With student accommodation set to see around €12.3 billion in investments according to research published by Savills, and purpose-built student accommodation (PBSA) expected to outperform other UK property subsectors moving forward according to research by Colliers, its clear this is a sector poised to enjoy a lot of investor attention in the years to come.
Considering the stark supply/demand imbalance, it seems there’s a lot of untapped potential. Student accommodation website StuRents found there is currently a shortage of 283,000 student beds in the UK with this forecast to rise to 621,000 by 2026. Last year, in the UK, just shy of 20,500 new PBSA beds were delivered across 74 schemes, Knight Frank found. The real estate consultancy noted that currently the total pipeline in the UK stands at around 151,000 beds across the UK, with 26 per cent of this presently under construction and a further 43% with full planning permission granted.
Meanwhile, James Hunt, global head of real estate at Global Student Accommodation notes: “There are about 20 million students across Europe but only around 1.2 million purpose-built beds.”
Opportunities and challenges
However, despite the appearance of significant opportunity, the sector is rife with challenges and obstacles for the interested investor. These include difficult planning policies, high construction costs and a lack of suitable and available land plots.
“Every year, it gets more difficult to make development work, not just in the UK but also in Europe and in America. And barriers to entry are as high as they've ever been,” Hunt says.
But from an investor perspective, interest continues to grow with Colliers noting an increase in the weight of capital looking to get into the PBSA sector “in particular those that have focused historically on ‘traditional’ sectors as they look to diversify their income streams.”
According to Investec Real Estate’s third Future Living report, a survey of 50 global institutional investors representing £442 billion in assets under management found that 59 per cent of respondents were optimistic about student accommodation in 2023 compared to just 27 per cent in 2021. The report also noted that institutional investors’ attitudes towards the UK Living sector are at their strongest in nearly half a decade, with 62 per cent of respondents said they expect their portfolio allocation to the Living sector to increase over the next five years.
This is as the sector continues to perform well. Colliers found that similar to Academic Year (AY) 2023/24, operators expect strong rental growth across their portfolios for AY2024/25.
Hunt adds: “It’s positive that you’re able to base your rents on an annual basis and keep up with inflation. Also, typically, occupancy has been in the mid to high 90s as a percentage every year. So from an investor's perspective, living i.e. all forms of housing is probably the most popular form of investment currently globally, and student is a big component of that.”
In December, Aviva Investors agreed to buy a portfolio of student homes across the UK from Curlew Capital and CBRE Global Investment Partners for around £240 million.
Positively too, Charlie Bottomley, director in Savills’ debt advisory team adds: “All lenders, including banks, insurance companies and debt funds are showing considerable appetite for the sector as they recognise its resilience and strong rental growth performance.”
Furthermore, there seems to be positivity and growing popularity on the consumer end. Katie O’Neill, head of student property research at Knight Frank says: “Against the backdrop of a cost-of-living crisis, there has been a changing sentiment towards PBSA. Once seen as a more expensive alternative to renting in a student HMO, rent and utility inflation means that more students are now opting for the fixed-cost model of PBSA which offers relative value for money.”
Key markets
For new student accommodation, Hunt notes the quality of (and quantity of) higher education institution in a city is of paramount importance as well as the dynamics around the marketplace such as tax, legislation, planning etc.
“What that means is that in Europe, it will be in cities like London, Manchester, Madrid, Berlin, Lyon, Paris and Rome that are already well-known. People presently don’t want to take undue risk,” he says.
However, Savill’s survey of European investors and operators who collectively manage PBSA assets worth €17.8 billion found that 36 per cent of respondents are also building in secondary cities, and 11 per cent in tertiary.
“In many markets across Europe, there has been an increase in the level of capital being deployed outside of primary cities. For example, over half of capital invested in Spain during H1 2023 has been outside of Madrid and Barcelona.
This trend of shifting to secondary and tertiary cities stems from a lack of suitable land to build on and/or assets to acquire in primary cities, along with a boom in higher education in smaller cities across Europe. Alongside these, the growing confidence of operators in the level of demand across markets as they mature.”
Hunt says that while new development remains difficult in the UK, there is still more to come. In terms of mainland Europe, he says “We are massive fans at present and we think that Europe is like the UK was about 15 years ago in terms of supply versus demand.”
He adds that as student accommodation becomes more established, the ability to learn from the hotel sector will become more prevalent, especially in terms of separating the brand and the operations from the real estate. He notes that while initially, the focus was predominantly on development with real estate considerations taking precedence over operational aspects, today’s market necessitates a keen emphasis on property management to stay competitive.
“We’re increasingly seeing a separation of the operating platform from the real estate platform. For example, in the student accommodation world, we’re the asset manager and we have a business that does the property management, and that’s more akin to the hotel model where there are recognised operating brands. So I think we’ll see more of an approach in that regard - we’ll see a continuation of that trend in order to drive better operational performance,” he says.
But it seems that’s not the only string connecting the hotel sector and the PBSA sector.
Simon Atha, associate director at planning consultancy Boyer says: “We’ve seen a huge growth in the PBSA market and some towns have imposed policies that restrict new student accommodation because they view the market as already saturated. However, a lot of hotel stock could be suitable for conversion into PBSA.”
Barriers to entry
And with barriers to entry to the sector remaining high especially in relation to land availability, the mismatch between seller/buyer aspirations and construction costs, conversion from hotels seems an even more attractive option.
Hunt agrees, noting a semi-common incidence of former hotels going to student use, especially in situations where an asset may be reaching the end of its useful life as a hotel and student accommodation may present a solution.
“We’re seeing lots of that in Italy at present. In Milan, for example, we've got a number of schemes that we're appraising are being promoted for student use that were formerly hotels. We've seen some examples in Germany as well.
He adds: “If your asset hasn’t been touched for twenty or 30 years, you may find that under the dynamics of that city and where that asset is located, student use is more favorable now. I wouldn't say that hotels are finished in Munich or Milan though as it's down to the site specifics.”
Furthermore, Hunt notes that considering the basic studio model for student accommodation, the synergy between student design and hotel design is pretty high, adding that subject to the sizes, convertibility is quite high.
However, Atha stresses the viability of a hotel to PBSA conversion is very much dependent on location and securing planning permission.
Looking ahead, Colliers says it is starting to see the ‘gap’ in price expectations between vendors and purchasers narrow, a trend likely to continue through 2024.
Hunt adds: “I think construction costs will stabilize and headwinds will abate. I think although new supply will be reduced versus historic levels, it will still be healthy enough. Most people are quite rightly concerned over instability in markets currently but I would say to look beyond the here-and-now, think about the quality of the assets that you have access to and if you can get really well-located student real estate in the best markets. I think the bad news is behind us.”