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Big investors are giving university digs an upgrade

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THE words “Unite Students” are emblazoned on Aston University’s residence halls and on signs all over campus. They are the name of a firm that builds, buys and manages student accommodation across Britain. Last year Unite Students bought all 3,000 of Aston’s on-campus bedrooms for £227m ($313m) in partnership with the Government of Singapore Investment Corporation, a sovereign-wealth fund. It was thought to be the largest ever one-off purchase of student housing.

Many readers will no doubt recall dingy halls of residence owned by universities, or squalid private digs owned by individual landlords. But student accommodation has got an upgrade. Private halls have sprung up as cash-strapped universities have outsourced to companies such as Unite. Some have grown into publicly traded brands offering thousands of beds across the globe. American Campus Communities owns more than 134,000 beds across America. Dubai’s GSA has student housing in eight countries.

Some $16bn poured into the sector globally in 2016. Sovereign-wealth funds invested over 15% of their worldwide spending in student accommodation that year, up from less than 4% in 2011-15, according to the Sovereign Wealth Lab at IE Business School. The Canada Pension Plan Investment Board announced earlier this year that it had acquired a new portfolio of student housing in America for $1.1bn as part of a joint venture. The sector offers strong risk-adjusted returns, limited supply and stable demand, says Peter Ballon, who oversees the fund’s property investments.

Some of this is a punt on the global middle class. As families in developing countries, in particular India and China, have become richer, the appetite for English-language degrees has grown. More than a fifth of university students in Britain are from abroad. America’s foreign-student population grew by 40% over the past five years.

To serve the rich among them, developers now offer hot tubs, rooftop bars, cinema rooms and the like. But most of the action is in more affordable housing close to campus. According to Knight Frank, an estate agent, rising tuition fees in Britain seem counter-intuitively to make students willing to spend more on housing, since it is a smaller share of the total cost. Akshay Bagga is a typical customer. The 19-year-old from Birmingham spent his first year commuting to Aston before deciding he wanted the full university experience. He chose what he thinks is Unite’s cheaper option and is happy with the convenience of living five minutes from the library.

Student accommodation has some specific risks as an investment. Students tend to move only at the beginning of academic years, so failing to find a tenant then may mean a vacancy for a full 12 months. Students are harder on properties than most renters. Students, parents and universities demand prompt repairs and tight security, particularly when the student is living away from home for the first time. And a nativist turn in both America and Britain has led to tighter rules on visas for foreign students, crimping their numbers.

Against that, yields are higher than in other sorts of residential property, according to Savills. In America the average is 5.9% for student accommodation, compared with 5.6% for private residential rentals. And student accommodation has a valuable countercyclical quality. In recessions, people tend to go back to school.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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