The final blog post on some of my main observations from MIPIM UK 2016 covering panel discussions entitled “Student Accommodation – Coming of Age?”; “The Rise of Workspace Offices: Fad or Future?” and “Specialised Markets: The Popularity and the Pitfalls” (also see part 1 and part 2 of this short series).
Student Accommodation – Coming of Age?
The consensus was that universities, and their associated accommodation needs, will continue remain in demand due to perceived excellency of British educational standards. One panelist went as far as to describe the sector is “relatively recession resistant”; student housing is more by demographically led and going to university remains a prominent aspiration for young adults. Sterling´s devaluation is also making education costs comparatively cheaper for foreign students compared to countries like the US. The sector is generally viewed as transparent due to being established for some time, with less variabilities in relation to other property classes. In turn, such factors are contributing to growing sovereign wealth and institutional investment interest.
The sector, however, is not without its risks. British universities are worried about European student intake and funding cuts in the coming years. Capped tuition fees may compromise teaching quality and the sector has noted that domestic and global rankings are directly correlated to the demand for accommodation. Affordability questions also come into play and, particularly in high density urban settings, project viability is increasingly problematic in light of rising land and construction costs as well as competition from other developers. It is also estimated that some 150,000 beds in purpose student accommodation (private) are below standard – a situation that many universities will have to confront in the coming years.
The changing face of tertiary study was also discussed. Flexible tenures, such as short stay occupation, look set to be increasingly common as students of the future spend less time on campus, choosing to study in “remote learning” environments. This may require student accommodation providers to become more “hospitality-focused” whilst simultaneously exploring other income streams and multiple pricing models as the sector matures. The challenge is that yields may compress as the costs of offering these various services mount up alongside the associated risks of under-occupation.
Ongoing research is focusing on meeting the demand efficiently in line with the influence of technology and how to create better learning environments. The primary demand for halls of residence remains for 1st year students – although there are certain expectations that 2nd to 4th year accommodation and post graduate units will see growth owing to what the panel termed as an increasing dissatisfaction with private sector landlord offerings. Foreign students generally prefer self-contained units / studios and, developers have become aware of range of cultural factors that need to be taken into account.
The Rise of Workspace Offices: Fad or Future?
A presentation by John Williams of Instant Offices demonstrated how co-working has become a reflection of changing work habits as clients ranging from incubators, accelerators, freelancers, SMEs, mid-market companies continue to look for more dynamic and flexible working arrangements in line with the fluid nature of their businesses. A model argued to be ideal in times of economic uncertainty, a wider reluctance to commit to long leases is perceived as a catalyst for growth – particularly as senior executives take a more “progressive” view to what is a major cost on balance sheets.
Investors and developers exploring the space were nonetheless advised to examine the details carefully. WeWork´s bullish market cap of US$ 16 billion earlier this year prompted cause for concern, particularly considering that other established market players (albeit with relatively modest presence in the co-working space) are valued considerably lower. As commercial buildings become smarter and occupiers more discerning, costs are likely to increase which may bring the feasibility of co-working development projects into question – particularly in light of the budgetary limitations faced by the sector´s typical client.
Whilst there was an increasing presence of larger companies looking to engage in short-medium term project-based contracts in co-working environments and tap into a wider pool of talent, questions have arisen as to whether certain activities need to be kept “in-house” and if would be more cost-efficient to adapt the spaces that are already owned.
Specialised Markets: The Popularity and the Pitfalls
A broad range of alternative property sub-sectors were explored on this panel from the established purpose built student accommodation and care home sectors to private hospitals, hotels, waste management, data centres and ground rents.
Invariably requiring specialist knowledge, not just of the property assets themselves but the sector of society in which they operate, assuring the long-term security of such niche assets can present challenges. Jonathan Murphy, interim chief executive at Assura, outlined how GP practices require deep understanding of the underlying fundamentals and a certain level of “high level” expertise. Offering a supportive structure to ensure optimum operational performance whilst ensuring liabilities are comfortably met are also fundamental factors. “This is not about getting the best price, it is about getting someone who understands the sector and is able to support the tenants´ property needs,” he commented. A GP surgery is difficult to convert if it becomes empty and so a clear comprehension of alternative use value and other exit strategies must be explored at the due diligence stage.
Lease structuring and securitisation are also important factors. Extra collateralisation would normally be required alongside other mechanisms that limit the likelihood of default, ensuring that income streams are durable and defensible. Regular inflation and other market reviews are also more likely. Nonetheless, it is still possible to invest in “missing” expertise – by means of joint venturing, investing in an operating platform or involving a specialist asset manager with in house experience.
At present, lot sizes are generally smaller so the asset class is not as widely of interest to institutional investors. However, this phenomenon is changing as investors take more calculated risks. For example, public sector partnerships, where covenants are leveraged to produce supplementary income streams, are increasingly viewed favourably. Anthony Eskinazi, founder and chief executive of Just Park also highlighted how technology and data-driven operational models enable more frictionless revenue generation capacity.