STUDENT MARKET REVIEW2016

CONSOLIDATION KEY THEME FOR 2016

INSTITUTIONS DOMINATING INVESTMENT LANDSCAPE

RETURNS OUTPERFORMING TRADITIONAL SECTORS

2 Please refer to the important notice at the end of this report

In 2015 the Purpose Built Student Accommodation (PBSA) investment market had a record year with £5.1bn of transactions. Of the 49,271 student bedrooms transacted over 46% were acquired by Institutions.

JAMES PULLAN Head of Student Property

The biggest single Institutional investor was CPPIB who acquired both the Liberty Living platform and the Student Castle portfolio. Other key institutional investors in 2015 included Henderson Global Investors, Aviva, BlackRock, LaSalle Investment Management and M & G with a combined £1.92bn of investment. This wave of Institutional investment has now polarised the market such that assets that fail to meet Institutional specification have much reduced liquidity.

A further sign of the markets maturity is the evolution of sector REITS such as Empiric Student Property and GCP Student Living. These publically listed entities have driven over £0.53bn of investment in 2015 and their investment presence looks set to increase in 2016.

Private Equity invested over £2.13bn in 2015 on 41 assets a high proportion of which were located within London. Interestingly, the share of the investment market taken by private equity has fallen every year since 2013. We anticipate the shift from Private Equity to Institutional/Publically listed vehicles will continue in 2016.

The Knight Frank Dashboard reveals that in 2015 PBSA total returns outperformed the traditional property sectors. This was a product of strong rental growth combined with a positive yield shift. We project that in 2016 rental growth will be more muted than in the previous year and that growth in capital values is unlikely driven by yield shift.

INSTITUTIONS TOP OF THE CLASS

Student beds transacted by region Jan to Dec 2015

£5.1bnspent on 172 assets

throughout 2015.

PRIVATE

LONDON 10,402

NORTH WEST 6,524

SOUTH EAST 5,253

YORKS & HUMBER 4,522

NORTH EAST 4,067

WAL

ES 4

,023

SOUTH

WEST

1,735

SCOTLAND

1,668 LONDON 10,402

NORTH WEST 6,524

SOUTH EAST 5,253

YORK

S &

HUMBE

R 4,5

22

NORT

H EA

ST

4,06

7

WAL

ES

4,02

3

SCOTLAND

3,988

WEST MIDLANDS 3,767

EAST

MIDLANDS

3,463

SOUTH

WES

T

1,938

EAST

51

7

£1,44bnCPPIB

£330mEmpiric Student Property

£1.25bnPartners of Greystar RE

Source: RCA, PBSA Investment in 2015

INSTITUTIONAL62 ASSETS

PRIVATE EQUITY41 ASSETS

PUBLIC47 ASSETS

TOP FINANCIAL SPENDERS TOP FINANCIAL SPENDERS TOP FINANCIAL SPENDERS

£150mApache Capital

£120mLaSalle IM

£270mUnite

£200mGCP Student Livng

£670mLetterOne

£70mKnightsbridge Student Housing

123

STUDENT MARKET REVIEW 2016

3

DASHBOARD

Source: RCA, IPD, Knight Frank Student Property

Source: Knight Frank Student Property

19.7%INDUSTRIAL (IPD)

20.5%OFFICE (IPD)

9.5%RETAIL (IPD)

21.5%STUDENT

12.7%INDUSTRIAL (IPD)

14.9%OFFICE (IPD)

3.3%RETAIL (IPD)

15.3%STUDENT

6.3%INDUSTRIAL (IPD)

4.9%OFFICE (IPD)

6.0%RETAIL (IPD)

6.1%STUDENT

19.7%INDUSTRIAL (IPD)

20.5%OFFICE (IPD)

9.5%RETAIL (IPD)

21.5%STUDENT

12.7%INDUSTRIAL (IPD)

14.9%OFFICE (IPD)

3.3%RETAIL (IPD)

15.3%STUDENT

6.3%INDUSTRIAL (IPD)

4.9%OFFICE (IPD)

6.0%RETAIL (IPD)

6.1%STUDENT

19.7%INDUSTRIAL (IPD)

20.5%OFFICE (IPD)

9.5%RETAIL (IPD)

21.5%STUDENT

12.7%INDUSTRIAL (IPD)

14.9%OFFICE (IPD)

3.3%RETAIL (IPD)

15.3%STUDENT

6.3%INDUSTRIAL (IPD)

4.9%OFFICE (IPD)

6.0%RETAIL (IPD)

6.1%STUDENT

UK student assets transactions Jan to Dec 2015

Investor Spend

Beds Transacted

Total returns Jan to Dec 2015 Capital returns Jan to Dec 2015 Income returns Jan to Dec 2015

4.0%

5.0%

6.0%

7.0%

8.0%

REGIONS

LONDON

REGIONS

LONDON

4.0%

5.0%

6.0%

7.0%

8.0%

Jan Feb Mar Apr May Jun2015

Jul Aug Sep Oct Nov Dec

Sep

15

Dec

15

May

-15

Jan-

15

Sep

-14

May

-14

Jan-

14

Sep

-13

May

-13

Jan-

13

Sep

-12

May

-12

Jan-

12

Sep

-11

May

-11

Jan-

11

Sep

-10

May

-10

Jan-

10

Sep

-09

May

-09 £1,000

£1,500

£2,000

£2,500

REGIONSLONDON

REGIONSLONDON

£1,500

£2,000

£2,500

Dec

-15

Sep

-15

Jan-

15

May

-15

Sep

-14

May

-14

Jan-

14

Sep

-13

May

-13

Jan-

13

Sep

-12

May

-12

Jan-

12

Sep

-11

May

-11

Jan-

11

Sep

-10

May

-10

Jan-

10

Sep

-09

May

-09

Jan Feb Mar Apr May Jun2015

Jul Aug Sep Oct Nov Dec

Estimated FM costs per bed May 2009 to Dec 2015Estimated Yield curve May 2009 to Dec 2015

22,793BEDS

17,766BEDS

49,271BEDS

2013 2014 2015

6%15%33%

46%

OTHER

PUBLIC

PRIVATE EQUITY

INSTITUTIONAL

2%28%31%

39%

OTHER

PUBLIC

INSTITUTIONAL

PRIVATE EQUITY

0%2%63%

35%

PUBLIC

OTHER

PRIVATE EQUITY

INSTITUTIONAL

£1.52bn

PRIVATE EQUITY£930m

PRIVATE EQUITY£670m

PRIVATE EQUITY£2.13bn

INSTITUTIONAL£550m

INSTITUTIONAL£460m

INSTITUTIONAL£1.92bn

PUBLIC£2m PUBLIC

£210mPUBLIC£810m

OTHER£40m OTHER

£22m OTHER£240m

£1.37bn £5.1bn

4

LEEDS

MANCHESTER

NEWCASTLE

EDINBURGH2.9%

4.8%

4.3%

2.5%

2.4%

6.5%

1.8%

8.1% 3.8%

GLASGOW7.1% 2.3%

SHEFFIELD4.5%

LIVERPOOL

COVENTRY

SOUTHAMPTONLONDON

BRISTOL

3.0%BIRMINGHAM

DURHAM

2015 HEADLINE RENTAL GROWTH

3.65%Overall UK headline

rental growth

5

BRISTOL EDINBURGH GLASGOW LEEDS LIVERPOOL

MANCHESTER SHEFFIELDBIRMINGHAM SOUTHAMPTON

1.3%

4.8%

2.8%2.5%

4.3%4.9%

7.1%

0.1% 0.2%

2.4%

4.5%

0.6%1.0%

0.0%-1.0%

1.8%

6.2%

4.7% 4.5%

8.1%5.7%

0.5% 0.7%2.6%

Studios StudiosFlatsFlats

StudiosFlats

StudiosFlats

-0.3%

5.5%

2.7%

INDUSTRIALOFFICERETAILSTUDENT

INDUSTRIALOFFICERETAILSTUDENT

INDUSTRIALOFFICERETAILSTUDENTINDUSTRIALOFFICE

RETAIL

STUDENT INDUSTRIALOFFICERETAILSTUDENT INDUSTRIALOFFICERETAILSTUDENT

INDUSTRIALOFFICERETAILSTUDENT INDUSTRIAL

OFFICE

RETAILSTUDENT

LONDON

11.9%

6.4%

5.0%4.0%

1.6%

INDUSTRIALOFFICERETAILSTUDENT

SOURCE FOR STUDENT DATA: KNIGHT FRANK STUDENT TEAMSOURCE FOR ALL OTHER DATA: IPD UK QUARTERLY KEY CENTRES: Q3 2015, Q3 2016, Q3 2017

3.0%

-0.5%

4.2%

4.9%

INDUSTRIALOFFICE

RETAIL

STUDENT

2.9%

1.6%

2.5%

4.5%

0.8%

Whilst the macro picture (3.65%) is relatively steady, each market demonstrates different credentials largely depending upon the current level of structural under supply together with the development pipeline and its delivery in any specific year. London (3.8%) and Manchester (4.8%) are good examples of cities with large student populations and very modest delivery pipelines. Both these cities showed strong rental growth in 2015 and we would expect that they would continue to show rental growth consistent with the national trend (3.65%) in 2016.

Bristol (1.8%) and Newcastle (2.3%) both saw relatively high volumes of stock

being delivered into the market and accordingly the rental growth in 2015 was somewhat muted relative to the national trend. The universities in both these cities are showing good student population growth and we project that rental growth in 2016 will approach national trends as the markets stabilise.

Glasgow (7.1%) and Liverpool (4.3%) appear to demonstrate above trend rental growth in 2015. However, we perceive that these market are more complex than the headline levels would suggest and that the significant delivery pipelines in these cities during 2016 will reduce rental growth to well below national trend in the forthcoming letting cycle.

NEIL ARMSTRONG Partner, Student Property Valuations

WHERE IS THE GROWTH?In 2015 Student Accommodation showed rock solid occupational demand supply credentials. Rental growth averaged at 3.65% as student numbers grew and supply struggled to meet demand.

2015 Headline rental growth Jan to Dec 2015

STUDENT MARKET REVIEW 2016

GLASGOW 79% 78%

LONDON 71% 70%

BRISTOL 66% 66%

BIRMINGHAM 67% 65%

MANCHESTER 64% 64%

SOUTHAMPTON 68% 64%

CARDIFF 66% 63%

ABERDEEN 66% 62%

NEWCASTLE 65% 62% UPON TYNE

EXETER 62% 60%

LEEDS 62% 60%

SHEFFIELD 63% 60%

EDINBURGH 64% 59%

NOTTINGHAM 60% 59%

DURHAM 60% 58%

LEICESTER 56% 53%

LIVERPOOL 51% 49%

COVENTRY 49% 47%

CURRENT SEP 2016

6

PERCENTAGE OF FULL TIME STUDENTS UNABLE TO ACCESS PBSA(assuming full delivery of development pipeline)

PBSA SUPPLY DYNAMICCurrent vs September 2016 (estimated)

The PBSA delivery pipeline in the UK has been fuelled by the availability of regional planning consents and rising capital values in the sector. Whilst construction costs have also risen significantly in the past few months, many of the schemes being delivered in September 2016 predate the most recent construction cost increases.

In Liverpool we anticipate 1,241 new student bedrooms to be delivered in 2016. After allowing for the expected increase of student numbers, the percentage of full time students in Liverpool unable to access PBSA will move from its current position of 51% to 49% in 2016. We project that in this market rental growth will be muted in 2016 and that “indigestion” may result. Equally we also foresee any letting turbulence during September 2016 will quickly subside as the volume of new stock is digested by the market.

London appears to show the largest pipeline in the UK of both university and private sector stock. However, London has the biggest shortfall of PBSA relative to student numbers. London student population is growing year on year and despite a single year’s delivery of over 5,000 student bedrooms we project that the structural undersupply will move by only 1% from 71% to 70% of students unable to access PBSA.

In raw percentage terms, Glasgow appears to be the most structurally under supplied market in the UK.

The delivery pipeline in Glasgow has been significant in 2015 and a further 858 student bedrooms are projected for 2016. Whilst we do anticipate further indigestion for this market as new schemes settle into position, we observe that at a macro level the market remains structurally under supplied. Many of the new schemes that have been delivered have provided studio accommodation of a high specification and we anticipate that further development will focus on cluster flat led schemes.

The rise in value of alternative uses (such as residential or offices) will make identifying PBSA development sites increasingly difficult in the regions. As construction costs reach a new high for PBSA and indigestion causes some rental turbulence we project that the pace of new development will slow in many markets which have seen greatest development recently.

NEW SCHEMES IN 2016The 2016 delivery pipeline is at its highest recorded level but we observe that with student numbers growing and the tendency to use PBSA increasing, the new stock is not making significant inroads into the structural undersupply of the sector. In this section we review how the delivery pipeline will change the balance of demand and supply.

“ London has the biggest shortfall of PBSA.”

7

UNIVERSITYPRIVATE SECTOR

1,382

SOUTHAMPTON

SHEFFIELD

1,178

NEWCASTLE

1,453

311

NOTTINGHAM

MANCHESTER

LONDON

1,241

0

LIVERPOOL

1,332

5,082

3,492

1,590

LEEDS

GLASGOW

858

362

EXETER

EDINBURGH

DURHAM

307

BIRMINGHAM

1,128

COVENTRY

376

LEICESTER

939

CARDIFF

1,311

BRISTOL

71

718

ABERDEEN

1,888

494

1,394

1,104

228

962

420

DELIVERY OF PBSA BEDS September 2016

STUDENT MARKET REVIEW 2016

Important Notice © Knight Frank LLP 2016 – This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.

For the latest news, views and analysison the world of prime property, visit

KnightFrankblog.com/global-briefing

GLOBAL BRIEFING

STUDENT PROPERTY

James Pullan MRICS Head of Student Property +44 20 7861 5422 james.pullen@knightfrank.com

STUDENT PROPERTY AGENCY

Rachel Pengilley MRICS Partner +44 7825364789 rachel.pengilley@knightfrank.com

Merelina Monk MRICS Partner +44 77 8557 7237 merelina.monk@knightfrank.com

STUDENT PROPERTY VALUATION

Neil Armstrong MRICS Partner +44 20 7861 5332 neil.armstrong@knightfrank.com

STUDENT PROPERTY SINGAPORE

Emily Fell Associate Director, Capital Markets +65 98 384 712 emily.fell@asia.knightfrank.com

ARA NEWMARK STUDENT HOUSING

Ryan Lang Executive Managing Director 512 637 1296 rlang@aranewmark.com

OUR PREDICTIONS FOR 2016

7

6

5

4

3

2Capital PBSA investment returnsoutperform traditional sectors

Development focus in regions

London development pipelinewill fall dramatically

Continued global investment demand

Growth of REITS and publicallylisted vehicles

Consolidation will be a key theme

1 Institutions dominate 2016

7

6

5

4

3

2Capital PBSA investment returnsoutperform traditional sectors

Development focus in regions

London development pipelinewill fall dramatically

Continued global investment demand

Growth of REITS and publicallylisted vehicles

Consolidation will be a key theme

1 Institutions dominate 2016

RECENT MARKET-LEADING RESEARCH PUBLICATIONS

Knight Frank Research Reports are available at KnightFrank.com/Research

Front Cover: Paul Street East is a premium 458 bed student accommodation scheme, completed in August 2015. The scheme was developed by way of a Joint Venture between Apache Capital Partners and McLaren Property and was acquired in full by investors represented by Apache in October 2015. For more information, please visit http://www.apachecapital.co.uk

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