the class of 2020 - radar - interviews
May 13th, 2020

A remarkably resilient sector, but not invulnerable

Philip Hillman JLL

Philip Hillman is Chairman of Living Capital Markets at JLL. He has over 25 years of experience working in the evolving student housing sector and has been involved in many of the larger portfolio transactions. More recently he has worked on student projects in the sector across Europe and is also involved in the evolving micro and coliving sectors.

As we take stock of the evolving impact of this crisis on our industry, we have kept in touch with the expert voices in The Class of 2020 community. While Philip Hillman, Chairman of Living Capital Markets at JLL, is optimistic that transactional activity may pick up in the latter part of 2020 and 2021, his experience informs a cautious view on the recovery timeline given some serious complexities at play in the higher education landscape, particularly in the UK.

Q. How have markets reacted to university closures and students demanding rent refunds?

In the first few months of this year, the student sector in the UK (and Europe) was looking in great shape. Student numbers, both domestic and international, were increasing. Operators were reporting high occupancy and booking levels were generally ahead of target. We saw transactions at record volumes and further yield compression. All looked set for a record year.

Within just a few weeks, everything changed. In fact in early March, just after the circa £4.7bn Blackstone purchase of IQ deal was announced, global stock markets took fright, and stocks tumbled.

Universities closed their campuses and the UK joined much of the rest of Europe in lockdown.
It was the banking sector that seemed to have the strongest initial reaction. Only those with strong existing credit lines and applications that were already being processed were able to progress their loan applications. New business virtually ground to a halt – with some banks putting all things on hold for months ahead. The reaction from the banks to the student housing sector was (and to some extent, still is) right up there with the other hardest-hit sectors. They do not seem to consider it particularly resilient right now.

However, the investment market has taken a far more reflective view, on the whole treating this as a ‘bump in the road’ to a resilient sector. There have been worries about the loss of income in the summer term as operators refund students, and much discussion about the potential fall in international numbers, but we have heard very little of investors turning away from the sector. In fact, to the contrary, we have seen most of those already investing looking forward to the possibility of extending their holdings with opportunistic purchases and also with strategic buys to increase economies of scale.

Q. How long will it take for the student housing sector to return to normalcy?

In the past decade, we have seen a predicted acceleration of international student mobility, driven especially by the growth of new middle classes in Asia. Before this pandemic, the predictions were that international student mobility would increase up to the year 2030. In the UK, growth has matched or exceeded these expectations consistently.

Many of the top research universities have focused specifically on the international market to pay top fees, especially at the postgraduate level, so that international students are effectively subsidising domestic students. Many considered this to be a risk.

Following SARS, I always feared that a limited epidemic could interrupt international student travel, thereby disrupting the universities and PBSA operators. I never predicted anything of this scale.
We never imagined the universities closing their doors completely for an extended, uncertain period of time and a massive disruption to international study and travel.

Universities in the UK are looking at a serious reduction in international students in Academic Year 2020/21, most planning at least of 40%-50% (some higher), representing a significant impact on university finances. The government in the UK has refused to give the universities the £2 billion bailout they requested and seems determined to ensure that any help that is provided comes at the cost of modernization and value for money.

There is talk of significant financial stress for the global university sector and this might lead to some failures. In the UK, there will be pressure to at least merge some institutions

For the PBSA sector, the big question is, how long will a reduction in numbers last? This depends on the cause of reductions.

  1. Travel restrictions: One obvious issue is the travel restrictions that are currently in place. We know these will slowly be eased. The UK will get a grip on visas, despite current chaos.
  2. Macro-economic concerns: Middle-class parents of students are being hit hard economically, at home and abroad. The recovery of international mobility may well be linked to the recovery of the global economy. Many domestic students would also have relied on parental support, but persistent and widespread UK furloughs are putting parents’ jobs at risk. How will those students cope who might no longer have parental support? Bar jobs will be limited. To what extent will parents continue to aspire to send their children abroad to study – a relatively expensive option compared to a local study. We are looking at a minimum of eighteen months of severe economic disruption from now with most countries in a severe recession. Few students’ parents will be unaffected economically.
  3. Concerns about a return to university: It would be unrealistic not to question the willingness of parents to send children overseas while there are still some health fears. It’s hard to imagine laboratories full of students. It’s hard to imagine lecture halls with people sitting next to each other 50 to a row, even if they’re all wearing face masks. I’m not sure that’s going to be socially acceptable until the vaccine is out there and trusted. I can’t see many students accepting shared rooms – in the US, all the focus is on the need for bed-bath parity. In UK & European PBSA, ensuite accommodation is the norm, but there may still be concerns about shared kitchen/diners.

The acceleration in international student numbers is likely to be on hold for a period of time and the private sector is probably going to focus more on domestic markets if it can. Meanwhile, we will be working hard to try to get back the international student numbers. But it is my view that we are talking more than one year. Eighteen months to two

Years from now, potentially, depending upon the success of any vaccine.