As the UK’s world-renowned universities continue to attract foreign students, purpose-built student accommodation is shedding its label as an “alternative” asset class to become a market in its own right.
Little wonder, then, that as constitutional uncertainty hampers property investment in other areas, Alex Pease, group investment director for Watkin Jones Group, finds investors saying of the developer’s focus on student housing and build to rent: “Thank God you’re in these sectors.”
“Student [accommodation has] fundamentally proven to be a very good, strong performer in a downturn economy,” Pease tells EG during its latest podcast on the market. He adds that Watkin Jones plans to grow its exposure to the sector in the short-term by a third, to 4,000 beds.
“We believe the market is underpinned by very strong dynamics; the demographic curve is just about to tip on the upward scale,” says Pease.
Confidence in the sector has been buoyed by the government’s proposed international education strategy, which aims to boost overseas student numbers by 30% to 600,000 per year through measures including visa extensions – potentially bolstering the economy by £35bn each year.
As the market matures, lenders too are feeling more confident about what lies ahead for PBSA.
Gavin Eustace, head of residential development at financier Octopus Real Estate, says: “In terms of analysing it from a debt point of view, I think it’s getting easier as it’s becoming more established.
“Debt lenders are more comfortable with occupancy levels; we understand the operating costs, there’s more of a track record, and we can start looking at the operators and how they’ve performed historically.”
Among Octopus’s key considerations are the location and the operator, as well as layout, services, proximity to universities and how these relate to rent levels. “As a debt provider, student housing is very attractive, and offers a lot of diversification to a real estate debt offering,” says Eustace.
Firms are also placing their bets on the sector through consolidation, as illustrated by Unite Group’s £1.4bn deal to take over rival provider Liberty Living.
It is not necessarily as easy as building a building and renting it out. Managing students is complex – Nick Hayes
Speaking before the deal was agreed earlier this month, Nick Hayes, group property director at Unite Students, says the deal “really gives us the opportunity to leverage the scale that we’ve built up in our operating platform”.
“We think it will sustain our medium-term rental growth outlook, and it should deliver pretty significant earnings accretion for us moving forward,” he adds. “So we are really optimistic about the future of the market.”
Unite aims to widen its investor base beyond sector specialists to more generalist investors. As Hayes notes, real estate only amounts to around 3% of global investment.
“If we can get investors who are looking at our company [to consider] the security of income, and the ability to grow income and grow dividends, then we will be able to get much greater investment into the business and a wider pool of investors,” says Hayes.
But the devil is in the detail when it comes to generating the optimal level of returns, he says: “It is not necessarily as easy as building a building and renting it out. Managing students is complex. Therefore having a good management platform in place is a really important element to an investor’s decision when looking at student accommodation.”
If you build it, will they come?
As well as student accommodation’s potential to attract more diverse investors, the future of the sector will also be defined by how its structural undersupply is addressed.
Hayes estimates there are almost two million students in the UK. The traditional customer base for accommodation has been first-year students, with international students accounting for around three quarters of a million of these – versus just over 600,000 purpose-built bed spaces.
“From an investor perspective the difficulty is actually acquiring bricks and mortar,” he adds. “When we are looking at new supply coming into the marketplace, the rate of supply is slowing. Generally speaking, the quality of new supply is pretty mixed.”
The likes of London, Brighton, Bath, Edinburgh and Manchester are commonly identified as cities that remain undersupplied, and which therefore have potential for rental growth and healthy occupancy levels.
But there is a separation between some of the lower-tier universities and their stronger peers, which is only expected to broaden. This has been exacerbated by growing polarisation between universities themselves.
Although UPP operates as an on-campus provider in partnership with specific universities, as opposed to a city-by-city basis, it has taken care to avoid certain markets. These include Manchester, where credit rating agency Moody’s currently pegs the university with a negative outlook.
Jon Wakeford, group corporate affairs director at UPP, says: “For the past couple of decades we have made very clear decisions not to go into some city markets.
“The way our model works is that the university does the marketing of the accommodation on our behalf. Therefore, in some of those markets, they are far too pressurised for us to operate. For example, we have never been in Manchester. We decided to dispose of assets very early on, in the mid-2000s.
“We look at the universities themselves. And actually what we’re finding is, the credit rating agencies are already identifying the difference between types of universities and are already pricing it into their ratings.”
Capital flows into the market have also been dictated by increasing competition between universities, which has been intensifying since a 2013 decision by the then government to remove the cap on student numbers.
Hayes says: “What we’ve seen over the last few years is that some of the weaker universities have struggled with recruitment and some of the strongest universities have continued to be able to recruit students.
“The stronger universities within what we call the mid-tier are performing really well, [so] while there is a demographic or structural shortfall in accommodation across the UK, we are seeing some markets where student numbers are going backwards and that’s having a negative effect on rents.”
Eustace agrees. “Because students are going to be paying so much for the cost of their degrees – and certainly if you’re an international student coming over, you’re paying a lot for it as well – they are looking to the stronger universities which have typically performed better and will continue to do so,” he says.
In defence of Newcastle
Even some strong university cities such as Newcastle – identified as a market “oversupplied” with studio beds – are starting to drop in some investors’ estimations.
But it need not be game over for these locations. Pease argues that the sector has cyclical qualities, meaning it is natural for cities such as Newcastle to reach a point of “indigestion”, with many spaces being delivered in a short period of time.
“It is key to monitor that market, because at the moment, the way the universities are going, they are continuing to recruit [and] to do well,” he says. “What will happen is quite a lot of the original stock – the first-generation stock and the second-generation stock – [will start to] fall out of that supply chain.
“So for us it’s [a case of] constant monitoring and trying to get your timing right in these markets, because I can guarantee you Newcastle will come back into play. It has two very strong universities, and a great student body and student town.”
The next stage of life
Student accommodation forms only one piece of the commercial residential puzzle. Its success appears to be paving the way for co-living – a type of purpose-built, shared housing designed for graduates accustomed to a communal lifestyle.
Eustace says co-living is “certainly” an area Octopus is interested in. “If you look back over the past 10 years or so, when students initially would just stay in halls for the first year and then move into HMO (house in multiple occupation) style accommodation – that’s changing very much [to] looking at the full student experience through your degree,” he adds.
“That is naturally going to be feeding through now to younger professionals . They are graduating with a lot more debt [and] moving into a market where rents are still pretty high. [We are] getting some wage inflation at the moment, so we are moving more to a rental model in this country.”
Pease observes there is an “absolute natural progression, through PBSA, co-living and BTR”, and which is even edging into retirement living.
“We see the lines blurring between all the sectors,” adds Pease. “They are very similar products – these are service industries and relate to your customer. It is bricks and mortar, but fundamentally it’s about operations.”
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