Institutions Heat Up UK Student Housing MarketPart 1
LONDON—The student housing investment market in the UK is heating up, with several big-name players active in the sector of late. Just last week, a fund managed by Barclays Infrastructure Funds Management sold a majority stake in University Partnerships Programme to PGGM. The purchase price wasn’t disclosed, but the transaction, which saw 60% of the firm change hands, is said to be worth £840 million (US$1.35 billion).
The deal has reportedly been in the works for over a year. PGGM, a Dutch pension fund with some €125 billion in assets under management, bought UPP through its PGGM Infrastructure Fund 2010. Barclays initially invested in UPP 15 years ago. While the firm didn’t disclose its plans for the remaining shares of UPP, a recent Financial Times article indicated that Barclays intends to sell down the remaining 40% of the company to other institutional investors.
UPP, which has a total enterprise value of £1.4 billion (US$2.27 billion), is considered to be the largest student housing provider in the UK. University Partnerships Programme has a nearly 100% occupied portfolio off some 28,000 rooms, both existing and under development, with an annual rent roll of £89 million (US$144.6 million). It plans to invest another £1 billion (US$1.6 billion) over the next two years to its portfolio up by another 7,000 rooms and a fully built-out rent roll of £133 million (US$216 million).
According to PGGM’s head of infrastructure, Henk Huizing, “The company has an excellent market position and we’re supportive of its strategy. We support its partnership model with the public sector and look forward to long-term mutual beneficial relationships.” The transaction, he adds, exemplifies the PGGM Infrastructure Fund’s strategy of investing in “stable social infrastructure sectors with a long-term focus,” and the steady cash flows of UK student housing, particularly given inflation, “are an excellent match with our clients’ liabilities.”
UPP develops its student housing projects through long-term partnerships with higher education institutions across the UK; currently, it’s teamed up with a dozen schools. The firm is also known for building sustainable projects, particularly through its Echo Residence developments, of which is has five so far.
PGGM’s acquisition, comments UPP CEO Sean O’Shea, underlines the student housing firm’s ongoing growth and investment plans. “This deal provides a strategic fit with our business model and provides a strong platform for future growth,” he adds.
Meanwhile, the Government of Singapore Investment Corp. has deepened its reach into the UK student housing market through a joint venture with UNITE Group, a local student housing developer. Through their new partnership, London Student Accommodation Joint Venture, GIC and UNITE plan to invest £330 million (US$536 million) into projects throughout the city. The 50-50 JV has a September 2022 maturity and has the right of first refusal on all UNITE London developments.
LSAV will be the primary vehicle through which UNITE develops in London. The JV has already agreed to buy two properties from UNITE on a forward-commitment basis and expects the the £330 million will result in developments totaling between 3,500 and 4,000 new beds.
UNITE kicked in £165 million (US$268 million) into the development JV, which will be invested between 2013 and 2017 at anticipated leverage of 65% loan-to-cost. In all, the firm will invest about £58 million (US$94.2 million) of equity into LSAV's development program.
Thanks to strong demand for such properties in the city, LSAV has already planned, or is in talks for, projects accounting for roughly 75% of its development capital. The bulk of the investments will be in projects with below-average rents for London, around sites in close proximity to transportation and amenities. If warranted, UNITE and GIC can also extend the development program by another £200 million once their existing capital is tapped out.
The two partners have also agreed to extend the life of a previous partnership, United Capital Cities. Formed in March 2005, the JV’s maturity date has been moved from March 2013 to September 2022.
As part of the extension, UNITE will reposition and refinance its portfolio over the next few years. Plans call for selling £100 million (US$162.4 million) of UCC's existing assets, or around 25% of its total portfolio as of midyear, over the next four years in an effort to focus its portfolio on properties in the highest-quality locations. The majority of the proceeds will go toward deleveraging its remaining holdings. Further, UNITE expects to replace its existing senior debt facility—£236 million (US$393.3 million) provided by a syndicate of lenders headed by HSH Nordbank that matures in September 2014—by 2013.
UNITE also has the option to increase its stake in UCC From 30% to 50% by year-end 2016, at which point UCC and LSAV can be merged into a single entity. UNITE will serve as property manager, asset manager and development manager for both JVs.
Also in the UK, Seera Investment Bank B.S.C. of Bahrain has a closed a deal for a Shari’a-compliant structured financing facility for a new purpose-built student housing project and commercial property in central London. When delivered next year, the property will have 339 rooms and 37,000 square feet of commercial space. The developer, UK-based student housing company Mace, which is also handling project management, has already completed the first phase of construction.
“The strong position of the UK and London as a destination for higher education combined with the persistent shortage of purpose-built student accommodation provide a very solid platform from an investor point of view,” comments Seera chairman Khalid Al Nasser. “The demand-supply gap in the sector supports a positive outlook for rental income and capital growth.” He adds that the firm is particularly attracted to the student housing sector given the current economic climate, the property type’s recession-proof nature and the yields associated with such investments.
“Attractive risk-adjusted returns for investors are a major attraction of this investment,” notes Abdulla Janahi, Seera’s CEO. The firm expects annual yields of around 8.5%, an expected IRR of between 13% and 14% on exit and a relatively short investment period of just two and a half years.
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