To go big in student housing, managers look to the public sector

Legal & General‘s joint venture with Oxford University is the latest public-private partnership in the fast-growing student housing sector.

The UK-based financial services firm is prepared to commit £4 billion ($4.99 billion; €4.47 billion) from its annuity books to the decade-long, 50-50 venture in the city of Oxford as part of its Future Cities initiative, which invests in British cities and towns outside London. Legal & General has previously invested alongside institutions in Manchester, Leeds, Newcastle, Cardiff and Salford, deploying more than £19 billion.

Rachel Dickie, head of urban regeneration at Legal & General Capital, the firm’s investment arm, said the joint venture aims to build approximately 1,000 units of student accommodations on Oxford-owned property along with an additional thousand units of post-graduate housing and between 1 million and 2 million square feet of office and retail space. Post-development, Legal & General will operate the assets on multi-decade ground leases from the university. The goal, she said, is to make the city more appealing to employers and young professionals to stifle the “brain drain” to London.

Universities have proved eager partners for Legal & General as they look to counter the population shift toward major urban centers, Dickie noted, because they have less financial support from banks or the government to do so.

“Legal & General Capital targets parts of the economy that have struggled since the government and banks have retrenched,” she said. “Universities have to work harder to attract students and, in a more competitive market, they have to be continually upgrading their facilities. As a group, they’re much more engaged with the conversations we’re having up and down the country.”

College campuses in the UK and US consequently have become magnets for institutional capital, with cash-constrained universities turning to the private market to help house their students and faculty. For example, Harvard University has 36 acres of land adjacent to its business school campus in the Allston section of Boston for which it is seeking partners to develop offices, labs, apartments and a hotel and conference center. Those properties will also be operated on long-term ground leases.

Some schools are likewise turning to private equity to offset high upkeep costs. Last year, Harrison Street, a Chicago-based manager, began fundraising for Harrison Street Social Infrastructure, an open-end fund targeting university-owned assets with significant deferred maintenance. The firm, which has a student housing portfolio of almost 150,000 beds in the US and Europe, had raised $425 million for the new vehicle when it began deploying capital in April.

The Massachusetts Institute of Technology has used its endowments to invest directly in the real estate around its campuses independently or through joint ventures. MIT’s Investment Management Company spearheaded a 1.9 million square-foot mixed-use redevelopment project in Cambridge’s Kendall Square, which was reported to have cost more than $1 billion. Harrison Street led a group of investors that acquired a long-term ground lease for three newly-built life science properties in the district from MIT for $1.1 billion in May. In addition to the underlying land, MIT also retained a minority ownership stake in the buildings.

Investment in US student housing climbed to $11 billion last year, up from less than $8 billion in 2017 and less than $2 billion in 2010, according to CBRE. Fund participation also ticked up significantly in 2018, with pooled capital accounting for 24 percent of acquisitions, more than triple the percentage in 2017, when funds accounted for 7 percent of the market.

Since 2015, 19 funds dedicated exclusively to student housing have closed on more than $3 billion, according to PERE data. Another 35 closed-end vehicles that include student accommodations as part of a diversified strategy have raised an additional $17.1 billion for the strategy in that same time frame.

Chris Merrill, co-founder and chief executive of Harrison Street, said investors are drawn to student housing strategies because of the secular growth around universities and the lack of capital many of those institutions have to invest independently. He also said such investments tend to perform well regardless of broader market trends.

“Partnering with universities makes for good, resilient, low-volatility-type investing, irrespective of where we are in the real estate cycle,” Merrill told PERE. “At the same time, we can also get a very attractive return.”