APG, one of the world’s largest pension funds, is investing hundreds of millions of pounds on college accommodation in the UK, betting that international students will return in droves once coronavirus is brought under control.
The Dutch investor is putting up about 75 per cent of the cash in a £500m joint venture with Scape, a developer and operator of student accommodation, which will lead to the roll out of more housing in London, Manchester, Birmingham and Leeds.
The UK student housing market offers “very compelling investment opportunities that provide our clients with long-term stable returns,” said Robert-Jan Foortse, head of European real estate at APG Asset Management.
Institutional investors such as APG have zeroed in on residential property in recent years, regrading it as a reliable source of income at a time when returns from other asset classes, such as bonds, are near-record lows.
Ten new investors entered the UK market in the last year, according to James Hanmer, head of student accommodation at Savills, up from the three to four in a typical year. US property investor Greystar on Thursday announced that it had bought five student blocks in the UK from private equity firm KKR in a £291m deal.
Others are scouring for investments, attracted by yields of about 4 per cent in London and 5 per cent elsewhere in the country, said Hanmer.
“Investors are now reallocating from the traditional sectors [such as retail and offices] to alternatives [which includes purpose-built rental blocks as well as student housing],” said Hanmer.
“To raise this kind of money in the harshest economic climate gives advocacy about investors’ belief in this asset class,” said Tom Ward, Scape’s founder and chief executive. “There is still a wall of capital looking for yield.”
Scape has about 5,000 beds in the UK, centred around London. About two-thirds of its tenants are overseas students, according to Ward. APG’s cash injection will allow the company to expand into university cities outside the capital and make a foray into the mainstream rental market with a development in Guildford.
The bet by APG comes despite the damage on the sector unleashed by the pandemic. Many international students have stayed in their home countries, while the cost of refunding accommodation bills to domestic students who could not return has been substantial.
However, the longer-term view for higher education looks brighter thanks, in part, to a demographic shift that will increase the number of 18-year-olds by about one-quarter by 2030.
Data released last week by the University and College Admissions Service, which processes applications, showed more than 306,000 UK 18-year-olds had applied to university by the January deadline for full-time courses this year, an increase of 11 per cent compared with 2020. Universities report international student recruitment for the coming year is also strong.
The government has scrapped a symbolic target to send 50 per cent of young people to higher education and, in England, the Department for Education is encouraging a shift from universities to vocational, locally-focused further education that could mean fewer students move away from home to study.
But Nick Hillman, the director of the Higher Education Policy Institute, a think-tank, said the UK’s popular residential model of study, where students live away from home, was likely to prove “resilient”.
“I’m often taken aback by how optimistic the property sector is,” he said. “But with the number of 18-year-olds going up, they have reason to be confident.”