Buying student accomodation. Thoughts?
Discussion
I received this in response to asking the name of the holding company.
A1 Alpha Properties (Leicester) Ltd is the main parent company behind all our investments. It is run by Derek Arthur Kewley and Nicholas John Spence.
This is a 16-year-old award winning UK based development company with a diversified portfolio of high cash flow commercial assets. These include student property developments, retail units and serviced apartments.
I understand that they are by far the most experienced developer in their sector, and unlike most, this developer has zero bank exposure. They are also the only one with NHBC registration, and have in fact been NHBC accredited for over a decade now, actually winning an award from them in 2005.
For student property, income is contractually secured by the main holding company, A1 Alpha Properties (Leicester) Ltd. Our serviced apartments in the holiday sector have their own structure.
It is worth noting that most of their properties and assets are, at least initially, bought through limited SPVs. These are set up to handle the risky construction, refurbishment or sales stages of each project. This strategy effectively ring-fences all investors from the risks associated with embarking on any new projects and ventures in future.
We call this selection of SPVs, coupled with the main parent company, Alpha Homes. (Prospectus attached)
For most of their student property investments, the main holding company hires in an independent professional management company, called Mezzino, to run the sites. Their work has consistently proven to be very successful.
For their properties in the holiday sector, everything is overseen by the developer themselves, under the name ‘Green Parks’, utilising partnerships with various other firms to maximise bookings and reservations.
Purely from the properties that we have been involved in with them since 2012, I understand the developer is now looking at a gross annual rental income of almost £17million, following total sales of around £155million, and assets of almost £32.5million.
This does not take any alternative sources of income into account, nor any developments currently secured in the pipeline, of which there is already a sales value of over £50million, with addional freehold asset values worth more than £9million.
Remember, from the moment contracts are exchanged, investor interest is registered with land registry, and there is full recourse against the developer for the full value of income.
Investors are also free to sell at any time.
Ok, interesting.
They are relatively small as far as developments and asset management companies go. £155m of sales in 16 years demonstrates why they are not able to sell to institutional investors. Our core business of supported living apartments has done £200m of sales in 3.5 years and we are only just big enough in terms of volume.
If volume is small then the main investors are private equity, if you are then looking at leases vested directly with the landlord (ie not to a university of a large asset management company) then most private equity companies will also run a mile as the risks are just too high.
The use of SPV's is common in portfolio style development, its why I am a Director of about 14 companies at the moment, the only one that matter is the top co. But a major word of warning, pretty much all development funders will seek to cross collateralise across the group of companies and will look for debentures in Top Co. They will also have a first charge over the asset. Private Equity Co's are particularly hot on cross collateralisation. So although your name may be on the title there could be a legal charge registered against the title., and again in a block of apartments that is likely to subsist until they are all sold. This has a big impact on the reversionary value of each unit.
In essence all of the occupational risk appears (educated guess) to pass to the purchaser but the control over getting the units let looks like it lies with someone else. If that is the case then the risk is huge and may explain the high yields.
As others have said, although you can sell the unit, if you are selling because of voids etc and the rest of the block is part occupied by students, who are you actually going to be selling to? I wouldn't buy one!
I have never heard of Mezzino, so they probably are not a major player in asset management. You would need to see their contract, especially the step in rights.
NHBC is just an insurance policy and means nothing material, investors are just as happy with any other new build policy and warranties from contractors.
I am not convinced that the developer will take an active interest after they are all sold. In 30 odd years of development I can't think of a single developer that really cares after the defects period has expired. In essence this is just sale spiel.
I wish I could be more positive about it, but there are so many alarm bells ringing about the way its funded, the scale of the business, the nature of the offer, the voids risk, the liquidity etc.
Maybe, if Mezzino are a decent size or the unnamed companies that are trying to fill this are a decent size, you could get some sort of warranty against voids, but it would need to be a large company with a strong balance sheet, nor a ring fenced SPV.
At the yield you previously mentioned, Private Equity would fall over themselves for it, if the risks are managed. The fact that doesn't seem to be happening is also telling. If they were the developer could get at least 25% more for the asset. If it was major institutional investors he would nearly double his price.
They are relatively small as far as developments and asset management companies go. £155m of sales in 16 years demonstrates why they are not able to sell to institutional investors. Our core business of supported living apartments has done £200m of sales in 3.5 years and we are only just big enough in terms of volume.
If volume is small then the main investors are private equity, if you are then looking at leases vested directly with the landlord (ie not to a university of a large asset management company) then most private equity companies will also run a mile as the risks are just too high.
The use of SPV's is common in portfolio style development, its why I am a Director of about 14 companies at the moment, the only one that matter is the top co. But a major word of warning, pretty much all development funders will seek to cross collateralise across the group of companies and will look for debentures in Top Co. They will also have a first charge over the asset. Private Equity Co's are particularly hot on cross collateralisation. So although your name may be on the title there could be a legal charge registered against the title., and again in a block of apartments that is likely to subsist until they are all sold. This has a big impact on the reversionary value of each unit.
In essence all of the occupational risk appears (educated guess) to pass to the purchaser but the control over getting the units let looks like it lies with someone else. If that is the case then the risk is huge and may explain the high yields.
As others have said, although you can sell the unit, if you are selling because of voids etc and the rest of the block is part occupied by students, who are you actually going to be selling to? I wouldn't buy one!
I have never heard of Mezzino, so they probably are not a major player in asset management. You would need to see their contract, especially the step in rights.
NHBC is just an insurance policy and means nothing material, investors are just as happy with any other new build policy and warranties from contractors.
I am not convinced that the developer will take an active interest after they are all sold. In 30 odd years of development I can't think of a single developer that really cares after the defects period has expired. In essence this is just sale spiel.
I wish I could be more positive about it, but there are so many alarm bells ringing about the way its funded, the scale of the business, the nature of the offer, the voids risk, the liquidity etc.
Maybe, if Mezzino are a decent size or the unnamed companies that are trying to fill this are a decent size, you could get some sort of warranty against voids, but it would need to be a large company with a strong balance sheet, nor a ring fenced SPV.
At the yield you previously mentioned, Private Equity would fall over themselves for it, if the risks are managed. The fact that doesn't seem to be happening is also telling. If they were the developer could get at least 25% more for the asset. If it was major institutional investors he would nearly double his price.
few questions ill chime in on as I used to work in this area.
First things first a lot of the comments seem to be confusing a 4 bedroom house rented out as a 5 with one in the dining room versus a purpose built block of studios.
Generally the blocks have staff/warden so the unsupervised house party problem is irradiated.
Generally they will suffer from harder wear and tear than a professional let, however flooring is usually commercial (hard wearing) carpet and hard floors. Very minimal furniture so the real cost is a lick of paint every 3 years, don't forget the things that really cost landlords are boilers and building maintenance (roofs etc) which will be covered in the service charges exclusive of your net income.
Location is key, most universities are investing in teaching buildings and the halls they build will be to facilitate the extra first years. The good developers will be securing sites within stones throw, that said a Uni on the outskirts will see students interest in halls closer to the town (nightlife).
I saw mentioned why don't they sell to the institutional investors, trust funds etc. they do, but not new builds, although due diligence will indicate every reason for the buildings success they are not really allowed to risk peoples pensions on a 'upstart business' in theory.
What does happen often is in 3 years you will be bought out at a premium by the pension funds, at which point you will have had 3 years rental and a bigger lump back. The company I worked for had clients who bought at 80k saw 8% a year and sold for 115k 3 years later... guess what they bought with their money.
And finally the operator, this is and isn't important.. they make money from letting units. If you get a crap one and they fail i am sure there is another operator willing to pick up a portfolio of 400 units generating £100k income a year. I would imagine worst case scenario they could go bust and take a term or two or your money.
..oh on the student companies going bust, look into the actual cases you will find they were funds. And they collapsed (as did many other financial funds) when the market took a turn 10 years ago. No fund is liquid when everyone wants to exit consecutively and its not a student property problem it was part of a larger financial problem.
I no longer work in the industry so have nothing to gain, but I thought some insight from a insider opposed to opinions on half the information.
First things first a lot of the comments seem to be confusing a 4 bedroom house rented out as a 5 with one in the dining room versus a purpose built block of studios.
Generally the blocks have staff/warden so the unsupervised house party problem is irradiated.
Generally they will suffer from harder wear and tear than a professional let, however flooring is usually commercial (hard wearing) carpet and hard floors. Very minimal furniture so the real cost is a lick of paint every 3 years, don't forget the things that really cost landlords are boilers and building maintenance (roofs etc) which will be covered in the service charges exclusive of your net income.
Location is key, most universities are investing in teaching buildings and the halls they build will be to facilitate the extra first years. The good developers will be securing sites within stones throw, that said a Uni on the outskirts will see students interest in halls closer to the town (nightlife).
I saw mentioned why don't they sell to the institutional investors, trust funds etc. they do, but not new builds, although due diligence will indicate every reason for the buildings success they are not really allowed to risk peoples pensions on a 'upstart business' in theory.
What does happen often is in 3 years you will be bought out at a premium by the pension funds, at which point you will have had 3 years rental and a bigger lump back. The company I worked for had clients who bought at 80k saw 8% a year and sold for 115k 3 years later... guess what they bought with their money.
And finally the operator, this is and isn't important.. they make money from letting units. If you get a crap one and they fail i am sure there is another operator willing to pick up a portfolio of 400 units generating £100k income a year. I would imagine worst case scenario they could go bust and take a term or two or your money.
..oh on the student companies going bust, look into the actual cases you will find they were funds. And they collapsed (as did many other financial funds) when the market took a turn 10 years ago. No fund is liquid when everyone wants to exit consecutively and its not a student property problem it was part of a larger financial problem.
I no longer work in the industry so have nothing to gain, but I thought some insight from a insider opposed to opinions on half the information.
Please bear in mind that this structure of long-term tenancy is unfortunately incompatible with mortgages, and as such, all investor purchases are cash-only.
No - it is because a bank would laugh at you if you asked for a mortgage for this investment!
Throw your money at it if you like, but ask yourself why they are giving these places away then guaranteeing 10% returns for 10 years, why the website looks and acts like one trying to sell "a set of amazing books to turn you into an internet millionaire" and why the whole thing smells fishier than a fishmonger's fish tank?
No - it is because a bank would laugh at you if you asked for a mortgage for this investment!
Throw your money at it if you like, but ask yourself why they are giving these places away then guaranteeing 10% returns for 10 years, why the website looks and acts like one trying to sell "a set of amazing books to turn you into an internet millionaire" and why the whole thing smells fishier than a fishmonger's fish tank?
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