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.
- 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.
- 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.
- 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.
Q. Do some operators have a better chance than others in this crisis?
Where student accommodation operators have great relationships with universities, they will cope well. Where they don’t have strong university relationships, they could face more of a challenge.
Universities have rarely been enthusiastic about the private sector provided studio rooms. They said they were too expensive, they lacked opportunities for social interaction. But suddenly students might be much more attracted to self-contained units, despite a price premium. How long might these preferences last? Might they stick? Architects are already thinking about how they will design health and wellbeing resilience in the next generation of PBSA. Some older PBSA, and in particular older university stock, might not be adaptable to the new environment.
Q. Do you anticipate continued rental growth?
Investors have seen strong rental growth and high occupancy since this sector was nascent. People will be a lot more cautious with their occupancy assumptions, particularly out of the main letting season. I still think that there can be rental growth, but the focus of many operations for the next 12 months to two years will be maximising occupancy.
Many operators can cope with rent waivers for the summer term but would struggle with a delayed start to the 2020/21 academic year.
I think that investors will be looking at not just a reduction in some income, but will also be looking at the risk-return profile and will be looking carefully at the pricing, particularly relative to rented residential which might now look lower risk that student, with a wider potential user group.
This has reminded us why there should perhaps be a delta between a private rental sector yield and a student housing yield, certainly in the UK. Yields were compressing towards PRS levels, looking ahead I anticipate a period where investors will recognize that there should be a delta between those sectors.
Investors will be looking hard to see how developments recover. If they are reliant on international students, then are those students coming back in the numbers we’d hoped that they would be? We’ve never seen anything like this before and I don’t think any valuer, hand on heart, could tell you they know where values will be in six months’ time.
Q. Are transactions ongoing?
We are seeing transactions that are progressing, even now while everyone is working from home. JLL is processing sales that are underway and we are seeing good investor interest. Transactions will pick up in the latter half of the year as investors seek to close positions before the year-end.
The trend of investors coming into the sector will also continue. There are quite a number of pension funds and sovereign wealth funds who have failed to get into the market and are still looking to get in. And of course, private equity is getting involved in a big way.
I anticipate a high level of transactions in 2021 due to further consolidation of the market players, as they seek economies of scale. There will surely be some opportunities for those seeking distressed purchases or to provide lending to hard-hit developers.
Valuations are somewhat in limbo at the moment and are likely to continue to be until we see some volume of transactions to help them reset values. I find it hard to believe there is not some adverse impact on value, but at the moment most valuers are looking back at 2019 yields and making discounts for loss of income over the next 18 months or so.
With a weight of capital still seeing the student sector as relatively resilient, then any impact on values is likely to be far less than in other sectors (as was the case in the global financial crisis). However, no sector can be completely immune from macro global economic factors of a kind not seen in our lifetimes.
Q. So does student housing still look resilient to you?
Deciding where and when to study higher education is not like taking a short city break. There is a right time to do it – usually after secondary school or as a way to improve your chances in a difficult economic climate. It is not something you can put off indefinitely.
Nobody is questioning if universities will reopen. It does look probable a hybrid of on-campus teaching and some online teaching will happen for the new 2020/21 academic year in September. By the 2021/21 academic year, most would anticipate a degree of normalcy on campus, so long as a vaccine has been successfully rolled out globally. If it hasn’t, then as with much of the rest of the economy, all bets are off.
My friend Paddy Jackman, formerly of Imperial College and University of Birmingham, recently commented:
“The end of mass numbers of students opting for a residential experience has been predicted in the UK on a number of occasions, not least following the improvement of online learning and the introduction of fees. The current crisis will probably see similar predictions, but it may well be the case that it actually reinforces the value of an on-campus higher education experience.”
People are recognizing that the residential student experience, actually being there in person, is highly important. Face-to-face teaching is something that students have been complaining they’re not getting enough of anyways.
If the vaccine is out there, the Class of 2021+, having been locked up for the sunshine months, will want to enjoy the university experience, that experience being a communal experience with face-to-face contact and full social networking. Not just online.
Universities have been around for hundreds of years. They have been through World Wars. In the context of all the traumas of political and social upheaval, the Great Depression, the Global Financial crisis, universities have continued on the whole to stay strong and get stronger. Universities are long-term institutions. That is after all one of the great attractions to investors in the sector.
But everyone is still having to reflect on the so-called resilience of student housing. I’ve spent the last 25 years in the sector and I would never have suggested that universities would have to close for extended periods of time and that many halls would be empty.
Many investors have described this as a ‘bump in the road’. I am concerned the bumps may be longer and rougher than initially anticipated. However, I do believe that the sector will continue to appeal to investors and that the wall of capital looking to invest in the sector will to a considerable extent cushion the impact of most of those bumps… Resilient? Yes. Invulnerable? No.