Blackrock and Housing Bubbles
A friend in Leith complains about yet another planning application locally to build student flats. Edinburgh is drowning not just under the weight of excess tourist numbers but also of students colonising the centre of the city. I’m all in favour of universities, but the vast growth in higher education in the UK – over 80,000 students in Edinburgh alone – has resulted in booming demand for accommodation. This, in turn, has fuelled a huge, speculative property bubble in building student flats. This bubble is funded mostly by hot money from outside the UK. And as with all asset bubbles, it is about to explode, leaving acres of empty, shoddily built rabbit hutches littering Britain’s inner cities.
Purpose-built student flats provide accommodation for around 600,000 people in the UK. They have a current portfolio value of £50bn. More important, these flats are big rental earners in an economy where investment yields are generally low. In London, which has one of the world’s biggest concentrations of higher education institutions, student property provides assured income yields of between 7-10 per cent annually. Result: foreign cash that used to go into luxury flat developments has been cascading into new-build student accommodation.
In recent years, the annual investment in constructing student flats has been running at circa £4bn per year in the UK. The bulk of the cash comes from America and the Middle East, with Russia chipping in a bit too – which suggests there is a lot of money laundering going on. The US money is being pumped in by big investment funds such as BlackRock, currently the world’s largest investor in new coal power stations. (Yes, your student rent is fuelling global warming!)
Why is student accommodation such a big draw for international capitalism? One obvious reason is that, unlike other property, it is super cheap to throw up, or convert from redundant office buildings. This is because student rabbit hutches do not officially classify as housing, so developers don’t have to adhere to the normal building standards that apply to residential properties – from space to daylight requirements. Also, developers of student accommodation automatically escape planning demands for parking space and associated “social housing”, which eat up profitable building space.
The result has been a financial bonanza for developers in an economy where returns have been in short supply since the financial crash in 2008. Consider Unite – not to be confused with the trade union – which is the UK’s largest developer of purpose-built student accommodation. Unite owns 50,000 rooms in 22 towns and cities. Unite has proved so profitable that its share price has risen 140 per cent in the last five years.
Now for the sting: the student housing bubble is about to burst. As with any property bubble, too many investors have piled in, creating a potential surplus to demand. Meanwhile, the number of 18 and 19-year olds in the UK is predicted to fall by around 8 per cent between mid-2016 and mid-2022. Result: the more savvy investors are heading for the door. America’s BlackRock, for instance, has announced it is selling off its £300m portfolio of student flats in the UK. Good luck to whoever buys them.
BAD DAY AT BLACKROCK
For the record, BlackRock shifted into student housing, and away from investing in commercial office property, as security against Brexit causing a flight of service companies from London and the UK. This was meant to be a long-term bet. The fact that BlackRock has abandoned this strategy is very significant. It suggests that BlackRock – the world’s biggest asset manager with a cool $7 trillion under its control – has its doubts about where the UK is headed. (By the way, $7 trillion is double the UK’s GDP!)
Before we leave BlackRock, note that it has just been awarded a fat contract by the UK to manage the cash now accumulating in the new, auto enrollment, workplace pension system. Employee and employer contributions to this scheme already amount to £7.5bn. It is accruing £450m in new contributions every month. By 2022, there should be £20bn in the pot. The question is where to invest it?
The public body running the scheme is called Nest, presumably because this is supposed to be your ‘nest egg’. Nest reports directly to the work and Pensions Secretary, the unmemorable Thérèse Coffey. So far, Nest is putting the bulk of its cash into so-called tracker funds, which invest in safe assets. However, such safe asset class don’t earn much for your savings.
So Nest has hired BlackRock – and a French asset management outfit called Amundi – to invest some of its cash pile in riskier (but more profitable) assets. BlackRock will not use the money to buy existing assets but rather provide private credit to new construction projects in renewable energy and social housing. BlackRock as an ethical lender? Pull the other one.