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UK student accommodation sector could see distress in 2021

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UK student accommodation sector could see distress in 2021

Some smaller, independent student accommodation providers in the U.K. could go bust in 2021 as a consequence of the COVID-19 pandemic, offering opportunities to some larger players, according to industry experts.

The sector has had a turbulent year following the imposition of a national lockdown in March that closed universities and prompted thousands of students to vacate their accommodation. Several of the sector's larger players offered affected students rental refunds for the period.

The pandemic appears to have had a significant impact on occupancy across the sector during the first semester of the 2020/2021 academic year. The three largest listed U.K. purpose-built student accommodation providers, Unite Group PLC, Empiric Student Property PLC and GCP Student Living PLC, reported occupancy of 88%, 70%, and 69% respectively.

Some landlords' ability to withstand the impact of the pandemic on occupancy is likely to be tested as 2021 progresses, Duncan Garrood, CEO of Empiric Student Property, said in an interview. "The opportunity for distress is, unfortunately, clearly there for smaller operators of smaller properties," said Garrood.

Empty beds

U.K. student accommodation providers have been hit particularly hard by the number of international students who chose not to come for the 2020/2021 academic year due to travel restrictions and concerns about the pandemic. The U.K. is one of the largest markets in the world for international students, who make up 20% of the total student population, 54% of full-time taught postgraduates and 49% of full-time research degree students.

Booking data showed a 29% fall in U.K. student accommodation bookings by international students, according to a report published in October by international student housing marketplace Student.com and global market research firm Bonard.

"It's still not clear how many international students are actually going to turn up [this academic year]," said Philip Hillman, chairman, living capital markets at real estate services firm JLL. "International students were put off initially by the way COVID-19 seemingly wasn't taken so seriously in this country."

Despite the resultant fall in demand for student beds, the sector is not expected to see any significant signs of distress before the end of 2020, said Jon Knowles, head of national capital markets at real estate services firm Colliers International. Banks have "stayed their hand" in situations where student accommodation providers are in breach of either loan-to-value or interest coverage ratio covenants, he said.

Hopes for the new year

Much will depend on what happens at the beginning of 2021. Many operators are hoping January will bring the arrival or return of many students who are currently studying remotely, said Russell Hefferan, partner, student accommodation capital markets at real estate services firm Cushman & Wakefield. The successful rollout of a COVID-19 vaccination program could also be key to putting struggling operators in "a more comfortable position with their lenders" by Q2, he said.

"If there is going to be distress, it's going to be focused on those smaller providers that have a quite highly geared relationship with the banks," he said. "And if it is going to occur, it may well be around Q1 or Q2 next year."

Among those vulnerable are developers unable to secure funding due to tighter lending criteria are also exposed, said Hillman. "They will either go bust or will have to sell very cheap. There are some operators who just don't have the resources behind them.

Beyond the institutionally backed PBSA sector, private landlords who lease properties known as houses of multiple occupancy are also exposed, said Garrood. "If they experience financial distress, it will simply take capacity out of the market, which will probably be to our advantage," he said.

Hungry eyes

If distressed opportunities do arise, there should be more than enough appetite in the market. Investor interest in U.K. student accommodation has remained strong in the face of the pandemic. The Blackstone Group Inc. closed a £4.7 billion acquisition, which was announced in February, of IQ Student Accommodation from Goldman Sachs Group Inc. and Wellcome Trust as the country emerged from its first national lockdown in May.

Between March and July, eight PBSA deals completed at a total of £280 million, according to a September report by real estate services firm CBRE. A further £750 million - £1 billion of deals were expected to transact by the end of the month, at which point investment in U.K. student accommodation stood at just over £5 billion, less than £1 billion short of the record set for total annual investment in 2015.

Among the larger listed players in the market, Unite Group has already been active in 2020. The company purchased a west London development site in November where it will build an 800-bed project for about £150 million.

Empiric, which made its last acquisition in 2018, is unlikely to be tempted into the investment market should there be distressed opportunities available, said Garrood. "Acquisitions would be lower down our list [of priorities] than other items," he said.

Empiric's absence from the market may mean more room for others to establish or extend their footprint in the market, but JLL's Hillman advised investors to temper their expectations of what might be on offer. "There will be some opportunities to make some distressed purchases," he said. "But nobody is predicting a huge wave of distress like what you are seeing in the retail and hospitality sectors."