Student Accommodation Portfolio: Introduction to yield compression

The student accommodation portfolio opportunity is the latest co-investment offered in a partnership between Heritage Explorer and a major Private Equity firm with over £1.2 billion under management.

Private equity opportunities look to maximise value by exploiting certain factors in a transaction which lead to increase investor returns over the optimum time period. These factors could be identifying a specific area with a need for development of units or, as in this case, by taking existing assets and reducing the risk profile to increase returns for the investors (i.e. the crowd and other co-investors). This is called yield compression.

To help provide more background on the transaction, we wanted to share some further details and information on how value is created via yield compression.

The current portfolio is already built and has been operating successfully as student accommodation for several years. The portfolio is being acquired at a rental yield of c.7.7% net. This offers initial downside protection to investors as we know that the assets are (1) built, (2) operational and (3) producing a high yield for the asset class.

The deal creates value by compressing this yield so that the assets can be sold at a lower yield, thereby a higher capital cost. We do this through reducing the risk in the assets to make the portfolio attractive to large institutions, which are looking at inflation and recession resistant assets to hold in their portfolio – typically at yields of between 4.25 – 5.5% p.a.

In this case, the assets are planned to be let on a long 20+ year lease to Mears Group PLC – a large FTSE listed PLC operator of housing stock who are experts in renting, managing and maintaining properties. Mears will be responsible for paying the rent and maintaining the property, therefore, the risk associated with ensuring the portfolio is tenanted and looked after sits with Mears Group PLC and not with the owners. This makes the assets very attractive to institutional buyers.

 

Here is a simple example:

Purchase Price - £1,000,000

Open Net Market Rent - £77,000

Current Net Yield = 7.7% p.a.

This yield may be subjected to fluctuations due to voids or maintenance costs which would be taken into account in the valuation.

 

Long term FRI (Full Repairing and Insuring) lease - £77,000

Projected Value of Asset - £1,400,000

Net Yield – 5.5%

Capital growth - £400,000

Gross Return – 40%

 

View PM SPV 56 and consider investing today!

Disclaimer and Legals

Heritage Explorer does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest..

Heritage Explorer is a trading name of HHS which is an Appointed Representative of Resolution Compliance Limited which is not authorised and regulated by the Financial Conduct Authority.