COMMENT Purpose-built student accommodation has been one of the property sector’s star performers over the past decade, and despite the economic headwinds of the past 18 months, investors have remained confident. But are they making the right decisions and assessing the supply and demand dynamics in their entirety?
Historically, the student-to-bed ratio has been used to understand if a market is undersupplied. But this is too simplistic as it merely compares student demand to beds available. On this basis, on paper, all locations are undersupplied. Furthermore, it ignores the role that houses in multiple occupation play and assumes all students want to and can afford to live in purpose-built accommodation.
The risk here is two-fold: firstly, this fails to answer what proportion of students can actually afford to pay for PBSA. In most cases, domestic students are more likely to stay in HMOs after a year in university accommodation. This is a more affordable option but still provides the opportunity to live with friends.
Secondly, it overestimates the addressable market for PBSA, which can and has already led to investors building PBSA when a market is saturated. A prime example of this is Cardiff. Between 2017 and 2020, almost 5,000 new beds were added to the city, while total demand is estimated to have grown by 3,200.
Furthermore, a significant proportion of these additional students are from the UK and would be unable to afford PBSA, leading some operators to apply for planning to let their accommodation to non-students, a route they are unlikely to take if they are confident about achieving 100% occupancy. Despite this, on paper, the student-to-bed ratio remained at more than 2:1, which suggests a healthy undersupply of accommodation, thereby offering a conflicting view.
With some locations becoming challenging for PBSA, the HMO sector is increasingly attracting the attention of institutional investors, which are beginning to enter this market. With HMOs in short supply and providing a more affordable alternative to PBSA, they represent an opportunity to tap into the domestic student market.
The UK remains a strong draw to investors, mainly due to its university sector’s attraction to international students from global economic powerhouses. It has several world-ranking universities and the appeal of a generous visa scheme allowing students who match its requirements to stay on in employment up to two years after graduating.
However, there are risks and further considerations to be made. Attendance of international students is sensitive to pandemic border measures. The foreign perception of national competence in dealing with the pandemic is also another factor. Politics – from Brexit to growing tensions between China and the West – is also a factor that might affect international student numbers. Against this background, investors will need to look at how their product can be adapted to appeal to the international or domestic student market or a combination of both in terms of price and specification to control risk.
A further consideration needs to be examined – the source of the data. Is it impartial and does it take a holistic view of the market? Many investors are dependent on data that does not even consider HMOs and may come from a source that has a significant conflict of interest, given the same party could be trying to sell an asset in the target location. In these instances, will those parties provide an unbiased view if it risks deterring the buyer?
The UK student accommodation market is undoubtedly thriving, however, the regional divergences in some areas of the country are already revealing some questionable investment choices. Looking at PBSA data on its own is simply not sufficient to understand a local market. Considering both domestic and international student demand and affordability alongside broader political and economic factors is crucial to making sustainable and favourable investment decisions.
Richard Ward is head of research at StuRents
