Insurance companies attracted to lending market by low risk income streams
Nearly £800m was invested in student housing in the first half of 2012, new research from CBRE has revealed. This is more than double the £375m invested over the same period last year, demonstrating the strength of the demand for this niche sector of the real estate market.
In spite of higher tuition fees being introduced for 2012/13, the UK’s higher education system remains heavily oversubscribed, and the development of new student housing has not kept pace with the growth in student numbers. With reported occupancy rates of 99 per cent or more and a lack of supply in the private rented sector, rents for purpose built accommodation are expected to grow annually in most university cities at least in line with inflation.
Funds continue to prefer completed student accommodation projects with long leases, but there has been a notable increase in forward funding deals by institutions although they still mostly require long-dated or de-risked income streams.
It is anticipated that the ‘income strip’ model, which creates a win-win structure where the university controls the residence and benefits from freehold reversion, the investor secures long term income streams and the vendor benefits from keen pricing, will be replicated more widely based on university covenants rated at BBB or better. CBRE was instrumental in the first deal of this kind in the sector when Griffon Studios in Battersea, which is let to Imperial College, was sold to Legal & General for £116m in 2011.
Some of the main student housing lenders have sought to reduce their sector weighting this year and it is still challenging to secure finance for projects outside of central London. However, insurance companies have been motivated to enter the student housing lending market to fund their annuity liabilities via low risk income streams. Recent examples include M&G Investments’ £266m loan for the acquisition of the Nido platform and Legal & General’s £121m 10-year deal to refinance a portfolio of UNITE Group’s properties.
Jo Winchester, Head of Student Housing Advisory, CBRE, said:
“The current lending market is dominated by large-scale loans against well-managed portfolios, but debt remains restricted for new entrants, single property deals and projects outside of London. Whilst they tend to prefer large transactions, insurance companies are able to fund direct let properties and still meet low risk criteria as their exposure is only based on a conservative percentage of valuation.
“There is no shortage of investor demand, but the market is hampered by a shortage of new high quality development opportunities. Proposed changes to the REIT regime, together with the significant increase in the number of new operators in the last four years could widen opportunities for indirect investors by creating a greater choice of investment funds, as well as creating an alternative exit position for established operators.”
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services firm (in terms of 2011 revenue). The Company has approximately 34,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.