Student homes shine amid Europe property gloom

By Daryl Loo

LONDON (Reuters) - Property investors are turning to the student accommodation sector as a would-be phoenix rising from the ashes of the UK real estate market, promising growth in returns and size for at least the next few years.

Property experts reckon average rents for UK student housing will rise about 10 percent in 2009 -- as demand outstrips supply -- and then slowly wane as investors crowd in.

Student housing is viewed as a rarity in the UK property market that still offers an attractive investment case, as more traditional commercial assets suffer falling capital values and rents, and rising tenant defaults.

"Ten percent increase (in student housing rents) per year is not sustainable in the long term when you have new supply coming on," said Philip Hillman of property agency King Sturge.

"But with the chronic shortage of student housing, rents will still rise for some time," he told Reuters.

Property broker Savills (SVS.L) said it now gets about two enquiries a week from pension funds new to student housing, as rents for other assets like offices, malls and factories are forecast to fall up to 15 percent this year amid the recession.

"Pension funds had their fingers burnt in commercial assets where if a big tenant drops out, the entire building is vacant; but if a student drops out, you still have a hundred more ready to take the room," Savills associate director Natasha Ham said.

The UK student housing sector, valued at 26.5 billion euros (22.7 billion pounds), two-thirds of which is owned by universities and the rest by private operators, is about 10 percent the size of UK's total commercial property market.

Risk-averse banks are still willing to lend to build new student flats thanks to an expected double-digit growth in Britain's student numbers, student homes operators said.

"Banks are struggling to find safe projects to lend to ... however liquidity has not been an issue for us," said Gabriel Behr, finance director of University Partnerships Programme UPP.L, UK's second-biggest student homes operator.

UPP, part of Barclays Private Equity, last year raised 300 million pounds from banks, and plans to further invest 1 billion pounds and double its portfolio of 18,000 student beds by 2015.

FOREIGN INTEREST

New entrants to the UK student housing market have been attracted by prospects of steady returns, where property yields have held steady at about 6 percent over the past three years, boosting values at UK-listed operators such as UNITE (UTG.L).

In March, Coral Portfolio launched Europe's first student housing fund of funds to raise 100 million pounds from U.S. and European investors, promising up to 10 percent returns a year.

The fund has so far received investments from major insurance firms such as Royal Skandia, Friends Provident and Irish Life, Coral's fund manager, John Kennedy, told Reuters.