From September 2015, universities will no longer be restricted in the amount of home and EU students that they can recruit, which could lead to some universities increasing their student enrolments. Meanwhile, recent UK budget cuts have led to declining public funding for university infrastructure. As a consequence, university infrastructure – particularly campus accommodation – could come under added pressure at a time when traditional sources of funding are drying up. As a result, universities are diversifying their sources of funding, and private investors are responding.
For instance, we saw two major institutional investors invest in student accommodation last month. Allianz and Pensions Insurance Corporation (PIC) subscribed to £119.7 million (€161 million; $182 million) and £30 million of senior secured notes respectively – issued by the University Partnerships Programme (UPP) – to refinance debt linked to student accommodation assets at the University of Exeter.
But the asset class has fairly specific characteristics – including strong links to the host university and exposure to competition from the local private rented market – so institutional investors hoping to increase their exposure would do well from gaining expertise in these areas.
FINDING THE OPPORTUNITIES
Due to government's higher education reforms, certain universities and private colleges may substantially expand their student enrolments. But this may in turn reduce demand for other universities. For example, institutions lower down the league tables may see application numbers fall as students with lower grades are now able to enter better universities that want to expand. Combined with the growth in private sector colleges, and a decline in overseas students, this could potentially lead to surplus capacity in the sector, and resultant university mergers and even closures, particularly in urban areas served by multiple universities.
That said, many stronger universities won't be planning to expand their home undergraduate intakes. The more research-intensive universities, for instance, tend to be more interested in increasing their intake of higher-paying overseas students, or postgraduates that can contribute to the university's research activity. Universities that place more emphasis on teaching, in contrast, are more likely to seek to increase their student intake, where their infrastructure allows.
It is in these institutions that institutional investors could find opportunities to expand and diversify their portfolios, particularly where the scarcity of existing residential accommodation is constraining growth. Paul David, director of infrastructure debt at AllianzGI, agrees that there is currently a “significant undersupply of student accommodation in the UK”.
UNDERSTANDING THE MARKET
To tap into the growing demand for student accommodation – and differentiate between the attractiveness of potential investments – institutional investors may need to gain a better understanding of the market and its associated risks.
Student accommodation projects are exposed to a number of markets which can affect student demand and project stability. As restrictions on recruitment are lifted later this year, student enrolments may increase at certain universities – positively affecting demand for student accommodation as we have seen at the University of Exeter. But new accommodation projects are often linked to the local real estate market, and many areas are experiencing a boom in private student housing schemes which could detract interest from campus accommodation.
There is also the risk that counterparties engaged in the management or construction of the property become insolvent – or back out of the project for other reasons – and are difficult to replace. While we view UPP Residential Services Ltd (URSL), the facilities management company at Exeter University, as easily replaceable, this is not always the case. And even if a replacement could be found in these cases, there are no guarantees that an economically viable contract will be agreed.
Despite these risks, increasing private investment will likely contribute to certain universities substantially expanding their student offerings in the coming years. While these universities will become larger and stronger as a result of regulatory reforms, others may struggle to adjust. Ultimately, the ability to adapt to the changing nature of student demand while maintaining academic quality and enhancing the employability of students will become increasingly important to universities striving to attract investment and preserve their financial viability.
Hugo Foxwood is a credit analyst at Standard & Poor’s while Michael Wilkins is a managing director within the agency’s infrastructure finance ratings unit.