Private sector investors that have ridden the wave of capital ploughing into the student accommodation sector must be wary of their duties of care as well as a possible flattening of pricing.
The sector has seen a dramatic inflow of capital and soaring pricing over the past two years, but market experts speaking at an RBS purpose-built student accommodation event last week warned that investors would have to be more forensic and selective with their investments from now on, with development activity and supply in some areas having surged.
“By 2020 there will be more students in corporate accommodation than university ones, which will matter to operators because the responsibility of looking after them all is going to be on them, and these welfare issues can be grubby,” says Mark Allan, chief executive of Unite Students.
Last year Unite dealt with around 145 fires and ambulance call outs. Fast forward to 2020, and that is projected to be 5,000 fires a year. This brings about major reputational risk for both operators and landlords.
“At some point, something is going to go wrong on the watch of a private operator and it will be tough. It’s fundamentally a human business,” says Allan.
To continue to attract students, landlords and operators must provide high-quality assets. “Students are demanding a much higher expectation,” says Neil Armstrong, valuation partner at Knight Frank.
“If you think you can build something that is a bog-standard property, put in a mediocre operator or operate it yourself and still charge premium rent, then it won’t work.”
However, affordability has become a pressing issue. Students at University College London have launched a ‘cut the rent’ campaign – with average rents for an en-suite single room at UCL at £200 a week – and if landlords continue to push prices, there is the danger of social backlash.
Allan says: “In five years’ time, the private sector is going to be a very large, very visible beast, and that is inevitably going to attract the attention of the National Union of Students and the universities. So, to me, rental levels and reputation will be the things to worry about.”
Not all students want a premium product and the average UK fresher does not necessarily want to live alone in a studio or have an en-suite bathroom. Some schemes that offer studio accommodation rather than cluster flats have been struggling to get their beds filled.
“Most investors say that it is still affordable, but there is the feeling that in some markets rents are peaking,” says Armstrong.
The number of international and post-graduate students in the UK increased by 14% and 18% last year respectively, with 436,585 international students enrolling, according to the Higher Education Statistics Agency. Despite these concerns, this is the reason the sector still has such appeal for investors. These students are willing to pay more, making premium products in some areas more viable.
“The numbers are going up despite anything that the government attempts to do with fees and immigration policy, and interest rates are staying down, which is a great market and macro background to be operating in,” says Armstrong. “We think there will be 60,000 more students each year, and 30,000 more beds each year, so the supply and demand imbalance is only going to widen.”
What the experts say
Paul Coates, head of real estate, RBS: “We have lent over £1bn into the sector, focusing on the very best operators in the very best towns in a market that is becoming more mainstream.”
Neil Armstrong, partner, Knight Frank: “One of the things we have to consider is what the operational costs of running an asset actually are, which is still around £1,600 per bed per annum.”
Tim Mitchell, chief executive, Global Student Accommodation Group: “We are experiencing the upper part of the market cycle but if you look systemically at the UK and Western Europe there is an undersupply of student accommodation but a polarisation between certain towns and cities.”
Mike Allan, chief executive, Unite Students: “By 2020 we are going to have more private sector bedrooms than we have university bedrooms, and operators will need to deal with more, such as questions about affordability of rent.”
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