Purpose-built student accommodation (PBSA) is a market that continues to attract strong international investor interest for good reasons. While 2023’s total investment spend was down on the previous year, the number of deals remained above the five-year average, according to recent Knight Frank data. We decided to take a look at some of the recent transactions, forecasts and wider macro issues impacting the sector.
Notable deals include DIF Capital Partners buying a 4,500-bed Campus Living portfolio for £300m and Savills Investment Management buying a 1,290-bed portfolio from Vita Group, also for £300m.
Unlike some other UK real estate sectors, the fundamentals of the UK student accommodation market remain strong, with the development pipeline of PBSA unable to keep pace with growing demand and thus continuing to put upward pressure on rents.
The UK's UCAS (Universities and Colleges Admissions Service) anticipates that student applicants will reach 1 million by 2030, up from 594,940 in 2023/4. This clearly adds to the investment opportunity for international investors, albeit there are still some risks to navigate.
Areas of opportunity
A few university markets have become saturated with PBSA stock, so location research is vitally important. There are two particular areas of potential market focus: Middle and lower-tier universities and affordable accommodation.
“There are certain cities where it's assumed students want to go to study, such as London, Manchester and Birmingham,” says Rebecca Wardle, Partner, Trowers & Hamlins.
“However, research indicates other cities and towns are showing significant promise as student destinations and present a real opportunity for investors.”
Similarly, the type of stock being built has focused on high-end student accommodation which appeals to international students with bigger budgets.
However, this has left a growing gap for more affordable accommodation for students with a smaller budget.
While international students remain important, universities also need to attract and support domestic students, which means providing a variety of accommodation. Renting a room from private landlords has traditionally been a cheaper alternative, but that market is shrinking.
“The mid-market gap is something that is increasingly talked about within the industry and how to deliver stock that satisfies that demand,” says Nikita Asher, Senior Associate, Trowers & Hamlins.
Developers are having to navigate a more challenging construction landscape with higher material costs, changes to building regulations and a stringent planning regime. The slow pace of delivery only adds to the supply/demand imbalance.
“Developers and investors need to be a bit more creative about how to solve this problem,” says Asher.
Partnership models as a means of satisfying different demand
One area of focus is the joint venture design build finance model (DBFO), where there is a partnership between a university, developer, and investor to create accommodation that meets a range of student demands.
Like public bodies, most universities must abide by certain procurement rules, so deals must be carefully structured.
“If it can be structured so the deal is kept off the university’s balance sheet, it means the capital receipts can fund things like research or a new academic building while still delivering accommodation to house students,” says Wardle.
The challenge is bringing together the different stakeholders into the partnership, but there are some good examples of it in action. For example, Newcastle University has recently entered into a £250m joint venture framework agreement with Unite Students to deliver 2,000 beds.
A university-backed deal can help speed up delivery and has the added benefit of appealing to students for the assurance it offers.
Sustainable buildings
Sustainability is high on the agenda in the UK, with a regulatory framework that sets out targets for things like a building’s energy efficiency. It also places restrictions on buildings with poor energy performance.
As the UK approaches the 2050 net zero carbon target, regulations will likely become more restrictive.
It’s an important consideration when reviewing investment assets. Buildings with good BREEAM ratings are likely to have a higher value attached and buildings that don’t rank as well are potentially higher risk.
To rent out a building it has to meet a minimum energy performance rating (EPC). The minimum rating is due to change, and assets that currently meet the standards may not meet them in a few years.
This means assets risk becoming obsolete if they aren’t upgraded in line with requirements.
“When buying secondary stock, doing the appropriate due diligence is key to determine the potential cost of retrofitting,” says Wardle.
“In some instances, it may not be cost-effective to do the improvement work. It is also easier to sell a building which is compliant with all the building regulations.”
Students coming through now are more conscious of living sustainably, and new stock coming through is designed with that in mind.
“While development carries a higher risk during construction due to changes in the Building Safety Act, as new assets are built to higher sustainability standards, it may offer a lower risk for investors in the longer term,” says Nick Green, Partner, Trowers & Hamlins.
Renters (Reform) Bill
One further area of potential risk is the Renters Reform Bill, which is still progressing through Parliament. There is debate about whether to abolish fixed-term tenancies which, if enacted, could impact student accommodation.
Rather than PBSA operators leasing rooms according to the academic year, it would mean that students could potentially stay in their student accommodation into the summer months. This would create uncertainty for operators about room vacancy and potentially remove the option to gain additional income from summer lettings.
It is, however, intended that PBSA should benefit from an exemption (which would allow operators to grant fixed term tenancies) where they are registered with a government approved code but if the exemption isn’t extended to private landlords renting to students, it may cause private landlords to reassess their options in the sector and exit altogether which in turn would drive further demand for PBSA.
With the potential change in government, now that an election on 4 July has been announced, we are yet to see whether any new government will see the Renters Reform Bill through.
In summary, while there are certainly risks to investing in student accommodation, as with all investment, the fundamental imbalance between supply and demand in the UK looks set to remain for the next few years. The sector continues to show its resilience, in spite of economic headwinds across other sectors, all of which is underpinned by broader demographic trends. Accordingly, there is an excellent opportunity for well-advised international investors to make solid returns by investing in UK PBSA in the right locations and with the right product.
