New Lease of Life: Student Accommodation Providers Shake Off Coronavirus Disruption

New Lease of Life: Student Accommodation Providers Shake Off Coronavirus Disruption​

The Story

Student digs are big business. Once predominately run by universities themselves, around 50% of UK halls of residence are now managed by private operators (Cushman & Wakefield). These range from real estate investment trusts (REITs) – tax-efficient listed property companies – to institutional investors such as pension funds. The market for purpose-built student accommodation (PBSA) was valued at £50 billion in 2019, with investment pouring in thanks to the promise of high returns with low volatility (Savills).

The outbreak of Covid-19 quickly became a financial headache for PBSA providers. For a start, there was the cost of foregone rent. The three UK university accommodation REITs, Unite Students, Empiric Student Property, and GCP Student Living, all allowed students to terminate their tenancies early in light of the first national lockdown, and lost around 10% of their 2019/20 revenue in doing so. Furthermore, occupancy for major PBSA providers has fallen from virtually 100% in previous academic years, to as low as 70% (Investors’ Chronicle).

In spite of these challenges, a recent flurry of transactions suggests that the PBSA market is in rude health. Property investment firm Greystar, advised by Jones Day, has bought up five UK student accommodation assets for £291 million; these properties will be operated under a new brand, distinct from the firm’s premium ‘Chapter’ portfolio. Meanwhile, alternative investment manager Ares Management has paid £157.5 million for developments in Exeter and Cardiff, and Canadian real estate company Quad Real, counselled by Macfarlanes, has picked up buildings in London and Manchester as part of a wider £750 million deal. In addition, just last week, Dutch pension fund APG announced a new £500 million joint venture with Scape, a leading PBSA developer. “To raise this kind of money in the harshest economic climate gives advocacy about investors’ belief in this asset class”, remarked Tom Ward, Scape’s CEO (Financial Times).

What It Means For Businesses and Law Firms

Going forward, law firms will be tapped principally for advice on funding arrangements for PBSA developments. Some projects are ‘forward funded’ by investors - meaning that gradual payments are made to the developer as building work progresses. In other cases, investors might only be willing to enter into a ‘forward purchase agreement’; here, investors pay a limited sum for a right of first refusal over the completed development, but otherwise leave the developer to fund construction. Developers without the benefit of forward funding could turn to specialist PBSA lenders; one example is Kinetic Capital, which recently provided a £39 million facility for a 522-bed accommodation building in Nottingham, with Burges Salmon acting as legal counsel. REITs have the advantage of being able to issue shares to fund growth; Unite, advised by Herbert Smith Freehills, raised £300 million through a share issue in June 2020, while GCP, advised by Gowling WLG, raised £77 million back in December 2019.

There is likely to be a sustained need for M&A advice, too, though deals as big as Blackstone’s £4.66 billion purchase of iQ Student Accommodation last year, on which Kirkland & Ellis advised, will be rare. Aside from this, PBSA providers might also require assistance with drafting ‘green obligations’ in construction contracts, requiring the use of sustainable materials and adherence to certain energy efficiency standards (Osborne Clarke). Eco-conscious projects are seen as key to winning over “young people [who] are increasingly conscious about the environment plus investors [who] want to hit big ESG targets” (Niamh O’Connor, Property Week). All this is enough to keep lawyers working flat out.

Image Credit: Ajit Wick / Shutterstock.com

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