The 2023/24 academic year is shaping up well for owners and operators of purpose-built student accommodation, say industry professionals.
Jamie Harris, head of student accommodation – capital markets at agency Harris Associates, said:
“Across the board, it is an interesting time to be in the market. Clearly, there has been a lot of volatility and dislocation that has happened on a macroeconomic level. However, occupationally this is probably the strongest year we have seen in over a decade.”
Jonathan Long, head of corporate real estate finance at Investec, said student accommodation remains a “countercyclical asset class”.
“In the student market, when the economy sees a downturn, the number of full-time students increases, and you see more and more people flock to higher education as the employment market is more challenging,” Long said.
Investec passed a £1bn “lending milestone” in UK student accommodation earlier this year, he added, having funded 22,000 beds across 55 schemes in 23 cities since 2011.
The country faces a shortage of some 350,000 beds across the 30 largest university towns and cities, according to CBRE, while Knight Frank forecasts fewer than 15,000 new beds will be added to supply this academic year, down from 20,695 in 2022/23. PBSA delivery has slowed by 28% year-on-year.
That supply-demand imbalance is supporting rental growth of around 7% across the board, according to Unite Students’ latest financial results. The developer and investor reported a record level of 98% for the 2023/24 academic year and is targeting rental growth of at least 5% for 2024/25.
International students and investors
That kind of growth is attracting investors. Stuart Carr-Jones, head of transactions for UK, Ireland and emerging Europe at AXA Investment Managers, said the business is looking to invest heavily in PBSA as one of its “conviction calls”. The sector’s ability to pass on inflationary pressures adds a resilience that is boosting interest, he said.
“Domestic and international demand is holding up very well,” Carr-Jones added. “There is lack of supply through planning, construction cost – whatever you want to call it. The UK is not great at delivering product. It is great for rental growth but not affordability and we do not see that changing anytime soon.
“That ability to pass on the inflationary pressures we are seeing gives some resiliency to the income stream that we look for as a core investor in the space.”
Industry players see investors that would typically look for more traditional assets now target student housing as a viable asset class.
“We are all seeing the structural changes happening in office, retail and leisure, and because of that a lot of the major funds that have previously deployed their capital in those sectors are now interested in student housing,” said Harris.
“Once there is a little more clarity on the macroeconomic situation and we are starting to hear a lot more positivity, then a lot of this new capital is going to enter the sector,” he added. “We will see UK pension funds investing in students, which we have not seen over the past few years, as well as office developers and investors looking at student housing as another option.”
Harris added that PBSA is one of the sectors in the UK that is seeing the most interest from overseas buyers as they spot a market where the supply-demand imbalance will deliver healthy yields.
“Planning applications have gone down 75% and we are seeing huge uplifts in the number of students,” he said.
“I think investors are seeing there are structural tailwinds behind the student accommodation sector and better demographics, hence there is no sign that rent uplifts are going to slow anytime soon and that is really encouraging for investors to see that it is a very inflationary hedged sector.
“We have a lot of Asian capital coming in, a lot of Middle Eastern capital, Japanese capital. It seems to be the sector that is attracting the most international exposure.”
PBSA versus HMO
With PBSA supply tight, the houses of multiple occupancy market also faces its share of challenges. Savills estimates that there were 31% fewer five-plus bed properties listed for rent in Q1 2023 than the pre-pandemic average.
Additionally, since 2017 there have been over 300,000 buy-to-let mortgage redemptions across the UK, as regulation and tax changes have made investment less attractive for private landlords.
The HMO market has historically been a strong contender to PBSA in attracting “budget-conscious” domestic students. However, with decreasing supply and increasing stamp duty and second home taxes, industry professionals believe the market will catch up to PBSA rents in the coming years.
Investec’s Long said: “We are seeing more and more private stock being removed from the market, and in the private stock that is there, rents are starting to converge, whereas years ago the rents used to be polar different.”
Student accommodation search platform StuRents shared its data on average HMO rents versus PBSA rents in key university cities with EG (see graph), which showed that PBSA is still charging significantly more.
Richard Ward, head of research at StuRents, said the PBSA sector continues to attract investment due to broad, positive fundamentals.
However, there is a risk that investors are failing to consider the nuances of the sector, he added, with vast differences in the landscape across the UK’s many university towns and cities.
“Overall, demand for PBSA is increasing across the country, while supply growth is slowing down,” he said. “There is a well-documented student housing crisis afoot in numerous cities – perhaps most acutely in Glasgow. Investors need to be cautious when choosing locations for new PBSA based on broad-brush analysis.”
Anecdotally, Ward said, places like St Andrews or Canterbury might be touted as ‘hot spots’ for investment – UCAS acceptance rates are up for both, and St Andrews has made headlines for housing shortages that have seen students commuting from as far as Dundee.
But the particulars of these locations mean that PBSA investment might not be straightforward. Planning permission is a major hurdle in many places, and competition with the HMO market is too tough in some locations where student budgets tend to be lower.
Domestic problems
As the PBSA market stands, industry experts are concerned that the affordability crisis of limited supply and raising rental growth is “slowly but surely pricing domestic students out of PBSA”.
Long said: “The main challenge is the over-reliance on overseas students – that’s what people are afraid of. There has been a lot of press on how in the top Russell Group institutions most of the students have been international because universities need that higher fee, and squeezing domestic students out of the UK’s big universities is a big risk for all PBSA markets.
“It might reach a point where domestic students wonder whether university is affordable. We have had a huge surge in student numbers and that is predicted to continue to 2030, but will it reach the point where there will be a reset in regard to higher education in this country?”
London as a beast of its own
London is an outlier in terms of the purpose-built student accommodation market, defying the pre-established notions of a PBSA scheme needing to be located within 15-minutes’ walking distance of a university campus. Instead, industry experts believe that the rule of thumb for London PBSA schemes is that they should be located within a 30-minute commute by public transport.
Jonathan Long, head of corporate real estate finance at Investec, said: “London is about transport links. People accept they have to commute to universities, whereas in campus-based universities like Nottingham, people expect to be able to walk.”
Long added that the Elizabeth Line will be key in redefining the future of London PBSA hotspots. Canary Wharf, he predicted, will see an influx of PBSA developments due to the improved transport links.
Long added that, as a debt provider, he looks at London schemes on a deal-to-deal basis and that one of the changes in student demand has been their preference to be a “part of the community”, with Wembley and Stratford as strong preferences.
“In Wembley, you walk around the stadium and get the feel for the community,” he said. “There is the London Designer Outlet providing a retail offering, and great tube connections that make us buy into the project more, compared with a standalone building in a different area of London.”
According to CBRE, Greater London has a supply gap of 106,000 beds, a figure that has grown by 45% since 2017/18, as demand continues to outweigh both the existing supply and fresh delivery of accommodation.
Long warned the London Plan has made stacking the viability of London PBSAs more difficult. He said: “The London Plan does feed through to end value and viability of a scheme as the rent for the affordable beds will be lower, and hence the GDV of the project lower and that feeds through to how much a developer can pay for a site and how viable it is.”
The London Plan specifies: “The majority of the bedrooms in the development including all of the affordable student accommodation bedrooms are secured through a nomination agreement for occupation by students of one or more higher education provider.”
However, even with challenges in the London market, Harris Associates’ Jamie Harris said the capital will remain alluring to investors.
“London is clearly a city that has a massive undersupply of student housing, and because there were only 1,500 beds delivered last year but quite significant growth in student numbers, even though it is a lower yielding market it is always going to be very attractive to investors,” he said.
“Even from a London council perspective student housing is becoming important in terms of regeneration in general.
“So councils are becoming more positive about student housing than they were in the past, but the planning environment is still difficult in London.”
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