The reduction in key strategic funding will soon force universities to consider the transfer of non-core services such as student rental accommodation to private sector owners claims Savills’ annual Student Housing Report.
The shortage of student bed space has continued to be compounded over recent years, with only one new bed created for every eight new students in 2009. Even if government austerity measures curb or even reverse student numbers growth, there will still be a shortage of student accommodation.
Meanwhile educational institutions which own property find themselves with ageing and low grade stock with high repair and maintenance liabilities. As their funding is curbed, these properties may seem increasingly burdensome.
Savills believes the transfer this non-core service to private sector owners may see universities either retaining the operational responsibility, or relinquishing that as well, to release resources and realise capital.
Currently 70 percent of purpose-built student housing is owned and managed by universities, but central government funding cuts will inevitably precipitate a change, says Savills.
The company also believes that, without the aid of private funding, universities will be unable to provide the quality of accommodation that will enable them to compete in a global market for talent and enable them to attract overseas students.
“British universities can no longer rely on name and status to maintain high application levels from overseas students,” said Marcus Roberts head of Savills Student Investment department.
“Tuition fees for international students have now risen to £9,300 per annum for standard courses and £11,500 for laboratory-based courses. At this level, it is fundamental that UK universities seek ways of upgrading and maintaining high standards of residential and non-residential buildings to maintain their advantage over aspiring international institutions.”
Details of expected cuts to university funding will not be clear until October’s comprehensive spending review, but it seems certain that the sector’s ability to invest in its future will require external, non central government funding.
The potential crisis is particularly acute in London, where the city’s universities can supply only 36 percent of the bed spaces required to meet their accommodation needs. Savills Residential Research estimates that, based on an optimistic completion forecast, the shortfall in purpose-built student bed spaces will be approaching 23,000 in London alone by 2014.
Other university cities can supply an average of around 65 percent of accommodation need, still a significant shortfall, particularly at a time when there is a rapidly increasing pressure of demand for private rented accommodation generally.
There is increasing investor interest at the institutional level in this sector. Yields are at a level to compete with commercial property and capital values have not fallen significantly. At the same time, rental growth has been strong so total returns and prospects for the future look attractive.
Individual students may each be paying relatively small amounts of rent, but taken collectively, a single building will produce significant cash flows with minimal voids and virtually no risk of large scale defaults, with or without a university guarantee. Significantly, the net rental income stream can be delivered to an investor at arms length by the manager or operator of a building or portfolio.
