Class in session: lessons for the UK PBSA sector

In late September, a group of real estate leaders gathered for an EG roundtable hosted at Colliers’ offices in central London to share their thoughts on the “political football” that is the student accommodation sector. The conversation centred on investor sentiment in the market, with growing concerns over the financial viability of universities, the predicted fall of international student numbers this academic year and the diversification of product being delivered. Experts were bullish about the market, describing the higher education sector as a “key export” for the UK. According to the latest data from StuRents, there were 437,240 domestic students accepted into UK universities this academic year – a 2% rise on 2023 numbers. The same figures revealed a 0.5% decline in EU numbers, at 10,520 students. Some 14,890 Chinese students were accepted, a 1.9% decline, and 4,770 Indian students, a 3.8% fall. Financial health cause for concern Opening up on the sector’s fears over universities’ financial health, Seb Horst, investment director at Host Student, said: “In the past 12-24 months, along with everything else that we need to tick off for various investors and banks, university financial stability is certainly something that is creeping more into conversation. The difficulty we find is that the data around university financial health is quite hard to come by.” Host Student, formerly Victoria Hall Management, has 10,000 student beds across 29 sites in the UK, Ireland and Europe. But Horst said a lack of data makes it difficult to know which geographies and markets the company should invest in next. “We have seen a few reports by the big accountancy firms that have been commissioned by various universities or the government to look at financial health but even those reports and that data is quite limited, so it is quite difficult to really get under the skin of which universities and which cities we should be concerned about, if any,” Horst said. The sentiment was shared by Ioannis Verdelis, chief investment officer of Vita Group. Verdelis said: “A few years ago, there were no concerns in the PBSA market about the government or external issues whatsoever. But now you have a range of issues, and they are all political in nature, whether it is the issue of visas and immigration that students have started to get caught up in, whether it is the funding of the university and the higher education sector.” Vita Group is prevalent in the PBSA, co-living, build-to-rent and luxury retirement markets. It has 31 schemes in 18 cities, with 11,514 beds. Verdelis said through speaking with Vita’s investors he has found the sector has become increasingly tangled in politics over the years, adding: “Generally anything that has been caught up in British politics has not done very well in the past few years.” He said: “However, the product is great, the universities are great, and the students are having a great experience and learning well, and they want to come. “So there is no concern there; there is always a demand and supply – it is just about whether any external factors such as migration numbers and university funding will throw a massive curveball in the sector that has become a consideration for external investors when they benchmark PBSA against BTR or equities or anything else they may put their money to.” Alex Pease, chief executive of developer Watkin Jones, argued that “the student sector being a political football is not a new thing”. The developer and operator, which focuses on BTR, student accommodation and affordable housing, has delivered more than 49,000 student beds across 147 sites across the UK. Fresh, its specialist accommodation management business, manages some 19,000 student beds and BTR apartments on behalf of institutional clients. Pease said: “Student has gone up and down so I don’t think this is a new thing, we are just in another phase where it is being put in the headlines. I agree that the data is just too poor, it’s always backwards-looking, never forward. The universities don’t know how many students they will have this year, that is a big challenge.” However, Pease added that it was too soon to tell if the financial viability of universities was something to be concerned about. He added: “You would like to think that the government will ultimately come back to all the economic benefits that higher education brings to the wider ecosystem, which are substantial.” Financial distress at universities is having a real-world impact on PBSA valuations and funding, said Tom Griffiths, an originator at Investec. He noted that the lender is “a lot more focused on the underwrite” when it comes to investing in schemes in cities with universities that may be facing problems. Investec has delivered more than £1.1bn in total UK PBSA lending, supporting 24 clients with the delivery of 22,000-plus beds across 62 schemes in 26 cities. Griffiths said: “We are still very much open for business in PBSA, and it is not to say our underwriting wasn’t robust previously, but we are being a lot more focused on the underwrite and looking at the individual schemes and locations. “We have done a huge piece of work on our existing books and looked at how many locations we are exposed to with one university and Russell Group universities and what the financial strength of those are.” Student developers’ plea to government Ahead of the Autumn Budget, student accommodation developers called on the government to focus on initiatives “orientated around growth”. Pease said: “Everyone was looking forward, whatever your political affiliations, to some stability, some steady ground. [Labour] have a substantial majority so they should be able to get some policy through. My fear would be if they go too hard. Global capital allocators can allocate anywhere, and if we make the UK unattractive then they can go anywhere. So for me, a budget that supports growth is very important, and they must strike the right balance.” Bringing a lawyer’s perspective to the debate, Balraj Birdi, partner and head of residential investment at Eversheds Sutherland, said to enable growth the government must solve the problems in the planning system. He said: “I hear from a lot of clients about the issues around trying to get planning. “They have local communities objecting because they don’t want another raft of students coming along, so schemes are refused and then those very students end up going into local housing and become the objectors’ immediate neighbours.” He added: “Now we are seeing universities tying up with developers to go for planning to give it that support, that this is not just another scheme it is for university purposes, to give it that growth. The planning system needs to change. I understand there will be tweaks instead of a complete overhaul coming but it is very important, especially from a developer lens.” The student market is now home to high-end PBSA schemes, leaving the mid-market product largely undelivered in many cities. With the added challenges of viability owing to the uncertain futures of universities, the situation has become trickier still. Verdelis said: “One of the conclusions is you don’t want to go to one of the tertiary cities or tertiary locations; you want a good-quality university, a good-quality location, a good-quality sponsor. It’s very difficult to deliver that at a price point that makes sense and that has been the challenge. I think you could potentially deliver a lower price product if you took a view on some of these things but nobody around the table seems to want to be doing it because it doesn’t seem to make sense when you look at the risk in some of those tertiary markets.” Irina Stamate-Rocha, investment director and partner at Patron Capital, has launched a joint venture with Curation Capital to acquire and refurbish existing student properties in towns and cities that are linked with Russell Group or tier-one universities. She agreed with the difficulties of stacking mid-market products. Patron has so far invested £100m in five PBSA properties comprising 1,000 beds in London, Manchester, Birmingham and Nottingham. The investor plans to deploy another £100m-£150m in the same strategy over the next couple of years. Stamate-Rocha said: “We tried to do a strategy that is focused on high-quality locations, ideally two universities in the town and looked at buying properties and refurbing them and repositioning them and still delivering an affordable product. Some of our product is no longer that affordable because it is still high-quality land but so far operationally that has worked.” She added: “The key challenge that we have is that core capital is not really in the market for when we will exit, but I suppose I can deal with it in a couple of years. The challenge is finding good properties at good prices and effectively being confident [in] everything that the fire safety Bill has thrown into the sector. So it’s a good strategy and we like it. We feel that affordability is important, particularly for the domestic – and maybe for the international students as well – as they are becoming more price-conscious.” Office-to-resi opportunities Horst said that with challenges in development and finding the right site in the right location, repositioning strategies are going to become more popular. “With two staircases, fire safety and construction costs becoming increasingly difficult, the risk-return appetite from the equity that is coming into the sector has gone up. The middle is getting squeezed from all those things and the risk, so that repositioning strategy as an alternative is less risky if you can get the underwrite correct and that might become more popular in the next few years.” George Adams, an associate director in the Colliers living capital markets team, agreed but had concerns on the ability to exit office-to-resi PBSA schemes. He said: “There are still concerns about exit – if you do office-to-student – who your ultimate buyer would be because you have to get it absolutely spot on in terms of all the institutional tick boxes to ultimately make it exit-able.” Pease said office-to-resi schemes ultimately cost a developer as much as a new-build, adding: “You have to pay for an existing use office on an office building, so someone’s book value has not written that office building down to a site value so it’s the dynamics more than anything else.” However, Will Atkinson, head of property at Empiric Student Property, which was “built on converting offices generally or through permitted developments”, said there are “benefits around planning” when it comes to conversions. Empiric has a £1.1bn portfolio of PBSA schemes, comprising 7,851 beds in 25 cities. Atkinson said: “We totally get that is does cost the same and you have to do it well, you have to bring on the fire safety and you have to comply with dual staircases. But there are benefits around planning, you don’t get as much objection and save embodied carbon. You engender a much better conversation with the local stakeholders by doing it and our strategy is very much small buildings.” Empiric undertakes sites capable of providing 100-150 beds and brings five or six sited together in a cluster. The developer drives amenity through one central building in a scheme. “That is our way of getting the scale and competitiveness against these big buildings that are being built but we find that it is more sustainable and also takes a shorter time,” Atkinson said, adding that unlike full planning, the timing for permitted developments are a quicker development model to get PBSA stock. Barriers to supply Pease said while build cost inflation has normalised, the sector has not yet seen deflation. Commodities are still up and down, therefore the developer is factoring inflation into all of its appraisals. He said: “You have 20-30% inflation on your build costs and rental growth has helped to an extent but, for me, that would be the single most useful thing in the sector, to have build cost and inflation come down.” Horst agreed and said: “Construction at the moment is so hard, there are so many boxes you have to tick from all sides: contractor, investor, bank, ESG, fire safety. All of that adds costs, notwithstanding inflation, and then it only goes to rents, if I am being honest.” Evershed Sunderland’s Birdi said developers in the student space can have £1m of extra costs added to appraisals for various health and safety aspects. “Fire safety and health and safety are all very important of course, but if you’re not hitting your time scales of, say, June-July finish, you are delayed by a year on your student arrivals.” However, Simon Saint, a principal at architectural practice Woods Bagot, said among the residential sectors, the student market was still the frontrunner in terms of viability studies. He said: “The two weeks from 4 July 2024 onwards were the busiest two weeks I have had in terms of inbound inquiries and requests for feasibility. That was initially election-led more than anything. It was the confidence in the market waking up again.” What does the future hold? Speaking about trends and upcoming strategies that will shape the PBSA sector, Empiric’s Atkinson said: “We have launched our first postgraduate-only product and we are letting very well. It is something we think can grow. We are at the point in the market where everyone is looking at their customer and asking, ‘what is driving the values for them?’ and really homing in on that.” Verdelis seconded the diversification strategy as one Vita is adopting as well. He said: “A lot of firms, including us, were focused on a very formulative product at the beginning but now you are seeing the product evolve and seeing different amenities, different levels of service, different layouts and, hopefully over time, a different range of price points because there is demand for all of them.” Adams said that adding flexibility in amenity spaces for students would be the next big thing. “Student preferences change all the time,” he said. “So having a cinema room that can be turned into a yoga studio going forward will be very important, as the customer will change over the next five to 10 years. Having that from the get-go, the flexibility of that being changed in the design of the building, will be very important.” In terms of amenity space in a PBSA scheme, Sam Scott, managing director of Watkin Jones’ third-party management business Fresh, added that from an operator perspective, the accumulation and accuracy of data will be all-important. He said: “We are seeing increasing demand from our clients and investors on data, how we can collect data in every shape and form and how we can present that in a way that is helpful to both us and our clients. Whether it is us in the building monitoring how often the gym gets used, what time of the day, or whether it is reporting on the nationalities of students, or whatever it might be. How can operators set up their back end to facilitate as much of that data as possible in a presentable format is going to be a challenge – a very good one.” Pease concluded: “The sector will continue to reinvent itself. The sector has been naysaid every single year since I have been involved. They say it will come to an end but I have got faith that government rhetoric will balance out and the students and higher education will be recognised as a key export in the UK, and that will help sustain the sector.” Image © Colliers