Banks cool on student housing as fee hikes approach

LONDON Oct 19 (Reuters) - Banks are curbing lending to the UK's student housing property market as hikes in British university fees exacerbate grim conditions for real estate lending and leave the way open for new funding providers to enter the sector.

Obtaining loans from banks such as Barclays and Royal Bank of Scotland has become more difficult in the last six months, several industry players told Reuters, forcing some developers to look elsewhere for backing.

"We expect some cities, especially those with an over-concentration of student housing, and some universities to be hit by next year's rise in tuition fees," Stewart Ward, head of the education sector at RBS Corporate and Institutional Banking, told Reuters.

While the bank has not reduced its overall appetite for the sector, it was pickier about which projects to back and was undertaking more due diligence on deals than before, Ward said.

Investors have stepped up interest in Britain's student accommodation sector in recent years, attracted by its steady occupancy numbers and rents, as the 2008 financial crisis knocked values and returns elsewhere.

CBRE Group estimates that 750 million pounds ($1.2 billion) has been poured into the market in the year to September, up from about 350 million pounds in 2009.

Recent government cuts to university funding opened the way for UK universities to triple their fees to as much as 9,000 pounds from 2012 , fueling violent student protests in London and raising concerns that university intakes would fall.

Several sources told Reuters that banks were backing fewer student housing projects for reasons that include the fee hike and that many favoured projects with pre-let agreements.

"We're seeing pretty limited activity from our competition," said Richard Simpson, Managing Director of Property at student housing developer UNITE Group .

"Anyone with a poorer covenant (than us) will almost certainly have seen a tightening of credit terms over the last few months just tracking the macro picture," he said.

Four sources, who declined to be named, told Reuters that Barclays had curbed lending to the sector in the last six months, putting a focus on long-term clients or developments with a pre-letting agreement in place.

However, Barclays' Head of Real Estate Brendan Jarvis said the bank had not reduced its exposure to student accommodation and had completed two deals last month. "We will continue to lend into the sector where the commercial and risk terms make sense to our clients and our shareholders," he told Reuters.

OUTSIDE INTEREST

The cooling attitude towards student accommodation comes amid growing economic uncertainty across Europe, which has forced banks to shift their focus towards safer bets like pre-let retail and office developments, EC Harris said.

A survey of 22 European banks by the building consultancy this month found that 3 percent chose student housing as their preferred sector to lend to in 2011, versus 11 percent in 2010.

As banks become more circumspect, more institutional investors and sovereign wealth funds are entering the sector.

"We've seen over the last six months more lenders coming into the sector on rebased terms, though admittedly the terms they're offering are much less attractive than they were a year ago," Knight Frank's Head of Student Property James Pullan told Reuters.

Jo Winchester, director of CBRE's student housing team, described the level of interest as "staggering", and said the property consultant was talking to investors with a combined 2 billion pounds to invest.

Recent new entrants to the sector include US-based Oaktree Capital Management, which is backing UK developer Knightsbridge Student Housing, and Carlyle Group . Insurers like Aviva and Legal & General may also expand their footprint in the sector, said a number of sources.

Dutch pension fund PGGM is in exclusive talks with Barclays Capital's infrastructure fund to buy a majority stake in University Partnerships Programme, the country's biggest developer of university campuses, in what would mark its first foray into the UK's student housing market, a source close to the talks told Reuters.

"A number of developers will be looking at alternative routes to funding their developments," Jones Lang LaSalle's Director of Student Housing Philip Hillman told Reuters. These could include joint ventures or forward commitments to sell which would include funding from a non-bank source, he said.