Student Accommodation: An Operational vs Long Income Case Study
This blog shows that PBSA Long Income assets perform more like other Long Income assets than Operational PBSA assets.
We recently released two indices covering areas of the UK market where data is scarce; our Q3 2018 Long Income Index provided an update of the performance of specialist Long Income funds, and our inaugural Student Index collated the performance of Purpose Built Student Accommodation (PBSA) assets.
As one of the more mature “Alternative” sectors, there are numerous ways for investors to gain exposure to PBSA (our Alternatives Property Perspective detailed the range of opportunities along the risk/reward spectrum). These investments straddle our two indices. This blog will explain the reasons for that, and reveal why investors seeking to understand performance should prioritise “structure” as an explanatory variable ahead of “sector” – upsetting some thirty years of accepted wisdom.
The CBRE Student Index covers PBSA assets owned and (usually) operated directly by investors. Most have no University guarantees and those that do are typically only for a couple of years – investors in other words have chosen to be fully exposed to the operational performance of their assets. By contrast, PBSA assets within the CBRE Long Income Index are designed to eliminate exposure to operational risk; they are structured either as a “Sale and Lease Back” to a University taking out a long (25 years plus) and usually index-linked or fixed uplift lease, or as an “Income Strip”, where the investor will return the asset for a nominal amount at the end of a period of perhaps 30-40 years, in exchange for an index-linked or fixed uplift rental stream over the term.
Figure 1 compares total returns over the last four years to September (the longest period for which data is available from both Indices) for the following:
- CBRE Long Income Index: Student Sample – the PBSA subset of the Long Income sample, henceforth “Long Income PBSA”
- CBRE Long Income Index: Income Strip & Sale & Lease Backs (Student Sample weighting) – the CBRE Long Income Index, re-weighted according to the mix of Income Strip and Sale & Lease Back assets in the CBRE Long Income Index: Student Sample, henceforth “Long Income (PBSA weighting)”.
- CBRE Student Index – the CBRE Student Index sample of PBSA assets, henceforth “Operational PBSA”.
Figure 2 shows the (non-directional) differences in total return between Long Income PBSA and Long Income (PBSA Weighting) and Long Income PBSA and Operational PBSA.
In very simple terms, this analysis shows that the behaviour of Long Income PBSA is more akin to other Long Income, and fairly unlike Operational PBSA. Thus, while the fortunes of the underlying sector the asset belongs to will remain of interest, investors in Long Income PBSA – and by implication, Long Income generally – should arguably principally pay attention to the performance of the Long Income market, and the specific investment structure to which their asset belongs.
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