Back to school

With private equity real estate groups like The Blackstone Group developing student housing projects in London, will dorms be able to provide big returns? By Aaron Lovell

London's King's Cross neighborhood lies in the shadow of King's Cross station, established in the mid-1800s as the London hub of the Great Northern Railway. A shabby stretch of the British capital known more for its cheap drugs and prostitutes than its outsized IRRs, King's Cross has long attracted all manner of misfit, unsigned band and student to its cheap accommodations.

But that image is changing. More affluent young professionals are moving into the area in search of affordable housing. The Guardian is planning to relocate its headquarters to the area, while the Eurostar will soon have a terminal at nearby St. Pancras Station. And at least one private equity real estate fund thinks it can score big returns by creating an upscale student housing project.

Earlier this fall, The Blackstone Group announced plans to invest £95 million in state-ofthe-art housing for local university students. Though it may seem a bit surprising that Blackstone is investing in a boozy North London neighborhood— this is after all the same firm who acquired Claridge's hotel, a scant few miles (but a universe) away—the private equity real estate firm believes it has found an underexploited opportunity.

“On the whole, student living standards in the UK are awful,” says Blackstone director Stuart Grant. “We have identified an opportunity to reinvent the student accommodation experience.”

The former NatWest building is certainly a smart location to begin the experiment, within range of eight London universities. One school, University College London, has buildings a short five- to tenminute walk away. When it opens, the 16-story building will have housing for 950 residents, as well as a cinema, a gym, free wireless internet, a coffee shop and 24-hour security. Of course, given the typical state of student apartments, it's not known how much Blackstone can do about old pizza boxes, unlaundered socks and pornographic magazines.

Much like its growing US hotel platforms, Blackstone hopes to expand the student housing play internationally and has even established a brand and operating entity for the burgeoning line called Nido, which means “nest” in Spanish and Italian. Recalling some student dormitories, the name is oddly appropriate.

The firm is scoping out possible acquisitions in university towns in Paris, Germany, Spain, Italy and Japan and has already reportedly acquired a building in London's too-cool-for-school Spitalfields neighborhood.

The demographic story and supply-and-demand mismatch seem to be worthy of private equity real estate attention. In London, for example, there were an estimated 120,000 students looking for a place to live this fall—and only 33,000 institutionally owned student beds.

Bristol-based property firm King Sturge has said it expects the student housing boom to continue unabated.

“Modern, quality-built and well-located residences should show sustained rental growth for the foreseeable future,” King Sturge head Philip Hillman told the Brighton Evening Post earlier this year. “Older schemes in secondary locations may struggle to compete with the high-quality, city center schemes now being developed.”

Other developers and investors have been rushing to provide for the country's young scholars. One company, Unite, has grown to become the UK's largest student accommodation firm. The company teamed up with GIC Real Estate to form a joint venture called Capital Cities, which currently owns 1,960 beds. Unite has also launched a partnership with Lehman Brothers called Student Village, which completed a second development with 964 beds in the Leeds city center this past summer.

The trend is growing overseas as well. Earlier this fall, Atlanta-based student housing developer Place Properties and Blue Vista Capital Management closed on $205 million to invest in student housing throughout the US. The firm is reportedly the largest commingled fund in the US focused solely on building university housing. Another new private equity real estate firm, Harrison Street Capital, led by former Heitman executive Chris Merrill, is hoping to build a $100 million portfolio of student housing by the end of next year.

Yet despite the attractive fundamentals in the market, competition is quickly growing. Unite, for example, has reportedly eschewed becoming a REIT when the vehicle is introduced in the UK next year.

It is, however, considering launching its own private equity real estate fund.