COMMENT: Student accommodation was one of the first sectors to be hit by Covid-19, as international students flocked home and developments shut up shop. But as the UK comes out of lockdown, this asset class is leading the recovery.
Within the past few months, student accommodation has attracted a swathe of new entrants including Blackstone, Lone Star, Barings, Patron Capital and Ares. Developers are also reworking schemes to replace challenged markets like residential for-sale and hotels with student schemes.
Unlike hotel, office, leisure and retail, student accommodation has exhibited impressive resilience in light of the Covid-19 pandemic. Rental collection is strong and the demand for student housing continues to grow, inviting further investment despite the downturn.
Demand for digs
In a competitive labour market and counter-cyclical environment, school-leavers are encouraged to go to university as a means to both ‘up-skill’ and seek better job prospects. In the wake of the pandemic, the latest UCAS numbers have shown applications up 8%, with an additional 48,000 students.
In addition to this, in 2020 the UK emerged from a demographic dip of 18-year-olds, meaning in tandem with higher participation rates, the sector expects an additional 364,000-421,000 students by 2035. This will require many more PBSA beds to satisfy extra demand.
Unlike BTR and co-living, which rely on rental growth based on earnings, the PBSA marketplace is supported by student loans. This tacit government support of the market meant that PBSA was the only sector that demonstrated rental growth during the global financial crisis. PBSA rental collection is already resilient – Unite collected 95% of rents last year – and looks strong to weather new challenges.
The UK is also openly courting overseas students with a goal to increase numbers by 600,000 by 2030. This has led to the launch of the Graduate Route, allowing students to apply to stay and work in Britain for up to three years post-study – a highly attractive prospect to many.
Why the sudden influx?
We are witnessing a substantial acceleration of capital into the student sector. But why the sudden influx? The yield gap between student accommodation and build-to-rent is seen to be too great. In prime regional markets, stabilised PBSA yields are at 5.25%, while BTR may be over 100 basis points lower.
As a residential use class and one of the only sectors funds can invest in at present, PBSA is seen to be comparatively good value.
This is particularly the case given the maturity and liquidity in the market, from UK institutions to US private equity funds and Asian sovereign wealth. As a point of difference from co-living, student accommodation has plentiful routes for successful exits. With BTR as a nascent sector, PBSA excels for investors via the broad variety of disposals available. Therefore, the PBSA market may be reaching a tipping point whereby it is no longer considered an ‘alternative’ use – transitioning into the mainstay of dominant sectors.
Having digested its £4.66bn acquisition of IQ, we are seeing an insatiable appetite for acquisitions from Blackstone to double the size of its existing portfolio to over 60,000 beds. As a result, PBSA is at the early stages of a rapid tightening of yields.
In 2021, the student accommodation marketplace is akin to industrial and logistics before the formation and expansion of Blackstone’s Mileway platform.
Unlike any other time in its history, the vast majority of purchasers in PBSA are private equity funds rather than the UK institutions. While we wait for UK institutions to re-enter the real estate markets meaningfully, private equity sees a window of opportunity to invest in this often ignored, albeit highly lucrative, sector. As a consequence, now is a unique moment to enter the student accommodation sector before there is significant and permanent yield compression.
Jamie Harris is head of student accommodation at Harris Associates
