Marcus Emadi | Director at Turning Point Capital
CONTENTS
What is a First Generation Bed?
Generally viewed by the market as accommodation comprising a single bed in a non-ensuite bedroom with shared communal facilities. Amenity provisions on site are typically basic and rents charged around £100pw and lower. Some of the more “premium” First Generation beds may have some rudimentary study/communal spaces.
The First Generation Beds Market In The UK
These assets are owned primarily by universities across the UK; 85% of all beds constructed before 2000 are university-owned. This poses a challenge for parties looking to secure such opportunities, as these sales are limited, and the ability to conduct off-market transactions is hampered by the restrictions on the respective institutions due to red tape and governance processes. In addition, universities lean towards holding onto more affordable products, enabling students, usually first years, to avail of cheaper accommodation when living away from home.
The map below shows the top ten locations, by percentage of the total First Generation beds, where you are most likely to find them in the UK. Buildings constructed from 2000 onward are excluded. Identifiable locations are both strong in terms of investor appetite and difficult to plan for.
Since 2000, over £1.7bn of capital has been deployed into single-built assets in these ten cities. Around 20% of this sum has been spent on older assets which, for the most part, will have required refurbishment programs to bring them up to a standard expectant of a modern-day student. Build costs are setting new records for new builds, and due to a scarcity of premium land opportunities, the costs to build new are as high as ever. ESG considerations are also at the forefront of investors’ minds, and benefits such as the embedded carbon of existing assets satisfy some of the requirements.
Four Key Benefits To Invest In First Generation Assets
Globally, most investors in the student accommodation sector are focused on prime assets, strategic forward fundings, and growing new or existing portfolios and management platforms – and why not? A few investors, however, have built business models focusing on transforming older assets into more modern offerings, and they are managing to do this by buying both at scale and at cheaper prices when considered on a bed rate. This has led to numerous new entrants to the scene who are keen to explore how they can benefit. Provided owners and operators are fit-for-purpose, the future for these beds is strong, as the following drivers underpin the long-term outlook.
1. Affordability
Due to the amenity provisions and competition within each city, these assets will offer lower-cost alternatives for students, and that appeases both parents, universities, and councils. Like the car market, PBSA is hugely heterogenous – we all know that an F1 car would be overkill for the school run, and a VW Polo would struggle to compete at Silverstone. Our analysis shows that for a new build asset’s viability, positive residuals need cluster ensuites to be reaching around £160pw and studios more than £200pw – not every market can manage this, as natural rental ceilings exist, and variable market cap rates also impact the viability. First Generation beds can be as much as 50% cheaper to occupy. There is a battle with HMOs, but with the way utilities have recently impacted so many households, students may choose to lock in their bills in private accommodation rather than be stuck with that one housemate who sees the meter reading as a challenge to complete.
2. Scale
The same amount of work is required to unlock an asset, whether it is 100 beds or 500 beds. Entry at scale appeals even more to most, and First Generation assets typically offer this to the market in abundance. Our student tracker database shows that the largest 100 First Generation assets comprise over 83,000 beds, and almost 90% of these are under the ownership of universities. Some of these assets are nearing the end of their lifecycle and are now under the scrutiny of estates teams across the UK. The costs to either reinstate, repair, or bring in line with the latest legislation around energy standards such as MEES, along with the building safety standards including fire safety, need to be funded, but do universities have the capital and do they want to prioritise over improving their academic estate?
We firmly believe that a significant number of these beds can be unlocked for the private market. If there are angles for working with universities to provide leases or JV partners, it makes the prospect even more attractive for some of the deeper pockets of capital, as voids can be mitigated for a period of time whilst plans are worked up for a phased refurbishment program. This is where early engagement with stakeholders to address a main headline topic – a shortage of beds – can prove the difference between a viable and unviable asset.
3. Location
Older assets have the benefit of location, and the sector has only really awoken to this market in the last ten years. A short walk to university is commonplace for First Generation beds, and this very basic metric still ranks highly with students who cannot resist the extra swipe of a snooze button.
In life, proximity is everything, as we know from Michael Lewis’ #1 New York Times Best Seller, Flash Boys. Students and parents will choose location and affordability, so poorly located assets will be the first to struggle, regardless of their age – something we have witnessed over the last few years in several cities, supported by our Student Bed Tracker. When occupancy levels are all rising, this may not be as noticeable, but when you consider some markets that have undergone significant absorption over the last five years, it is those buildings further away that will begin to suffer most – the canaries in the demand and supply mine.
4. Planning
Some developers and investors will be gearing up for difficult planning applications this year. First Generation beds offer an opportunity for developers who can think outside the box and revitalise a scheme. As there is planning already for occupation of students, councils are more likely to be receptive to alterations on disused car parks (less cars causing congestion), adding ensuite pods (catering for students), or increased massing (utilising the footprint), just to name a few. Cost implications are also favourable, as it may be a basic Section 73 amendment that is required. The building is currently in use, and with many councils under increasing pressure to look less favourably on new build developments, it may be in their best interests to maximise the performance and quality of existing stock wherever possible.
Yield Based Pricing
There is no hard and fast rule; however, a discount to prime yields in respective cities is expected when trading these assets. But the added risks of taking on a First-Generation bed tend to be realised in the unknowns. We would always strongly recommend that buyers undertake extensive surveys before moving to advanced stages of due diligence involving legal costs.
What is an appropriate yield discount? It will need to be considered on an asset-to-asset basis, but from a range perspective, an outward shift from prime between 25 and 75 basis points would be considered reasonable. However, as with any investment, the income certainty and capital expenditure requirement are critical when determining value.
A more market-friendly and investor-friendly way to consider these assets is to work backward from a bed rate and apply appropriate assumptions around running costs. Anything from £30,000 to £70,000 per bed for a direct-let First Generation asset could be expected. With new build costs regionally now around £80,000 per bed, most of these assets can be bought for less than it costs to build them, suggesting a highly defensive asset.
Can Smaller Entities Dent The Larger Funds Market Share?
Due to the ever-growing importance of ESG credentials for investors, buyers in the market for First Generation assets are in a different pool from those chasing prime funding or stabilised assets. This is not to say that these funds are opposed to older products, but rather that they know they will struggle to meet certain criteria when it comes to meeting overarching ESG requirements.
A well-known fund has recently explained that they are exploring avenues to set up an investment pot that would specifically target older assets that need some TLC. There are benefits from the start for institutional funds due to the reduced carbon waste and reuse of existing materials. We expect a number of key stakeholders in the sector to take a keener look at opportunities—including those involving JV partnerships—to acquire, refurbish, and enhance existing products to drive returns for retail customers. ESG and the repurposing/refurbishing of assets are becoming more cost-effective as new technologies emerge, and when there are legislative requirements, opportunities are aplenty. Adding competition to the existing pool.
We are starting to see the emergence of “Living Propcos,” who are targeting the First Generation beds to refurbish and reposition assets with a view to exiting to the institutional market and providing value-add returns. Large funds from overseas have in the past partnered successfully with UK-based entities, and this is a trend we are expecting to grow over the next few years as new entities are being backed by groups that are waking up to the untapped returns of breathing new life into an asset. Issues such as wellbeing, technology, operating costs, and embedded carbon within these assets will form a key part of what is delivered.
What Does The 2023 Landscape Look Like?
Demand for accommodation has been higher than ever in the sector. Overall, there are more students looking for a bed across the UK than exist. There are well-publicised stories of students commuting over an hour by rail to reach universities and others being paid by universities to defer their course by a year. With the number of students forecast to rise by a further 400,000 over the next 5 years (2/3 being domestic), demand will continue to outstrip supply.
First Generation beds are historically aimed at UK students rather than overseas, and based on how the cost of living has impacted everyone over the last 12 months, the 2023/24 cohort will be considering what they deem to be value more than ever when choosing their accommodation for the forthcoming academic year.
Working closely with our wider Education team (who are currently advising on 20,000 beds) and with access to unrivalled proprietary data, we are well placed to deliver expert knowledge to our clients on their investment and development strategies, ensuring maximum value is achieved.
