role of the private sector comes to the fore. In addition to this is the pressure on them to cater for the latent demand from first year undergraduates and are often unable to meet these applicants and so must restrict the criteria for eligibility. 25% 20% 15% 10% 5% 0% Brunel University The City University The University of East London The University of Greenwich Guildhall School of Music and Drama Imperial College of Science, Technology and Medicine Kingston University University of the Arts, London London Metropolitan University London South Bank University Middlesex University University of London All Colleges Combined Ravensbourne College of Design and Communication Roehampton University St Mary's University College, Twickenham Trinity Laban Thames Valley University The University of Westminster Source: King Sturge 2009 The above chart does not include the Conservatoire for Dance and Drama, Rose Bruford College, Royal College of Art, Royal College of Music and The Royal College of Nursing as these colleges do not provide any accommodation for their students. Brunel University provides the greatest number of bedrooms with nearly 40% of students being housed in university accommodation. The chart shows the low provision of bedrooms to students by universities. The shortfall is made up within the small proportion of private sector accommodation and the remainder is in HMOs or students live with their parents. CGI Nido, Spitalfields 9

12 King Sturge: London Student Accommodation Market 2009 The provision of accommodation is not only a means of attracting students to study at the university but also to ensure that they are integrated into the ethos of the university and the pastoral care that comes with it and to help reduce first year drop out rates. The London School of Economics (LSE) has undertaken a survey and found that if a first year student is not offered a place in a residence then 18% of those offered a place will decline to attend that university. With pressure on first year accommodation provision, second and third year undergraduates as well as postgraduates form a large gap in the market This is very relevant given that most London universities are set to increase student numbers over the next five to ten years by the region of 5% per annum to cope with the government s commitment to have 50% of school leavers entering higher education. London universities are typically over-subscribed by applications from new students and they will struggle to attract their preferred candidates if they are unable to provide suitable accommodation. Nido King s Cross As mentioned above, some universities have to restrict an offer of a place in a hall of residence to those that live outside a certain travel distance from the campus. This does not help the university obtain its target for widening participation and where the government sets targets for social inclusion. Living away from home is a major component of the HE experience and some HEIs are of the opinion that those students not offered a place in a hall of residence do not get the full benefit of all that the university has to offer, including integrating fully with other students. With pressure on first year accommodation provision, second and third year undergraduates as well as postgraduates form a large gap in the market. University strategies With an established market for student accommodation, University finance directors now have the option of raising capital sums from non-core residential assets for reinvestment in residences or capital expenditure in the academic estate. The strengthening student accommodation market over the last two years has meant that many universities own increasingly valuable assets. While there remains considerable sensitivity about any potential on-campus sales, off-campus disposals are increasingly being considered, albeit with a requirement for the accommodation to be made available to the university s students and sometimes with a requirement for the accommodation to be upgraded. King Sturge is working with several universities who are considering strategic partnerships with developer-operators to transfer their accommodation by way of the grant of a year interest or creation of an SPV. These partnerships can be created for both the refurbishment of existing accommodation and/or the development of new, high standard accommodation. Alternatively, there are also a number of innovative finance solutions available for universities to generate capital premiums from student accommodation income streams. Summary of accommodation provision The pie chart opposite illustrates the imbalance in supply of accommodation from the university and private commercial operators. In excess of 80% of students are unable to secure hall accommodation. When looking at the private sector in isolation less than 2% of full time students currently access direct 10

13 let bed spaces compared to the university provision of 38,500 beds. The majority of privately owned accommodation in London is subject to leases or nomination agreements and therefore not available as direct let accommodation to the London market City University Following an OJEU process for the provision of professional services in late 2006, King Sturge completed a feasibility review into the potential options to dispose of City University s halls of residence. The residential estate comprises almost 1,000 beds situated on three sites in close proximity to City University s Northampton Square academic buildings. Our initial involvement included preparing a residential strategy report which was presented to the University board in May This consultancy included a comprehensive programme of interviews of key stakeholders in the University including the student union, deans of faculties and the Vice Chancellor. The residential strategy evaluated potential options for the halls of residence including disposal, sale and lease back or creation of a public private partnership. We have been advising the University on procurement options for the redevelopment of its main residential site which includes integrating with planners and architects to define the concept of development for the new accommodation. We have now also been appointed to market the portfolio. The portfolio is split across three sites. The first stage of the transaction closed in August 2008 and involved the disposal of a 125 year long leasehold interest in two operational properties which were sold to Liberty Living for over 39 million. King Sturge is now advising the University on its options for disposal of the third site. This site, being the largest of the three with almost 500 beds, is not fit for purpose and is ripe for redevelopment. The redevelopment of this site is a key issue for the University in the transaction and the new development will help improve the quality of residential accommodation on offer to students at City University. (these schemes are included as part of the University provided accommodation). A total of 42,000 (17%) of students can access purpose built university or private sector accommodation, which indicates that 206,000 (83%) of students must rely on obtaining accommodation elsewhere. This shortfall is broadly made up from either Houses in Multiple Occupation (HMOs) or from students living with parents. London student accommodation analysis London universities Direct let private sector operators Other (students resident at home or in HMOs) Source: King Sturge 2009 The amount of accommodation in the development pipeline will help to a certain degree but only marginally as the growth in numbers over the short term is outstripping supply. This problem will be exacerbated with the lack of real estate investment due to the current economic and financial turbulence. CGI Opal 4, Tufnell Park, London Private sector bed numbers and development pipeline The provision of commercially-operated beds has grown slowly over the last few years. The proportion of students living in Houses in Multiple Occupation has remained relatively stable, whilst the number of students living with parents has increased nationally. 11

14 King Sturge: London Student Accommodation Market 2009 Pipeline schemes under construction The total number of bedrooms under construction is less than 2% of current full time student numbers. 50% are due to be delivered for the start of the 2009/2010 academic year and 50% in time for the start of the 2010/2011 academic year. Pipeline schemes with planning consent a refurbishment of former office accommodation. A further project is due to complete in 2010, comprising a 1,350 bed, 32 storey development at Spitalfields, which is under construction. The Nido brand is particularly focused on the overseas student market and they intend to offer flexible short-term lets, in addition to the more traditional week let. Pipeline bedspaces Number of beds Under construction Consent granted We have already summarised the current provision of private sector direct let accommodation but there are a number of other recongised players either on site or with schemes on the horizon including Hive, Opal, the iq fund, Ely and Victoria Hall. In the UK there is only one place to be Source: King Sturge There are a further 13 purpose-built student schemes accounting for less than 3,500 bedrooms that have secured planning consent but are not yet under construction. The chart below shows the pipeline schemes that are under construction and those with planning consent that are to be delivered each academic year. The chart (above) demonstrates that the majority of schemes which have secured planning consent are due to be delivered in time for the start of the 2010/2011 academic year. We have seen an increase in sites being put forward for student use particularly during the latter half of 2007 onwards, as the commercial markets have softened. Whilst the number of planning applications has increased only circa 10% of schemes have an implementable consent and even they are facing funding issues. The planning environment is predicated to harden considerably looking forward. Perhaps one of the most dramatic new entrants to the market has been the overseas investors. King Sturge has been advising a number of new entrants to the market such as Blackstone on its Nido brand. Commencing in 2004 with a major new 95 million development (now completed, at King s Cross, of 846 studios, providing accommodation for over 1,000 students). The scheme was developed as Pipeline by London borough The pie chart (below) shows the pipeline schemes which are under construction together with those which have secured planning consent by London borough. Pipeline schemes by London borough City 2% Hackney 3% Greenwich 2% Wembley 9% Camden 10% Source: King Sturge 2009 Haringey 9% Southwark 8% Islington 27% Tower Hamlets 30% The chart demonstrates that Tower Hamlets has the largest number of bedrooms in the pipeline followed by Islington and Camden. This is partially due to some of the larger schemes being within locations such as Nido Spitalfields which is a 1,204 bed development in Tower Hamlets. The pie chart includes pipeline schemes under construction together with those which have secured planning consent but are not yet under construction. In addition to the above schemes we are aware of 12

15 a further circa 3,800 bedrooms which are currently going through the planning process. With the planning environment becoming more restrictive (discussed further in the following section) we consider that only a fraction of these schemes will obtain planning consent. Generally the planning environment within London appears to be more restrictive overall. Some London boroughs are taking a tougher stance in giving student accommodation consents, particularly those which have been subject to a high proportion of student schemes. There is generally a lack of consistency between London boroughs which means policies varies between each borough and at City Hall level. London rental market CGI: Wakely Street, London - Infrastructure Investments Planning environment In the current economic climate, student accommodation has been viewed as a good alternative to other commercial sectors. As a result of this the number of planning applications made for student accommodation has increased significantly. However, the number actually getting planning consent is very limited. The London planning environment is predicted to become more restrictive going forward. In addition to this, some London boroughs are seeking to restrict the number of planning applications obtaining approval for student accommodation. We understand that some boroughs are considering the introduction of an affordable housing provision and / or rent controls for student schemes going forward. We have recently seen the first student scheme subject to an offsite affordable housing provision in Camden. Should there be an increase in the adoption of affordable housing provision together with rent controls, this will seriously impact on the viability of future schemes. Recent research undertaken by accommodationforstudents.com showed that the availability of accommodation for students has been reduced as many former student landlords are now renting their accommodation to young professionals who can no longer afford to buy properties due to the financial crisis. Residential values have been falling as well as the availability of mortgages so young professionals and graduates who previously were looking to buy property are now adopting the wait and see approach and renting in the interim. This further restricts the supply of available student accommodation. Another factor which is pushing the rental market in London is the decrease in the number of parents purchasing properties for their children. Partly due to the significant decrease in mortgage availability together with lower loan to value requirements. Rental growth in the student accommodation sector Rental growth across the UK student accommodation sector has been dramatic over the last few years. This in part has reflected the higher specification of new developments and a tendency for operators to focus on the premium end of the market, which incorporates a high level of associated hospitality services. Within London, due to demand consistently outstripping supply, rents are growing in excess of 10% per annum. This trend looks set to continue, at least in the short term. Early indications are that accommodation across London will see price 13

16 King Sturge: London Student Accommodation Market 2009 Other factors for consideration Tuition fees International students pay high levels of tuition fees. The income from tuition fees paid by undergraduate and postgraduate students from non-eu countries in London was 492 million in the 2006/2007 academic year according to HESA. At the current time EU undergraduate tuition fees are capped at 3,000 per annum. Some universities are keen to increase this cap to 8,000 per annum. However, it is feared that some students would not be able to afford this increase. Also, it is a concern that the current subsidy which poorer students obtain would not continue if the fees rose to this level. The Higher Education Policy Institute (HEPI) report says that increasing fees by up to 4,000 would hit the poorest students hardest. HEPI consider that as a result universities may have to waive poorer students fees. The HEPI report comes ahead of the planned review of the system of university funding and student support in HMO licensing Charles Morton Court, London - Unite Group plc increases of approximately 10% for the 2009/2010 academic year and lettings have commenced strongly at these levels. Private residential rental market sector The Association of Residential Letting Agents (ARLA) states that over the last three months there has been a rise of almost 20% in new tenancies. The rise in demand is partially a result of an increase in rental returns which rose by 4.8% to 4.9% for houses and flats across the UK. More properties are becoming available to rent as they are more difficult to sell at the moment. Investment landlords are adopting a wait and see approach to see if property prices will continue to fall before purchasing. The traditional student housing option of terraced HMOs now needs to comply with HMO legislation relating to safety, minimum sizes and security. The market anticipates that this legislation may eventually result in many such properties being withdrawn from student use. We are of the opinion that this will assist the purpose-built operators over the longer term. It is our understanding that a commercially operated hall will not require licensing provided that the operators sign up to a Code of Conduct. The licensing of HMO stock will reduce the amount of HMO accommodation available for students. HMO s have typically provided accommodation to students who have been unable to obtain university provided accommodation or from the private commercial sector. As shown the numbers of students are predicted to increase in London going forward but the planning process is restricting the numbers of private schemes being granted consent. Therefore, the pressure will increase on the HMO stock. If the HMO licensing results in the stock being reduced this will put even greater pressure on the available accommodation. 14

17 Studentification The Department for Communities and Local Government has recently published a paper focusing on the issues of studentification in areas where high concentrations of HMOs cluster together. These unmanaged areas create friction with the local residents and issues such as crime and deprivation during the holiday periods when large areas are vacated becoming ghost towns. The Government is discussing ways to reduce the clustering of student houses in this way through potentially making planning laws tighter to allow councils to determine their frequency in any area. The National Union of Students has concerns that these restrictions will discourage landlords from entering the HMO market. This in turn will place greater pressure on the existing private sector housing stock. Whilst not the sole option, managed student accommodation must have a significant role to play for a number of reasons. The currency really does help us. when we were at $2 to the 1, the total cost of coming to the LSE and living in London was really bumping up against the price of Columbia and Princeton, places that we see as our direct competitors Sir Howard Davies, London School of Economics Sterling depreciation As we have demonstrated throughout this report, the international student market forms a major dominant part of demand for accommodation in London. Whilst the UK is fairing well this mobile population has a number of alternatives such as the US, Australia and Europe and whilst the education offered is a major factor in a student s choice so too is the cost. In December 2007 Sterling was trading at a 27 year high of more than US$2 to 1. Over the intervening 12 month period we have seen a 26% depreciation in Sterling against the US Dollar. Over the same time frame, whilst not at record highs, Sterling into Euro has fallen to a record low, down 21%. In real terms therefore the UK market is significantly more affordable than the alternatives and we predict that there should be a real short term gain in student numbers. Not only is this good for the overseas student occupiers, it also represents an added benefit to overseas investors to purchase UK real estate at a time when Sterling is under priced against leading currencies, when most commentators expect a price correction in Sterling s favour. Exchange rates Sterling - Dollar Sterling - Euro Dollar - Euro Source: ONS, Experian Outlook and conclusion London represents a significant potential market for developers and operators at the current time. To conclude this report it is our opinion that the continued and projected growth in student numbers, both domestic and foreign, coupled with a tough planning and funding environment point to a continued imbalance of supply and demand. It is this simple supply and demand imbalance that points to pent up rental growth projections and therefore the attraction versus other commercial and residential investment opportunities. IQ Wave, Kingston 15

18 King Sturge: London Student Accommodation Market 2009 King Sturge student accommodation group King Sturge s specialist student accommodation consultancy team is the largest in the UK. King Sturge was one of the first property consultancies to be involved in the emerging student sector in the early 1990s. In 2008 King Sturge advised on over 2.5 billion of student accommodation. We also have a track record of successful agency transactions in the student sector. In 2008 we acted on a sale of approximately 250m of purpose built student accommodation throughout the UK. King Sturge also provides advice to universities across the UK on a wide range of student residence issues through our market leading HE team. Our advisory services include: Valuation of sites, developments and existing schemes Advice on leases and nomination agreements Investment advice Specialist sector based research and consultancy King Sturge works with the majority of the main operators, developers, student funds and universities across the UK and the leading investors in London. The King Sturge education sector expertise King Sturge has an established track record in the provision of property consultancy advice to the sector. Our advisory services include: Valuation Estate strategy Agency acquisition & disposal PFI/PPP advice Planning Funding and capital applications In addition, King Sturge Building Consultancy provides a range of services to the sector including: Project management Fund monitoring Due diligence Feasibility studies Building surveys High planned maintenance/life cycle costing advice Contacts Philip Hillman, Partner Tel: philip.hillman@kingsturge.com Huw Forrest, Partner Tel: huw.forrest@kingsturge.com Richard Taylerson, Partner Tel: richard.taylerson@kingsturge.com Tom Francis, Partner Tel: tom.francis@kingsturge.com Rose Denbee, Senior Surveyor Tel: rose.denbee@kingsturge.com All data contained in this report has been compiled by King Sturge LLP and is published for general information purposes only. While every effort has been made to ensure the accuracy of the data and other material contained in this report, King Sturge LLP does not accept any liability (whether in contract, tort or otherwise) to any person for any loss or damage suffered as a result of any errors or omissions. The information, opinions and forecasts set out in the report should not be relied upon to replace professional advice on specific matters, and no responsibility for loss occasioned to any person acting, or refraining from acting, as a result of any material in this publication can be accepted by King Sturge LLP. King Sturge LLP January 2009 This publication is printed on recycled, post-consumer fibre, totally chlorine free paper produced from sustainable stock. FSC certification. 16

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