A Thinking real estate publication
The deficit of student beds in the UK is forecast to hit more than 620,000 by 2026, according to StuRents research.
However, while the underlying supply/demand imbalance in student accommodation presents a good opportunity for developers, there are external market forces to navigate.
Rising build costs are making development more challenging, as are supply chain issues, higher interest rates and the introduction of the Building Safety Act.
The impact is evident in the fall in pace of delivery of new stock, which has dropped from 36,000 beds a year in 2019 to 12,000 in 2023, according to StuRents.
But this typically fast-paced market certainly hasn’t ground to a halt. Deals are still being done, and plans drawn up.
Easing inflation and the prospect of interest rates falling will no doubt help boost confidence. The PBSA sector is also evolving with changing demands and emerging opportunities.
Until then, developers are having to adapt. “Materials have to be ordered earlier because of shortages, which impacts when funds are needed,” says Ivy Acorda, Partner.
The introduction of the Building Safety Act for all developments means there are more stringent requirements for high-rise buildings before and on completion of building work.
Building control approval is required before works start, so more of the design work has to be completed before construction can start.
Once completed, buildings can’t be occupied until final checks have been done. Of course having a safe building is paramount, but such delays may have cost implications since the asset is income-generating.
Delays can also be problematic as PBSA is serving a market that adheres to strict term times.
“You do have to deliver, complete the works and register your building in time for that new term,” says Acorda. “So it is a risk, and it’s understanding how those risks will be allocated between the developer and contractor and, potentially, whoever is managing the building.”
Those with existing assets also have to go through the process of registering with the potential need for remedial work.
Student demands are also changing. The big conundrum for developers is ensuring they are creating stock that appeals to and, crucially, is affordable for a range of students.
“Affordability is a key challenge. International students tend to have a higher price point for student accommodation, but there is a middle market gap for affordable accommodation,” says Nikita Asher, Senior Associate.
“The problem is that construction costs mean viability is an issue.”
UK students’ maintenance loans aren’t rising as quickly as rents, so there is a danger of a certain portion of students being priced out.
And while universities, like those in the Russell Group, make the UK a draw for international students, domestic students also need to be catered for.
One area being considered is location. The natural inclination is to build PBSA as close to the university as possible, but there is a cost implication, particularly when a campus is in a city centre.
There may be more viable development opportunities further away, which can help with the provision of more affordable accommodation, but that has to be weighed against how long it takes to commute to campus.
The market is also going through an evolution of student needs. Are smaller rooms with more communal spaces more attractive than larger rooms with less communal space?
Sustainability is also important for students, and that is an area of particular focus for some operators.
We are seeing new student accommodation platforms that are putting ESG at the forefront of their brand, where everything down to the smallest details including muted colours they chose for their branding, are deliberately designed to reduce the carbon footprint from running their website.
PBSA market outlook
While there is a nervousness around costs, the market fundamentals remain strong.
“There is a lot of appetite to do deals, to acquire sites and build. As soon as inflation comes down, we predict there will be even more activity in the sector,” says Asher.
The top players will set the benchmark, and the consensus is that there will be a flurry of activity at the end of this year and early next.
Co-living: BTR and PBSA’s younger sibling
The new kid in the residential sector is co-living which, in offer, sits between PBSA and BTR (build to rent).
Co-living is a mixture of shared and private spaces. Tenants have their own room and bathroom but share kitchen and living spaces.
There is an emphasis on community and communal living, with some operators organising activities and events.
Like PBSA and BTR, the spaces are managed and generally have a consistency in quality that is missing from renting privately in an HMO. Rent includes bills and often wi-fi.
The concept offers a more affordable option, particularly for young people. “You can expect pay a bit less than you would for a BTR flat, but there are opportunities to share with friends or meet new people,” says Nikita Asher, Senior Associate.
While it is early days, there is a lot of market interest in the concept and it is something that planners are taking seriously, in the capital at least.
The London Plan has released guidance earlier this year, on co-living schemes with detailed requirements on size and what needs to be included.
Asher sees this as a good sign: “It shows confidence and understanding that planners are looking at it as something that can exist and coexist amongst the other asset classes.
