Contrary to many asset classes within the UK infrastructure market, student accommodation could be described as thriving. Demand for high quality, modern accommodation is driven by the increasingly competitive Higher Education landscape and the desire of Universities to improve the all-round student experience and tap into the lucrative market for foreign (and particularly non-EU) students.
At the same time, the relative paucity of pipeline elsewhere in UK infrastructure has resulted in traditional infrastructure investors moving into the University accommodation market, alongside specialist providers and construction firms. Private sector investors have become increasingly comfortable taking on demand risk, allowing Universities to transfer this risk to private operators and, in doing so, generate funds for investment in their academic estates.
Degrees of separation
Typical student accommodation partnerships differ in several key respects from traditional PFI-style availability-based structures.
Demand risk: The private sector assumes the risk that there will be demand for the asset, i.e. students who are willing to pay the specified rents to live in the accommodation. Unlike a PFI school or hospital where the asset being available and in good working order means that the project company gets paid, a student accommodation operator needs to be confident that there is (and will continue to be) a supply of students to fill the rooms. Detailed due diligence is carried out in advance of the deal, taking into account factors ranging from the strength of the University in question and its ability to attract students, to the location of and rental levels for the accommodation in comparison to competing stock. Contractual provisions are included to protect the demand position of the operator by, for example, preventing the University developing further competing accommodation unless certain criteria are met.
Tenor: Whereas a PFI project might last for 20-30 years, student housing deals are typically structured such that the private sector acquires or builds the asset before operating and maintaining it for up to 50 years before it reverts to the University. These ultra-long tenors make the sector a natural fit for institutional investors – pension funds or insurance companies who have long-dated liabilities which need to be matched. By contrast, typical PFI bank lenders are largely unable to lend beyond circa 25 years.
Inflation-linkage: Increases in rents over the duration of the contract are typically linked to RPI, often with a floor and a cap applied each year. Index-linked debt provides a good match to this indexed revenue stream – and again makes the sector a natural playing field for institutional investors with inflation-adjusting liabilities.
Balance sheet: Balance sheet treatment is a key consideration for the procuring Universities who want to ensure that there is full demand risk transfer to the private sector partner so that the project debt does not appear on their balance sheet and impinge on their borrowing capacity. A significant element of the bidding and due diligence process involves making sure that the project is structured to be off balance sheet for the University.
With a steady pipeline of deals over the last couple of years, the institutional investor market has stepped up with the likes of Legal & General, M&G Investments, Aviva Investors and Pension Insurance Corporation, to name but a few, providing long-term index-linked bond debt to finance student housing developments, on both a wrapped and unwrapped basis.
Assured Guaranty has been one of the most active parties in the sector, providing credit enhancement to bonds issued for a number of projects.
The market has also benefited from historically low financing rates with several project bonds having been issued at negative real yields. Such a low cost of capital has allowed projects to generate significant up front “capital receipts” paid to procuring Universities.
Recent success stories
Operis has been involved with a number of successful projects in recent years. In the first quarter of 2017, Uliving@Essex Limited refinanced its Meadows Phase 1 and Quays project at the University of Essex’s Colchester campus. Uliving issued £98.2m of index-linked guaranteed secured bonds – wrapped by Assured Guaranty – to repay the existing senior debt facility from Aviva and pay other costs. Operis acted as financial advisor to Uliving.
Shortly thereafter, in May 2017 Operis advised Uliving on the financial close of the Meadows Phase 2A project (known as the Copse) again at the University of Essex. Financing for the deal comprised £61 million of wrapped senior index-linked bonds which were issued by Uliving@Essex2 Issuerco PLC and wrapped by Assured Guaranty.
Other recent projects where Operis acted as advisor or auditor include:
- Goldsmiths University of London Student Village – development of 391 bed student village, financed by £50m bond issue, listed on the Irish Stock Exchange and placed with Legal & General Investment Management;
- Opal Portfolio Acquisition – acquisition of portfolio of “direct let” student accommodation supported by £210m listed bond issue with a 50-year maturity;
- Project Holte – acquisition of 2 portfolios of 7 student accommodations, financed with a £94 million public bond issue;
- University of Sussex East Slopes Residences- construction of over 2,000 new bedrooms by Balfour Beatty at the University’s Falmer campus, financed with £200m inflation-linked bond wrapped by Assured Guaranty; and
- Holyrood, Edinburgh University –construction of 1,160 new bedrooms by Balfour Beatty in Holyrood, financed with £63m of fixed and index-linked bonds, wrapped by Assured Guaranty.
The market is buoyant for the Universities sector in the UK. Current deals in the procurement stages include the University of Leicester, Durham University, University of York and Kingston University with others in the pipeline.
The number of successfully closed deals over the last 3 years is clear evidence that there is a growing appetite for these hybrid PFI-real estate style deals to fund student accommodation, from both Universities and the private sector. This is an area which requires a great deal of investment to allow Universities to provide a high quality accommodation offer to prospective students and compete for applicants in an increasingly dynamic marketplace.
Over the next few years, it will be interesting to see whether the UK model can be exported to other higher education markets around the world or to other asset classes.