During the pandemic, there were quiet rumblings amongst investors as to whether the student accommodation market would face a downward trend in the long term, with university lectures being delivered online and students choosing (or in some cases being forced) to remain at home whilst in lockdown. However, the market continues to show its resilience with investors choosing to invest despite current market challenges.
1. Demand and supply
The demand for purpose built student accommodation (PBSA) is high, with an influx of both home grown and international students. Student numbers are rising with a marked increase in the number of postgraduate students in response to the economic downturn, which accounts for 40% of all growth over the last 12 months (despite representing only 22% of the student population).
The supply of houses in multiple occupation (HMOs), which are typically priced 20% below that of the average private sector PBSA bed, have decreased due to a combination of tax changes, surges in council tax and the after effects of the pandemic.
This is significant because those universities without adequate supply of either university-owned or nominated accommodation, are essentially forcing students to look further afield for accommodation, which then may impact the ‘university experience’ that most students dream of as well as contributing to the increasing concerns of the cost of living.
2. Investment and development
The development of new PBSA continues to be of interest to investors due to the lack of high quality stock, the huge demand from students and the increasing pinch on yields from the operations of existing buildings. However, delivering PBSA is challenging with planning continuing to be a barrier, development and labour costs being high, resulting in challenges in making schemes financially viable. Collaboration between universities, developers and planners, could help drive design and innovation in the sector, to ensure high quality accommodation is available and affordable to the majority of students, rather than the minority.
3. ESG
Environmental, Social and Governance (ESG) requirements have to be a primary consideration and there is continued discussion in how this can be seamlessly integrated into the sector. ESG will be specific to the particular asset or organisation in question and will be driven by regulatory requirements, but ultimately investors will require this at the forefront of any investment strategy. The sector is considering the “S” in ESG – the social agenda, and how offerings can be tailored to improve the wellbeing of students. “E” also plays a huge role, in a world where students are more vocal about their concerns on climate change than ever before.
Organisations should have a net zero-aligned ESG strategy and put frameworks in place to enable adaptation, flexibility and alternative ways of handling energy. Such sustainability strategies are all influencing investment decisions. In order to make this a true collaborative approach, in the student sector in particular, operators may want to think about finding creative ways to give students the ability to monitor their use of energy. This way, as with anything, if the individual is invested in making a change, the impact across an entire university could be monumental.
4. Affordability/cost of living
The affordability of renting student accommodation in the UK continues to be a growing concern. Rents have outpaced inflation, but simply capping rents does not seem to be the answer. Therefore, the sector needs to be creative in how they propose to pass on the increase in utility costs to students – a challenge that will need to be addressed in 2023.
HMOs are generally on the more affordable end of the spectrum, however, students who rent in the private rented sector are more exposed to rising utility costs without much protection from landlords.
More than three quarters of students are worried that soaring living costs will affect their academic success, according to the office of national statistics (ONS). This is resulting in more students bunking the non-mandatory lectures, opting not to attend course related events and choosing to study at home to save money. This may all take a toll on their financial and mental wellbeing.
The quality of student accommodation is increasing, and the sector is seeing less price sensitive students gravitating towards the best rooms. However, even though there are still 175,910 bed spaces in operation (which are un-refurbished, and in desperate need of a makeover) there is a continuous battle between choosing to demolish and choosing to refurbish, bearing in mind the embedded carbon associated with new builds.
5. Building Safety Act
The Building Safety Act 2022 (BSA) is set to significantly impact the way PBSA products are constructed and designed. The gateway regime will seek to ensure building safety risks are considered at each stage of the design and construction of higher-risk buildings (higher-risk buildings are defined as a building that is at least 18 metres in height or has at least 7 storeys). It is important that developers recognise the financial impact that the changes under the BSA could have. They will need to take action to meet current and future obligations in good time to maintain viability of schemes, minimise risk, and steer clear of legal implications.
The PBSA sector continues to be an attractive sector in which to invest, and even though there are economic uncertainties ahead, the strong fundamentals which underpin the student accommodation sector, remain firmly in place.
