SINGAPORE (Feb 14): With Brexit done and almost dusted, and the sterling volatility on the ebb, the UK is an obvious market for investors hunting for assets with stable cash flows. Case in point, the first UK and sterling-denominated REIT, Elite Commercial REIT (Elite REIT) has had a robust start. In the first week of trading, its unit price has risen by more than its annual DPU.
It appears increasingly likely that Singapore Press Holdings (SPH), which is developing its property fund management business into a multi-billion business, is likely to be sponsor to a sec-ond REIT with UK assets. SPH is already sponsor to SPH REIT, a successful retail REIT with assets valued at $4 billion.
In response to a Reuters report that it planned to list its purpose built student accommodation (PBSA) in a REIT, SPH announced on Feb 6 “the company is always considering and looking out for opportunities to improve shareholder value, including the possibility of listing its PBSA assets, to achieve its corporate objectives. An an-nouncement will be issued by the company in the event that there is any material development on this matter.”
Since SPH announced that its PBSA portfolio has grown to $1.5 billion following a GBP448 million ($803 million) purchase of the Student Castle portfolio on Dec 23, it is logical to anticipate that the budding property fund manager and developer would list a second REIT with its PBSA portfolio. The $1.5 billion valuation includes a revaluation gain of GBP22.8 million recorded for SPH’s FY2019 ended Aug 31, 2019.
SPH first acquired a portfolio of PBSA properties in September 2018. Called the Mayflower portfolio, this comprised 3,436 beds in 14 prop-erties in six towns and cities in the United Kingdom for GBP180.5 million.
The properties included 10 freehold assets and four leasehold assets in London, Birmingham, Bristol, Huddersfield, Plymouth and Sheffield, all of which have large student populations. According to Unite Students, the vendor of the Mayflower portfolio, SPH’s purchase price was marginally below book value, and reflected a net initial yield of 6.3%.
According to Unite, Plymouth and Huddersfield were underperforming sectors. “As a result of the disposal, Unite no longer has a presence in Plymouth or Huddersfield and the efficiency and quality of the portfolio has been enhanced,” said Unite back then.
“The transaction is in line with Unite’s strategy to recycle capital through the disposal of assets with lower than average growth pros-pects and reinvest into developments increasingly focusing on high and mid-ranked univer-sities, which have the best long-term growth prospects,” added the seller, which subsequently acquired the Liberty Living portfolio for almost GBP2 billion.
In April 2019, SPH bought three more assets comprising 1,243 beds in Leeds, Sheffield and Southampton for GBP133.7 million. The properties came with a rental guarantee of GBP9.9 million for academic year 2018/2019 exclud-ing summer income and GBP9,764,000 for academic year 2019/2020 excluding summer income. Based on this income, and assuming operating expenses of around 15–20%, NPI yield would translate to around 5.9–6.3% excluding summer income.
Student Castle yields
SPH’s Student Castle portfolio comprises 2,383 beds in seven UK cities as well as the operating platform which includes the Student Castle brand, its proprietary booking system and employees.
Within the portfolio, five are stabilised assets in York, Cambridge, Bath, Edinburgh and Durham, and two are development assets in Brighton and Oxford. Based on a back-of-the-envelope estimation (see table), Student Castle’s net operating income (NOI) – which is equivalent to net prop-erty income (NPI) – yield of around 4.5% based on 100% occupancy.
In November 2019, SPH bought a 284-bed PBSA in Bremen, Germany. Altogether, SPH now owns a PBSA portfolio of 7,726 beds in 26 assets in 18 cities, including the Bremen property.
According to a recent report by UBS analyst Rachel Tan, excluding its first Mayflower portfolio purchase (GBP85 initial average weekly rent), SPH’s subsequent acquisitions have focused on newer assets with higher rent. Together with the Student Castle portfolio, Tan estimates an average portfolio rental of GBP230–235/week and initial NOI yield of 4.5%-5.0% which is “a sharp compression versus 6.3% for the Mayflower portfolio”.
Demand and supply
In 2019, the UK had 1.84 million students, up 2.6% y-o-y, and 659,478 beds. This year, beds are likely to grow by 4.8%. “Over 32,000 new beds [are] entering the market across 40 locations for the 2019/220 academic year,” says global real estate services firm Cushman and Wakefield.
JLL, another real estate services firm, is also bullish on the long-term outlook of student housing in the UK. “At a national level, there has been an increase of 1.4 full-time students for every new PBSA bed. In many regions, the ratio is much higher, and demand has outstripped supply by much higher margins in the Midlands, the North West and London.
Looking forward to 2030, the anticipated increases in demand combined with a falling development pipeline means that JLL expects the new student to new bed ratio to increase above 3:1, leading to a continued structural undersupply in the sector,” says JLL in a December 2019 report.
According to the JLL report, the core components of PBSA demand are first year, international and postgraduate students. Analysis by JLL shows that 41% of PBSA tenants are international students. “On this basis, there is still a shortfall of over 370,000 beds,” JLL says.
JLL is positive on the UK government’s strategy to increase the total number of international students in the UK to 600,000 by 2030, an in-crease of 30%. While the UK remains a popular destination for higher education, not all cities have thriving universities and seats of higher learning with rising student populations, warn some consultants.
Although UK’s top five fastest growing universities have increased full-time student numbers by 41% from 2014 to 2019, the bottom five universities have seen a 29% decrease in full-time student numbers, based on Cushman and Wakefield’s research.
Even for the fastest growing universities, beds could be rising faster that student growth. For instance, a 50% increase in beds in Newcastle, Sheffield and Liverpool since 2015 has not been accompanied by a commensurate growth in stu-dent number, Cushman and Wakefield warns in a recent report.
Affordability a concern
Despite being bullish about prospects for investing in PBSA, JLL acknowledges that affordability will be an issue. “We expect cities with prominent student markets to adapt planning policy to include an element of affordability provision or part-nership requirements in the future,” JLL admits.
According to JLL, five years ago, 55% of all markets had a rent below GBP125 per week. In the last 12 months, the proportion of markets with an average rent above GBP200 per week has increased to 13% of the overall, and only 36% of student markets are still below GBP125 per week. This level is important as it is the threshold for affordable rent outside of London based on maintenance grant payments. PBSA stock at lower price points is shrinking as a proportion of overall supply and is set to continue to do so, JLL admits. “There are a limited number of markets that can absorb luxury schemes with high weekly rents,” it adds.
JLL’s rent analysis shows that the largest segment of the market lies within GBP100–150 per week and this is where operators will be looking to add value to draw more demand across to PBSA from the private rented sector. “
Rising development costs in recent years have led to PBSA developers doubling down on the premium segment, that is GBP150–180/week outside London. As such, the pre-mium market may be reaching saturation in many popular university cities/towns, where-as there is an undersupply of affordable pur-pose-built student beds of less than GBP150/week,” says Tan of UBS.
According to studies commissioned by Unite Students, the largest manager and developer of PBSA and vendor of the Mayflower portfolio, student-to-bed ratios have limited usefulness in determining the defensiveness of premium PBSA assets, as only 5-10% of the full-time student population can afford them.
Increasing focus on property and fund management
Nevertheless, a portfolio of stabilised assets would help to boost SPH’s earnings, and the Student Castle portfolio should increase SPH’s pro forma EPS by 1 cent to 14 cents, although NAV should stay neutral. Based on SPH’s results 1QFY2020 ended Nov 30, 2019, its property division, which includes fees and DPU from its 70% stake in SPH REIT, NOI from the student portfolio, and a $10.5 mil-lion fair value gain from an asset in its recently acquired PBSA, contributed $54.9 million or 80% of profit before tax.
Tan of UBS has a “sell” rating on SPH, because she has an estimated RNAV of just $2.09 compared with book NAV of $2.14, and a target of $1.70.In an announcement in December 2019, SPH said that the Student Castle acquisition “dove-tails” with the group’s ongoing strategy of expanding its asset management business of acquiring cash-yielding assets in multiple defensive sectors.
“The acquisition demonstrates the group’s intent to build its PBSA portfolio into a sizeable platform, while developing its strong domain expertise and on-ground capabilities in the United Kingdom,” SPH said.
The Student Castle portfolio comes along with the management company, which is useful when SPH wants to transform the portfolio into a REIT. This includes an operating platform, proprietary booking system, and management team which would help with its earlier Mayflower acquisition.For its expanding PBSA portfolio, SPH says it will continue to focus on cities with highly ranked universities such as those in the Russell Group, and in cities that face an undersupply in student-to-PBSA bed ratio.
The budding developer says it will focus on yield-accretive and new operational assets with development opportunities. SPH also plans to widen its net for students, saying, “Marketing capabilities have been expanded with a centralised marketing and sales office in China to capitalise on the demand by Chinese students for UK higher education.”
SPH is not the only Singapore developer acquiring PBSA assets. In March 2017, Mapletree Investments closed its Mapletree Global Student Accommodation Private Trust (MGSA) with a capital of US$535 million ($742 million). Mapletree Investments holds 35% of the fund. MGSA is a student accommodation-focused fund with assets in the UK and US, with AUM of US$1.3 billion. The fund life is five years with an option to extend for one year. Investors include Great Eastern Hold-ings, DBS Group Holdings and UBS on behalf of their private banking clients.
Since SPH is not stymied by a private fund with a defined fund life, it could launch an IPO sooner rather than later. In its results for 1QFY2020 ended Nov 30, 2019, it announced Straits Capitol Trust, which holds the British properties, has debt of GBP205 million. With a loan-to-value of 56.8%, the PBSA portfolio, excluding the Student Castle and Bremen properties, are likely to yield more than their NOI yields. As a guide, Unite Students’ NOI yield is just 5%.
As REITs have to comply with a gearing ratio ceiling of 45%, this will enable the SPH UK PBSA REIT to be listed with a yield upwards of 6%.
But because student housing may not have the long weighted average lease expiries that Elite Commercial REIT has, SPH will have its work cut out for it to maintain occupancies at 100%, although REIT portfolios can be structured with master leases to limit the volatility and raise yields.