How a £100m student accommodation scheme went wrong

  1. A Plymouth student property proposition
  2. Educational exports: the story so far
  3. How Lloyds got burnt by a for-profit education deal
  4. A casualty in the education marketplace
  5. Connecting an Australian private equity buyout to Swansea University
  6. Oxford & Legal & General, the real estate play
  7. Alpha Plus is still losing money
  8. Students as a commodity, Sino-US trade war edition
  9. What the bond market thinks about the prospect of a university crisis
  10. How the forces of finance fund MBAs
  11. Introducing the shadow education sector
  12. Why US investors are betting on European student accommodation
  13. The Alpha Plus pension problem
  14. The rise of educational forgery
  15. For sale: one luxury Georgian townhouse
  16. Canada's educational exposure to China
  17. University graduates and the means of financial production
  18. A business model fit to educate royalty
  19. American education and the rise of philanthropic capital
  20. The financial plumbing of university education
  21. Bailing out the universities
  22. The temptations of student real estate
  23. The Egyptian campus that wasn't
  24. The real student politics
  25. Cambridge University’s £1bn bet on housing
  26. University accommodation deals: it's a wrap
  27. Saudi Arabia vs. Canada, the education angle
  28. When is a loss not a loss?
  29. Taking education into account
  30. On the genealogy of moral hazard
  31. Student flows with Chinese characteristics
  32. The great balance sheet shift of British universities
  33. Spare a thought for the music halls
  34. Universities and the allure of capital markets
  35. The strange economics of the university strikes
  36. Higher education and the new doctrine of vocation
  37. The financing of student accommodation
  38. The many problems with a market for higher education
  39. The questionable credit-worthiness of student loans

A short walk from the centre of Stoke-on-Trent, a new student accommodation block is nearing completion. The lights work, the water runs from the taps, and the hundreds of rooms have beds in them.

The problem is that there are no students.

Q Studios has been frozen in time for the past four months. It is one of 19 buildings in a £100m UK property scheme that enticed more than a thousand retail investors from around the world.

Buyers from the UK, Asia and the Middle East were offered “effortless” annual returns of 8-12 per cent if they bought student rooms in Stoke, Loughborough, Bradford, Preston, Leicester and Huddersfield. Currently, they are receiving nothing at all.

The returns were supposed to be paid through a company — A1 Alpha Properties (Leicester) Ltd — which collapsed earlier this year, as the FT revealed on Friday. That company signed a contract to act as the tenant for investors, paying them an income over a 10-year period, and in turn bringing in rents from students across the many sites.

In October, A1 Alpha Properties (Leicester) Ltd missed a payment to investors. Not enough money was coming in to cover costs, notably including ground rents and service charges, and the company was put into administration in February.

A major reason for the collapse in the first place was earlier construction delays at the Stoke site. The directors running the scheme, Nicholas Spence, 47, and Derek Kewley, 46, also blame new supply “flooding” the market. Just over half of the more than two thousand rooms across the sites were occupied, as of February.

But beyond the reasons for its failure, the structure of the scheme highlights the complex risks that the retail investors were exposed to, that might not have been apparent from the initial ads on Facebook. A deeper look at the way it was marketed, moreover, raises questions over whether the returns on offer were ever plausible.

Follow the freeholds

The view from inside Q Studios, Stoke-on-Trent.

Investors bought the rooms on 250-year leases from a series of separate development companies, each linked to a particular site - many of which were not built from scratch. In the case of Q Studios in Stoke, a lease seen by FT Alphaville shows the developer to be Alpha Developments (Stoke) Ltd. In that case, the room was purchased for £73,950.

Nicholas Spence and Derek Kewley, in addition to acting as directors at A1 Alpha Properties (Leicester) Ltd, were directors at these development companies. The day-to-day running of seven of the properties was originally handled by Mezzino Ltd, a separate company. Mezzino, after a dispute with Mr Spence and Mr Kewley (a process that no one involved can comment on due to a confidentiality agreement), was replaced with Alpha Student Management, which was also run by Mr Spence and Mr Kewley.

Mr Spence and Mr Kewley, then, were directors of the development companies, directors of the company that committed to pay investors a return, and, following the dispute, directors of the service company, which is responsible for overseeing the day-to-day running of the buildings. Another director of Alpha Student Management, Peter Sullivan, 55, was appointed director of the main company, A1 Alpha Properties (Leicester) Ltd, in January 2018 and has conducted communications with investors over recent months. Mr Spence and Mr Kewley resigned at the end of November

The development companies actually sold on the freeholds to another company, Premier Ground Rents Ltd, according to a summary of a meeting available on the website of Quantuma, the administrator. The company could not be reached for comment.

The insolvent company A1 Alpha Properties (Leicester) Ltd, as well as paying returns to investors and bringing in rents from students across all of the sites, also committed to pay ground rents and service charges to the investors.

The investors, when they bought the rooms on 250-year leases, had committed to pay these charges in turn. While the scheme was working, A1 Alpha Properties (Leicester) Ltd simply bypassed them, paying the fees directly. But because that company is now in administration, it cannot do so.

Across the scheme, the ground rents and high service charges outweigh incoming rents from students. £4.5m of rents were coming in annually, compared to £1.2m of ground rents and £3.9m of service charges, leading to a deficit as of February, according to a person familiar with the matter.

A few days ago, investors received emails from Peter Sullivan asking them for payment of ground rents and service charges. In the case of the Bradford site, for example, payment was requested for ground rents of £125 and service charges of £367.46 for the three months to the end of September. Peter Sullivan did not respond to multiple requests for comment.

The investors, who have paid between £50,000 and £75,000 for rooms in the buildings across the UK, are not only receiving none of the income they expected. They are also under pressure to make payments themselves.

Where is the money?

An unfinished room at the Stoke development.

Around £100m flowed into the scheme from nearly one-and-a-half-thousand investors. The directors say that the majority of this money was used for development, renovation, infrastructure, and was invested back into A1 Alpha.

While they also resigned from that company and the management company, Mr Spence and Mr Kewley are still listed at directors at the developer companies which sold the rooms, at a correspondence address in Sunderland. Alpha Developments (Stoke) had £2.3m of cash at the bank, as of the end of December 2017. It had total assets of £4.3m and current liabilities of £3.2m.

Quantuma, the administrators, are only dealing with the insolvent company A1 Alpha Properties (Leicester) Ltd. They do not have a mandate to deal with the developer companies, or go over their accounts.

Their aim is now to resurrect the scheme by splitting out the individual buildings and returning them to the control of investors. Previously, as a result of A1 Alpha Properties (Leicester) Ltd’s central role, investors in one building had exposure to all the others.

Investors who have bought in stronger markets, under the new approach, would be in a better position. Occupancy rates vary across the country. In Bradford, for example, they were just 35 per cent, as of February. It is unclear when the Stoke building will be finished — and who exactly will pay for the final touches.

Advertised returns

The centre of Stoke-on-Trent.

The marketing materials for the Stoke building promoted its location, close to Keele University and the University of Staffordshire, which it said “ensures high demand in a thriving student city”.

That quote formed part of a sleek marketing campaign by Emerging Property, an estate agent, which included Facebook ads and a showroom in Dubai. The prospectus, which at the bottom pointed out the estate agent is not regulated by the FCA, drew on some of the arguments that have also helped drive the institutional investment flows into student property over the past few years.

In Stoke, the buildings around the city centre are plastered with advertisements for student housing. Rob Butters, a local estate agent, says that in the last few years, “a lot of investors have come from outside. He adds that typical student rents might be £130 a week in a block, or less than £100 a week in a shared house.

The directors of the scheme, Mr Spence and Mr Kewley, partly blame competing supply for the schemes’ difficulties. Even if it were fully let, though, it would only bring in £10m of income, according to notes of the creditors’ meeting with Quantuma. Most of the sites offered returns of 10 per cent — meaning even maximum rents, as it currently stands, do not appear to be enough to pay the investors the amount in the contracts after accounting for costs.

Minutes of the same meeting, which took place in May, said questions were being asked regarding this point, and that “to date, a satisfactory response has not been received”.

The developer prospectus, which was sent to investors in early 2017, listed fifteen sites. It said that twelve of them were already “fully operational & 100% occupied”. This amounted to 1,654 of the 2,216 units.

But occupancy rates are just over 50 per cent, as of February. Moreover, the page on the prospectus was entitled “freeholds retained by the developer”, when the freeholds were, as above, sold on to another company by Mr Spence and Mr Kewley.

Many investors, meanwhile, believe they will still have a viable investment after the travails of the administration process are finished. Some of them expect to make returns of 6-7 per cent, rather than 8-12. They say investors from outside the UK bought in because of their trust in the English legal system. That legal system is central to the prospect that they may now have to make, rather than receive, payments.

To Florida

Nicholas Spence is not in Stoke, or any of the other locations across the scheme. In early 2018, he moved to Florida, where he is involved in a company called EP Realtors.

The name, which is short for Emerging Property Realtors, is similar to the name of the UK estate agent that marketed the student accommodation scheme. The latter once acted as a sales agent for the US company, but has no other connection with it.

On its website, there is a “testimonial” from Burket Ali.

We called up Burket Ali, who told us he had “never heard” of EP Realtors, though he did write a testimonial in 2015 for the estate agent that worked on the UK scheme, after buying a property at the Leicester development. Andrew Crump, managing director of the UK company, says he has no affiliation with the US company and contests the use of material from his website.

Mr Ali, 56, is head of engineering and computing at De Montfort University International College, which teaches pre-undergraduate and pre-master’s degree courses to international students. He says the prospect of paying ground rent and service charges “adds insult to injury”.

Mr Ali knows Tudor Studios, the building he invested in, well.

“I used to drive past it every day and I know that there’s a huge demand in Leicester,” he said. “We bought them, they paid like clockwork … until October last year,” he added. “They always paid on time. It seemed a really good investment.”

  1. A Plymouth student property proposition
  2. Educational exports: the story so far
  3. How Lloyds got burnt by a for-profit education deal
  4. A casualty in the education marketplace
  5. Connecting an Australian private equity buyout to Swansea University
  6. Oxford & Legal & General, the real estate play
  7. Alpha Plus is still losing money
  8. Students as a commodity, Sino-US trade war edition
  9. What the bond market thinks about the prospect of a university crisis
  10. How the forces of finance fund MBAs
  11. Introducing the shadow education sector
  12. Why US investors are betting on European student accommodation
  13. The Alpha Plus pension problem
  14. The rise of educational forgery
  15. For sale: one luxury Georgian townhouse
  16. Canada's educational exposure to China
  17. University graduates and the means of financial production
  18. A business model fit to educate royalty
  19. American education and the rise of philanthropic capital
  20. The financial plumbing of university education
  21. Bailing out the universities
  22. The temptations of student real estate
  23. The Egyptian campus that wasn't
  24. The real student politics
  25. Cambridge University’s £1bn bet on housing
  26. University accommodation deals: it's a wrap
  27. Saudi Arabia vs. Canada, the education angle
  28. When is a loss not a loss?
  29. Taking education into account
  30. On the genealogy of moral hazard
  31. Student flows with Chinese characteristics
  32. The great balance sheet shift of British universities
  33. Spare a thought for the music halls
  34. Universities and the allure of capital markets
  35. The strange economics of the university strikes
  36. Higher education and the new doctrine of vocation
  37. The financing of student accommodation
  38. The many problems with a market for higher education
  39. The questionable credit-worthiness of student loans
Copyright The Financial Times Limited 2019. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

Read next:

Read next:

Lookout, there’s a dollar crunch!

FT Alpha Tweets