Brian Welsh, CEO of Nido Student on the resilience of the student housing sector
The pandemic has turbocharged interest in alternative real estate assets as investors shift their focus away from struggling retail and leisure to student housing and residential, according to Nido Student CEO Brian Welsh.
Speaking to Blackstock Consulting founder Andrew Teacher, Welsh says that despite a tumultuous 2020 for the property industry as a whole, PBSA is set to benefit from the looming downturn in traditional real estate.
Welsh explains: “The prevailing sentiment in the sector is that by September 2021, we will largely be back to business as usual, with very high occupancy levels.
“And that’s not to say that September 2020 – 2021 academic year is a write-off — far from it. Across Europe, we have very high levels of occupancy.
“And when you contrast student accommodation with, for example, hospitality businesses, it can be no surprise that investors are more comfortable with having their money in PBSA than in hotels or hostels, who are seeing significantly lower occupancy, particularly with local lockdowns taking place in different countries across Europe.”
A widening middle class in China is bolstering an increasing number of university applications from international students each year, says Welsh.
Despite the “regulatory hurdles” Covid-19 wrought on travel, Welsh says international students are still as keen as ever to study at Britain’s world-leading universities.
“We’re seeing an unabated growth of the middle classes in China and India in particular. Covid-19 hasn’t stopped the attractiveness of a European education and studying in a local European language — that hasn’t diminished in any way.”
And there remain billions of dollars of capital ready to be invested into retail, says Welsh, but that the risk profile for many covenants has been “called into question” and the “old order is being disrupted”.
Where once investing in PBSA was viewed as too complex and “granular” compared to more straight forward asset classes, its operationally-intensive nature is today what makes it so appealing to investors.
“The very granularity of it has actually become attractive,” says Welsh. “A bad year in PBSA in 80 percent occupancy or 90 percent occupancy. A bad year in retail is zero percent occupancy.”
He adds: “We are seeing that most investors don’t see value in retail and offices right now and do see it in residential.
“Student accommodation occupancy is high and rents are being paid, and residential occupancy is high and rents are being paid. So, I think we’re going to see most investors increase their weighting. In fact, they’re telling us now they’re increasing their weighting to these asset classes.”
And with a flattening development pipeline, particularly in the likes of London, pricing is likely to hold up as demand catches up with the supply.
“More investors chasing fewer assets can only result in yields coming in”, says Welsh.
One silver lining to emerge from the pandemic is that investors and banks have sought to engage more closely with the businesses through which they have skin in the game.
Welsh adds: “For me, this is the year where ESG has really been put to the test as well, because the systems and processes of governance have had to move far more quickly than they are accustomed to.
“It’s been great to see some of these massive organisations pulling together and recognising that there’s a problem — and organisations that you may not have previously known having really strong ESG policies.
“They’re looking at this and saying ‘hey, what’s the right thing to do for the students?’”
Andrew Teacher: So Brian, while it’s obviously been a tough year for you guys in the PBSA sector, much like your cousin’s in hospitality, you have had a fair bit of pressure from all sides. What is the investor sentiment now looking like as we head into 2021? We’re standing on the shoulders of a vaccine, there’s obviously still quite a lot of anxiety about the economy, and about real estate more generally. So where where do you guys sit in the PBSA sector?
Brian Welsh: I guess that’s the question we’ve been asking ourselves for the past 12 months or so. And, bizarrely, the projections that we made 12 months or the beginning of the pandemic, let’s say, and have largely held true. We’ve always been anticipating that one way or another, the vaccine would start to be coming to a close ahead of the September 2021 academic year. And now we’re seeing that vaccines should be widely available in Q1 of 2021. We know that lots of students want to go to university, universities want to welcome them with open arms and governments are supportive of getting those 18, 19 and 20 year olds, out to university to continue their education. We’re seeing evidence of every day when we talk to the students who are currently in resonance with us who were saying they, they are still happy to go to university even in full knowledge that they may not be attending face to face lectures. And so the prevailing sentiment in the sector is that September 2021, will be back to largely business as usual, with very high occupancy levels. And that’s not to say that September 2020, the 2021 academic year is a write off – far from it, across Europe we’ve very high levels of occupancy. And when you contrast student accommodation with, for example, hospitality businesses, it can be no surprise that investors are more comfortable having their money in PBSA than in hotels or hostels, who are seeing significantly worse occupancy, particularly with local lockdowns taking place in different countries across Europe. So overall investor sentiment remains pretty strong for student. We are seeing investors who maybe took a pause over the summer, while they kind of worked out what was going to happen in September, would students go to university would universities be open? Would any universities go into administration or experience really significant financial difficulties and be allowed to go under by local governments or central government? We haven’t seen any evidence of any of those worst case scenarios. So there’s a definite increase in investor activity going into Q4 this year. And there’s a sense of momentum building into Q1 2021, where that sort of almost uninterrupted growth in student numbers is expected to continue.
Andrew Teacher: And how do you see the international landscape holding up? Because clearly a large part of, certainly the domestic purpose built student accommodation market in the UK, and certainly a large part of the flows through Western Europe are driven by global student flows. How are they predicted to to to hold up over the next 12 months?
Brian Welsh: Well, it’s fair to say they certainly have been affected in September 2020. And we still have students even now at the end of November, as we record this, moving into our residences, where they’ve been able to clear regulatory hurdles or issues around visas being delivered late, or university course start dates moving around. So we’re still seeing some international students finding their way to their ultimate University destination. And but we have seen going into this year, certainly in the UK, speaking as the most mature European market, we’re seeing a large uptick in the number of international students applying to study in the UK, particularly in the Chinese and Indian demographics. We are seeing a flattening off and a slight reduction in EU applicants, but that was always a reasonably small proportion of students at British universities. So we’re seeing an unabated growth of the middle classes in China and India in particular. It hasn’t stopped and the attractiveness of a European education and studying in a local European language, that hasn’t diminished in any way.
Andrew Teacher: And is there going to be a consolidation then do you think with the core UK locations where some of the more peripheral former polytechnics, for example, might see a bit of a drop off and where actually, the richest students coming in from the Far East are going to say look, we’re going to just focus on on the Russell Group universities?
Brian Welsh: Well, I think it has always been the case that the more prestigious the university, the more applicants you get. And the more prestigious the city as well, the more internationally renowned the city, the more international you will get. So if we look at London, for example, you’ve got the some universities with a very, very high international student weighting up to 80% in some cases…
Andrew Teacher: London, followed by the UK’s Second City of Newcastle.
Brian Welsh: Yeah, yes, absolutely. But what you find is that international students, for cultural reasons, might gravitate to a particular city. And if there’s a big Chinatown like there is…
Andrew Teacher: Yeah, there’s a huge Chinese contingent in Manchester.
Brian Welsh: Absolutely. Right. So you do find Chinese students gravitating to Manchester and Liverpool and other cities for sure. And they will choose, like any British student will choose, ‘Hey, can I get Oxbridge, can I get Imperial? Can I work my way down the Russell Group? Can I move into the different universities beyond that?’ So you definitely see that it’s not just the university and the course, it’s the university, the course, and the city, all of which are drivers, probably in that kind of order of priority for international students. But I think what we need to remember is that the overall quantum of international students is growing. So the pie is growing. So you can have the same proportion of the pie and get more students the following year, so international students are absolutely a driver. And I think government policy is suggesting that they will continue to be a driver in the future.
Andrew Teacher: So given everything that we’re likely to see happening across the European economy in the next couple of years, what are the sorts of things that investors are asking you about PBSA as an asset class, given what we know about interest rates, given that we can see inflation starting to pick up, given that QE isn’t going anywhere? And given obviously, there’s a lot of volatility and depression in other real estate asset areas?
Brian Welsh: Again, great question. I mean, what are investors are interested in when they’re choosing where to deploy their investors’ money or their capital? Well, currency is clearly a part of it. So people who like to invest in Europe like the nature of the single currency, that makes it easier to cross borders without incurring additional hedging costs. But equally, people are looking at the UK and the pound and saying, ‘Well, I’m buying the UK at a discount.’ So that feels quite good as well. So the currency can work in different directions. People are looking at the long term horizon for interest rates and I think the general view is that interest rates will remain low for a protracted period of time, which makes any investment which has the potential to grow in excess of that RPI pretty attractive when your interest rates are remaining fixed and low. So I think investors are looking at that. But fundamentally, 90% of the time we spend talking to investors about investing in purpose built student accommodation in any jurisdiction, is to talk fundamentally about the supply and demand dynamics in that micro location. So it’s a macro play, but it’s a micro game. You can build the whizziest, most amazing student accommodation building. But if there’s no strong University and no strong demand, then it doesn’t matter what currency, what interest rates or anything else, if the fundamentals of the business are incorrect.
Andrew Teacher: So it’s the residual value of the location?
Brian Welsh: Yes, I would say that. And there are, of course, multiple other factors. So what do you pay for the land? What does it cost to build? And how defensive is it? Are there a million brownfield sites between you and the university that could be developed? So I think it’s multifaceted. But investors I think, with a maturing asset class like this, in investors minds, it becomes safer as it becomes more understood.
Andrew Teacher: How important is the platform? Because again, you’re correct, certainly to say that actually, the real estate is great. And if you’ve got academia as your anchor tenant – unlike a lot of retail establishments, academia isn’t going anywhere, academia isn’t going to have a challenge about the covenant strength of Manchester University in the same respect as people are now having question marks over Pret and over some fashion retailers so that that that ships fine, we will bank that. In terms of the platform and the operational element within PBSA, how much of a key driver is that for investors? Because clearly, somebody can pitch up next door, they can build a development that’s shinier or newer than yours, if they choose to and if they’ve got the money to do that, and if the opportunity arises, but clearly, having that platform and having that depth of data and that coverage across Europe it’s almost a defensive asset in its own right isn’t it?
Brian Welsh: Yeah, it is. When I started out in this business 15 years ago, institutional investors weren’t interested in getting involved in purpose built student accommodation because it felt too granular. It was multiple individual tendencies. And operations were quite intensive – students as a market can be complicated. And it’s more than just buying a building on Oxford Street and renting it out to a tenant on a lease for 15 years and going down the pub, which is what real estate investment used to be like. But over that period, we’ve seen this operationally intensive real estate investment be much more interesting to investors and much more accepted by investors. So the very granularity of it has actually become attractive. A bad year in PBSA is 80% occupancy or 90% occupancy. A bad year in a retail unit is zero percent occupancy. So investors have become more comfortable with that. But it’s not right to say you can be completely complacent about that risk. It means we need to sell 1000 rooms in a 1000 bed residence every year. And some of them might come through returners, but most of them you are reselling every year. And that gets down to what does your marketing campaign look like? What is every conversation everyday happening with every student? How effective are your maintenance regimes? Fundamentally, is the building safe? Can people move in? So there’s so much going on to operate these residences, and give each of the students a great experience every time they come through the door. So not only do they have a great experience themselves and think about re-booking, but they give you a great word of mouth referral to their friends, they give you a great reputation with the university. And you build this community that people really want to be a part of. So we’ve built up some level of expertise with that within Nido, where we focus very much on building that community and giving everybody that great experience, we focus hugely on student wellbeing. We just won The Class conference award for the best student wellbeing programme in Europe, which we’re super proud about, because we invested very heavily in that to get those students – and during the pandemic it’s obviously compounded a lot of the work that we’ve needed to do – but to give all the students a great experience.
Andrew Teacher: So this operationalization of real estate has clearly been one of the big prevailing trends over the last four or five years and it must be quite nice to see that your colleagues in the office and retail investment spheres are looking at what the PBSA and residential sectors have been pioneering and almost taking it for themselves. This focus on service, this focus on technologies, this focus on wellbeing that was never there before is now something that everyone’s talking about, and that’s something that you guys have pioneered right?
Brian Welsh: I guess, to my mind, it’s something of a continuum where as student accommodation businesses, we are, to a point reflecting our clients and reflecting society and people have become, I would say, more demanding of their suppliers, and, by extension more demanding of their landlords. So at the forefront of that has been purpose built student accommodation, housing 18 to 20 year olds. So their first housing experience has been with us. And that includes broadband internet, includes inclusive utility bills, and you pop to reception if your showers broken, and somebody comes and fixes it a few hours later, and all of these good things and giveaways and high speed broadband, whatever else it is. So that’s people’s experience, as they move into housing for their first time now. And they, I guess, come to expect that of their housing in later life as well. And also looking now at these new asset classes, which are emerging, like Build to Rent, like co-living, and it’s pretty natural that we found a way of delivering high levels of service for relatively modest additional cost over and above what it would have been in the past. And why would you not? It gives you that USP and differentiator in the market and a lot of these things – today, I think, as a society, we’ve got this shift towards more of a marketing lead approach. And you can see that evidence in every interaction you have in every shop and every app you download and every retailer you engage with, you see that customer service is such a hugely important part of it. And the people who fail in the customer service delivery are the businesses that fail pretty quickly, I think.
Andrew Teacher: Yeah, and you look at Amazon’s business model. And actually, if you want to return something on Amazon, it’s pretty easy to do that versus most other websites. And that ease of use is probably why it’s more appealing. You feel yourself having to go ‘Right, I’m going to order this record from a really independent place with a terrible website, just because it’s the better thing to do’ right? But you sit there watching TV on the sofa at night, after a couple glasses of wine, you think ‘Oh I really need that fountain for my cat’ or ‘I really need that new pointless gadget from my office’, and you don’t really but it’s really easy to order!
Brian Welsh: Absolutely right. Just look at our friends over in retail. And that, you know, Jeff Bezos is stealing Christmas. A friend of mine works in retail real estate and he can’t really compete, because Amazon can do it much cheaper and much faster, which is pretty sad.
Andrew Teacher: Yeah, well, I guess it’s good if you’re in the logistics and big box and last mile space – those guys are doing very well right now. So as we head into 2021, other than last mile logistics and data centres and all of those things that are going to support Amazon and Shopify and this growing breed of e-commerce Titans, what is the investor sentiment looking like then towards residential and where do you see PBSA sitting within a diversified real estate portfolio for institutions? There’s going to be a lot of rebalancing of portfolios over the next 12 to 18 months as people take stock of the situation post COVID, as people take stock of revaluations, and those revaluations are going to take time to filter through the system aren’t they? As people then are able to determine occupier strength in commercial real estate? So what do you expect to happen there? And where do you then expect PBSA to sit when that’s all come through the system?
Brian Welsh: Yeah, I mean, there are billions and billions of dollars around the world with allocations towards real estate. And in a lot of the places that that cash would have found a home the risk reward proposition has changed dramatically. So previously you might have invested in retail or hotels or hostels or similar sorts of businesses, with a Counterparty with a reasonably strong covenant or a very strong covenant. And those companies have been called into question and I would extend that to the office market as well, where WeWork obviously turned the office market upside down over the past few years. But even before that, you were signing office leases for 5, 10, 15, 20 years in some cases. So I think I think we’re definitely seeing the old guard or that old order being disrupted dramatically. And beds & sheds, as you’ve rightly said, seem to be those asset classes that have been most resilient through all of the financial crises and recessions we’ve had, certainly in the past 20 years. Student accommodation occupancy growth and total return lines have continued almost regardless, right the way through those periods. Student accommodation occupancy is high and rents are being paid, and residential occupancy is high and rents are being paid. So I think we’re going to see most investors increasing their weighting, in fact, they’re telling us now they’re increasing their weighting to these asset classes and sheds and data centres following on behind. So I think you’re right, we are seeing that most investors don’t see value in retail and offices right now and do see it in residential. And that can only serve to drive in yields and increase development, arguably. However, what we’re seeing at the moment is, there’s certainly in the UK, those development costs have climbed very, very quickly over the last few years, far more quickly than the equivalent rent so there are some schemes we’re seeing for the first time now that aren’t viable to develop. And it’s a reasonably new feature to the UK market. So developments going on, but there’s a sense of that pipeline beginning to tail off. So what will happen then: more investors chasing fewer assets can only result in yield coming in.
Andrew Teacher: And reflecting on COVID – and we’re not out of it yet – if you had to pick two or three key learnings for you, with a pan European student housing business, managing, not just all the human interactions that you have day to day, but obviously all the different local governments, regulatory systems in different countries, it’s obviously been a minefield of complexity. What have been some of the takeaways from it? What are some of the positive things that, when you sit with your family over Christmas, what are some of the things that you’ll reflect on?
Brian Welsh: Well, yeah, 2020 has been a tumultuous year for anybody, for everybody, full stop. People involved in purpose built student accommodation, I think in 2020, really found that the businesses tend to be quite light on staff, because it’s a very predictable cycle that you have in student accommodation. Students move in in September and that’s a big process. You start letting rooms in October, November. You spend the letting rooms in a relatively steady state environment. And then in July, August, students move out, you clean all the rooms and they move back in in September. So it’s very predictable. And you can resource according to that calendar. And that means that most people in purpose built student accommodation work incredibly hard in August and September, but then can manage their workload more effectively and smoothly throughout the rest of the year. And what happened this year is that in that down period for the sector, where everybody breathes a huge sigh of relief and gets ready for the next September = what happened? We had the pandemic and everything was thrown up in the air. Students moving out, rent refunds, systems, processes and technology that weren’t equipped to push money out as quickly as it is to take in. So much has changed in the past six months around, particularly flexibility and systems and processes, and liaising with investors and banks – which has been a positive thing coming out of this, that the investors and banks have perhaps been more in the detail and have understood their businesses more than they might have done in the past. But also this year for me is where ESG has been really put to the test as well, because the system and processes of governance have had to move far more quickly than they are accustomed to. And for the first time in student accommodation it’s bad news to be moving up and down the chain as well. ‘Hey the students are moving out, hey, the students might need some rent back, hey, we need to put an additional safety measures and cleaning regimes, which is going to cost money.’ So for almost the first time has been bad news moving up and down the investment. And so it’s been great to see some of these massive organisations pulling together and recognising that there’s a problem. And organisations that you may not have previously known had really strong ESG policies and looking at this and saying, ‘Hey, what’s the right thing to do for the students?’ So we’ve seen a lot of that, so it’s great for us as operators to kind of go ‘hey, you know, we should refund the students their money because it’s a really bad situation, there’s a pandemic on’, but for the investor to be of the same mind, and – in some cases going further than we were preparing to go – by way of helping students, smoothing their journeys and giving them refunds where appropriate or requested, whilst continuing to fund the buildings to the point where we can continue operating them for the students have stayed behind. That’s been great to see. So just been great to see those investors who get sometimes bad press for just focusing on the bottom line, but here in the pandemic, they’re taking a very – using that ESG terminology again – taking a very social approach to how are we going to help these young people through this? Protect the long term value of the asset, of course, but not to the absolute detriment of people who are living there. That’s been great to see.
Andrew Teacher: Yeah, yeah. So a focus on ESG, a focus on wellbeing and of course, congratulations again, for the European wellbeing award that you’ve won recently at The Class student housing awards. And some positive sentiment there on on the future of the sector, actually, ironically driven by pressures on the development side of things that could ultimately prove beneficial for investors in the UK market, certainly over the next 12 months. So thanks a lot for your time, Brian Welsh, and we hope you have a wonderful Christmas and have plenty of time to reflect on what’s been a obviously hugely challenging year.
Brian Welsh: Certainly won’t be going out anywhere so yeah, plenty of time to reflect!