Canada Pension Plan Investment Board is cozying up to students in a $2.1-billion deal to purchase dormitories in the U.K., the largest real estate deal the fund has ever done in Europe.
The portfolio of student accommodations is the first investment in an alternative real estate sector for CPPIB, which manages the Canada Pension Plan's investment portfolio, and the fund is already planning a further expansion into this market.
The 40 student residences and 16,700 rooms being acquired are marketed under the banner of Liberty Living. The deal comes after seller Brandeaux Student Accommodation Fund, which had managed institutional investment in student accommodation since 2000, held an auction for the assets.
"We've seen the sector have very solid occupancy rates for quite a long time that reflects the supply and demand situation in the U.K.," said Andrea Orlandi, CPPIB's head of real estate investments in Europe. The company said last summer that about 90 per cent of its available space was reserved in the 2014 to 2015 academic year. Mr. Orlandi added that the business produces robust cash flows. "The U.K. university sector has high appeal, not just in the domestic market but also the international market. For us, it a good foundation to build on."
Investing in student housing comes with some unique considerations, Mr. Orlandi said. The business must maintain good relationships with each university. "Likewise, the duty of care you have towards the students and the reputation you build with the student body is critical," he said. CPPIB not only bought the properties, but also Liberty Living's management platform, Liberty Living Management Two Ltd.
Each dormitory has its own management team on the ground. The portfolio of properties is spread across 17 cities in the U.K. Without the presence of an experienced management team, the property assets alone would have been less appealing to CPPIB, because the fund would be exposed to more risk. The senior management team at Liberty Living has been together for more than a decade.
"We can go to the market and look for additional stock, and basically target building the portfolio. Because for us, the management team isn't just about carrying the existing assets, but it's also about being able to source and build the portfolio," Mr. Orlandi said.
Before Liberty Living's sale at auction, Brandeaux was considering an initial public offering for the business. Plans for an IPO were shelved in June last year, with the company citing "adverse public market conditions" for the decision not to proceed.
"I think for us this is a long-term investment. This is a sector we think we can grow in and we have the ability to dedicate more and more capital to it," Mr. Orlandi said. That includes buying more properties and remodeling and renovating existing buildings, he said.
CPPIB sees opportunities to expand its ownership of the student housing market in the U.K. because the business is highly fragmented. "We have the means to buy additional assets in the market and grow the portfolio," Mr. Orlandi said.
CPPIB recently reported total assets of $238.8-billion in its fiscal third quarter, with 16.5 per cent of its assets invested in real estate and infrastructure holdings.