Diversification is key to Scots PBSA

Given the economic headwinds facing property investors in recent years, it is particularly reassuring to see certain sectors performing so well. Purpose-built student accommodation in Scotland is one such area. In fact, a recent report by Cushman & Wakefield (UK Student Accommodation Report) concluded that last year was the strongest on record for rental growth in the PBSA sector across the UK, with student rents in Glasgow rising more quickly than in any other major student hub across the country. There may be some challenges facing PBSA investors in the coming years, but the evidence suggests that the Scottish PBSA sector will continue to be a strong performer. A success story There is no shortage of statistics to reinforce the proposition that the PBSA market in Scotland is achieving strong financial results. Cushman & Wakefield’s study noted that rents were surging across Scotland’s key academic cities. Aberdeen’s market is growing, with annual rents increasing by 8.4% between 2022/23 and 2023/24. In the same period, the Edinburgh market saw growth of 11.2% and, even more impressively, Glasgow returned an increase of 19.4%. With impressive figures like this, it is easy to see why the sector remains an attractive option for investors globally. It is perhaps interesting to compare the growth of PBSA rents against private rental sector schemes. Findings from a recent study by the Scottish government found that properties across Scotland in the PRS have increased by only around 13% since 2010. These are different markets, and juxtaposing the comparative rents is helpful only to a degree. The difference remains stark. There may also be an argument that the PBSA market has been more insulated from the impact of the cost-of-living crisis than the rest of the PRS. The Scottish government’s decision to withdraw PBSA from the rent cap imposed by the Cost of Living (Tenant Protection) (Scotland) Act 2022 before private residential tenancies is just one example of this. The PRS is also cyclical, whereas there will always be a heavy demand for PBSA. The student population in Scotland is rising year-on-year, with more than a 30% increase since 2006. The burgeoning student population will offer PBSA investors a semblance of comfort that their schemes are unlikely to see widescale voids, but it also presents challenges. The UK Student Accommodation Report notes that the national average student-to-bed ratio currently stands at 2.1 students per bed. Perhaps a good problem to have, but PBSA investors will need to work increasingly hard to satiate the demand for beds. A word of caution There are more reasons for positivity in the PBSA sector than can be listed in this article. However, investors will need to work harder in the coming years to ensure that their assets continue to meet the expectations of academic institutions and their students. Affordability is of exponentially increasing importance, especially in the context of a cost-of-living crisis. One recent survey found that 64% of students are worried about housing costs. Worse still, the National Union of Students Scotland identified that 12% of students have experienced homelessness during their studies. There are growing calls for governments across the UK to permanently address the problems with the affordability of student housing. In Scotland, temporary action has been taken by legislature to date, but more permanent solutions have been mooted south of the border. For example, Bristol’s new local plan is deliberating the imposition of a requirement on developers to provide 35% of their beds at an affordable rate (“affordable” meaning half of the amount received in student loans). Developers in Scotland will be keenly watching the possibility of similar legislation, as the capital consequences of such regulation will be considerable. The Scottish government’s review of its PBSA sector has been long-awaited, though the minister for higher and further education recently confirmed that work is now underway to progress the recommendations of the Purpose Built Student Accommodation Review Group. The 11 recommendations are outwith the scope of this article, but investors in the sector will be particularly interested in the consultation on the introduction of legislation regulating notice periods for PBSA and the potential knock-on effect on rent and investment levels. The government also aims to work closely with PBSA partners to address other issues in the sector, aiming to impose a model set of terms and conditions as well as engaging with developers to encourage the building of a further diversified range of student accommodation properties. Diversity is key The PBSA sector has been one of the strongest performers over the past few years, but it is not a silver bullet. Rent levels are rising at pace and, with student populations also on the rise, it is easy to see why it remains an attractive asset class for investors. That said, the affordability of beds is now more important than ever, and it looks increasingly likely that government regulation will be introduced to guarantee that students will not be priced out of a degree. Ensuring the delivery of a more diverse range of PBSA will be key to the future performance of the sector. Rory Stewart is an associate at Dentons