Universities should turn to bond markets for accommodation funding

Student accommodation is a great long term investment. It has a reliable income stream and is lower risk than some other kinds of residential property development.

Investors have noticed this, and student accommodation has come-of-age as an asset class in its own right. As a result there is a wall of institutional money attracted by the sector’s long-term income stream. With banks reluctant to lend for more than five years, the bond market is becoming the first choice for development funds or refinancing needs.

There are various options available both on- and off-balance sheet for funding developments, but increasingly it is bonds that are the most attractive choice for both new development and refinancing. The social housing sector has proved in recent years that bond financing is a viable alternative and one that, in the absence of long-term bank funding, should be embraced.

Some companies and institutions are already using the bond market. Student housing developer Unite raised £185 million in November 2013 through 12 year bonds with a coupon of 3.921%, while last year the London School of Economics raised £125m split between three maturity tranches of 15, 30 and 40 years.

Others could benefit too. Universities and developers need to take advantage of current bond market conditions and capitalise on the institutional money seeking long-term income. Capital projects of this scale demand appropriate financing, and bonds are in most cases the best option for such developments.

Edward Sunderland is a capital markets and banking expert at Pinsent Masons, the law firm behind Out-Law.com