The UK has been a pioneer in Shariah-compliant student accommodation financing transactions. In the mid-1990s, for instance, the then International Islamic Banking Unit (IIBU) of the United Bank of Kuwait (now Ahli United Bank) launched the first Student Accommodation Fund. A few years later ABC International Bank also completed a couple of Shariah-compliant student accommodation deals.
But over the last year or so, one bank alone, Gatehouse Bank, the wholesale Islamic bank authorized by the Financial Services Authority (FSA), has concluded three Islamic investment transactions involving student accommodation assets totaling in excess of 93 million pounds. The important development is that these deals span the UK and the US, both countries with huge and established student accommodation demand dynamics.
In fact, only last week, Gatehouse Bank in collaboration with Kuwait-based Global Securities House (GSH) completed the acquisition of its first US based student accommodation property in College Station, Texas. The transaction was conducted in partnership with GSH Kuwait and is part of a joint investment with The Scion Group, a specialized student-housing operator and one of the most active acquirers of student housing assets in the United States.
The College Station acquisition, at a current 98 percent occupancy rate, is forecast to deliver a stable and secure income flow with projected net cash yields of 7.0 percent per annum over the 5 year holding period. Not surprisingly, Fahed Boodai, chairman of the board of directors at Gatehouse Bank, is confident that "student accommodation is a sector of great importance that we believe will deliver strong investment opportunities for the maximum benefit of our GCC clients."
Indeed, Robert Bronstein, president of The Scion Group, hinted that more such deals may be underway with Gatehouse and GSH Kuwait. In fact, another Kuwaiti Islamic bank, Kuwait Finance House (KFH), a few days ago indicated that it is re-entering the US realty investment market after an absence of a few years.
The US is by far the biggest and most lucrative real estate investment market in the world. In the past, several Islamic banks have conducted Shariah-compliant realty transactions in various segments of the real estate asset class including retirement homes, gated communities, family developments, residential apartments and retail outlets. These have included KFH, Qatar Islamic Bank and Arcapita Bank.
The latest Gatehouse student accommodation property acquisition is minutes away from Texas A&M University, which is one of the largest in the United States. The Southwest and Southeast regions in the US, stressed Gatehouse Bank, "together account for almost 32 percent of all US student enrolments and are one of the fastest growing regions nationwide. As a result, there is a significant demand for living space. Last year in the US transaction volume in the student housing sector increased 250 percent in comparison to 2009 levels and there is a very real opportunity for investors looking to tap into this yield-generating growth sector".
Last year in the UK, Gatehouse acquired two student accommodation properties, the Europa building in Liverpool and the Optima building in Loughborough. The properties, developed by and leased to Watkin Jones Group, are well located in the university towns of Liverpool and Loughborough.
According to Philip Churchill, vice president and head of real estate, Gatehouse Bank, "values in the student accommodation sector in the UK have not fallen to the same degree as the residential and commercial markets, with investors attracted by rental growth and the underlying demand/supply imbalance. Given the fact that average rental growth over the last three years remains extremely resilient, these acquisitions represent an exciting opportunity for our investors. We hope to see many more transactions in this area, where demand for student accommodation continues to grow."
The UK remains an attractive market for student accommodation given that student numbers continue to increase and demand for university places is at a premium. This, despite the fact that local student fees in England is set to increase substantially for the next academic year, starting in September 2011. The latest figures, according to Ethical Asset Management (EAM) Limited, suggest that demand for higher education in the UK remains strong, with 2.4 million full time students.
Applications for 2010/11 jumped to 688,310, which is up 22.9 percent over the previous year with overseas applicants registering a healthy 28.7 percent increase. In fact, according to one property consultant, some 140,000 applicants missed out last year due to shortage of student accommodation spaces.
Student accommodation experts stress that there are several demand rivers that will see the sector sustaining strong growth over the next few years. This despite the combined impact of coalition Conservative/Liberal Democrat government's spending and the impact of the Browne Review on university education funding.
The demand drivers include the possibility of ceilings removed on “Home” and “EU” students, which means that the top universities would be able to expand; student numbers are projected to increase by over 10 percent over the next decade or so; similarly, the number of overseas students are projected to increase even more - well beyond the 350,000 currently studying at UK universities; many of the top universities tend to guarantee accommodation especially for overseas students and first year home students, which makes the market even more sustainable; there is a huge shortage of purpose-built student accommodation in many university towns; many universities also grant leases or nominations agreements, which means that the rental income streams are secure; and there is also a low delivery of new affordable council and private housing stock in general which means supply is severely depressed and has resulted in upward rental growth is many university towns and cities.
The student accommodation sector has also performed well despite the downturn in the UK economy and the commercial and residential property sectors in general.
There are other opportunities for Islamic student accommodation financing, investment and uptake. Many overseas students studying at British universities come from member countries of the Islamic Development Bank (IDB). There are for instance over 18,000 Malaysian students studying in Britain alone.
Similarly in April this year the IDB signed a landmark agreement with the University of Oxford to launch the Islamic Development Bank-University of Oxford Clarendon Scholarship. The joint program is launched within the scope of IDB Merit Scholarship Program for Science and Hi-Technology (MSP) and the Clarendon Fund of the university to place talented and meritorious students from IDB member countries for 3-year Ph.D. study and research programs at the world-renowned British university. The MSP has been running for over 17 years with the objective of developing human resources of the IDB member countries in science and hi-technology. The IDB has similar agreements with several other prominent universities including the University of Cambridge in the UK which was signed in April 2009. These agreements according to some market players can have a good fit with the Islamic finance sector if there is the necessary cooperation between various segments of the market.
Bundles of student accommodation assets are lend themselves as ideal for sukuk originations, subject to the location, quality of assets and of course the secured rental streams.
