The lack of dealflow in the UK social infrastructure sector has been well documented. The Chancellor and Infrastructure UK have been very clear that the government’s top priority is investment in economic infrastructure to help boost the country’s productivity.
However, one sector that has bucked the trend in recent years is student accommodation. Deals in this sector are atypical of social infrastructure projects as they can often be structured to require little or no taxpayer subsidy and some can actually generate a healthy capital receipt for the university itself.
Operis has worked on a number of such projects and has identified four factors which are vital for the success of deals in this sector:
• increasing student numbers providing clear demand for accommodation on-campus or close to the university;
• a local market which supports rents at a sufficiently high level to make the project economically viable;
• low long-term interest rates; and
• availability of competitively priced, very long-dated (40+ year) inflation-linked senior debt funding
Of course there are many other factors which are important, such as having an experienced construction contractor, service provider and asset manager, the availability of land and requisite planning consents.
However, such factors are consistent across many infrastructure projects.
The long-term factors relate to the senior debt funding of the project and are currently favourable. While interest rates may begin to increase in the near to medium-term, the long-term rates still look low relative to historic norms. Operis is currently seeing a number of institutional investors providing the senior debt funding to support these projects.
An interesting question is whether the structure could be enhanced so that it may be used in sectors other than higher education. There are certainly other sectors where there is demand for high quality, affordable accommodation.
Extra Care Accommodation
The demographics of the UK population are set to change dramatically over the next couple of decades with the retirement of the baby boomers combined with people living longer. Government policy in this area is still evolving but with the severe pressure on local authorities’ social care budgets, it seems highly likely that councils will need to look for creative and innovative solutions to meet demand for services.
If a council could show that there was strong demand for this type of accommodation offering independent living for residents who want to continue to live in their own home, then funders might be able to take (or share) demand risk for this type of development. If this were to be combined with rents that made the project economically viable then the student accommodation model could well be applicable.
Key Worker Accommodation
The cost of rented accommodation (particularly in London and the South East) has now reached levels which make it prohibitively expensive for many key workers to live close to their place of work. This makes the recruitment and retention of staff increasingly challenging for large public sector employers.
If, for example, an NHS trust had surplus land located close to a large hospital and was looking for a way to encourage a developer to build affordable housing there then again the student accommodation model could be attractive.
Necessary demand conditions could be met by key workers who would be attracted by reasonably priced accommodation close to their place of work. If rents could be pitched at a level which was high enough to make the project viable, yet low enough to be affordable to the key workers for whom the development is intended, then this model could gain traction.
While it appears that at present the necessary conditions are in place to allow this type of project to proceed, this might not be the case for a prolonged period. Both short and long-term interest rates are beginning to creep upwards and while there is currently a strong supply of institutional debt looking to invest in this type of opportunity, there is no guarantee that inflation-linked debt with such a long tenor will always be available in the market.
For public sector entities or developers interested in this type of opportunity, the first step could be to develop a business plan and a financial model to calculate what level of capital receipt might be achieved under different assumptions. This should provide a good indication of whether this model could deliver the infrastructure that is needed. Given the current levels of austerity in the UK and attitudes to capital spending on social infrastructure, the alternative could be a long wait.