When one thinks of commercial real estate, student housing isn’t always the first asset class to spring to mind! However, as a general rule, any larger blocks of housing that are valued on a yield basis are classed as commercial.  Purpose built student accommodation (PBSA) is most definitely in this group, with other examples including retirement living and build to rent. Of course, I’m talking about large blocks of student accommodation as opposed to student HMOs – although some of these may also be valued on commercial yields – especially if they are large enough and have a Sui Generis use.

Over the last 5 to 10 years the student housing sector has been in boom mode. Opinion polls of university students have shown that having purpose-built blocks of student accommodation on a university campus, or close by, can significantly enhance student satisfaction scores and will aid the rise of universities in the rankings – which in turn will attract more students. Such blocks have a wide range of facilities including, quite often, gyms, study space and common rooms, as well as ensuite bathrooms…a very different experience from the student housing I lived in when I was at university! 

Universities across the UK over the last 10-15 years have been securing PBSA blocks, either by building themselves or, more commonly, paying developers and pension funds by way of longer-term commercial leases.  As a result, long-income pension funds have flocked to this sector fuelled by their desire for long leases to secure university covenants, and to diversify their assets away from other sectors – most notably retail and (in some instances) offices. However, during the pandemic of 2020-2021, as students remained at home and universities taught online, institutional appetite for these types of investments faltered as doubt was put in the minds of the markets as to whether universities would recover.  University covenants suffered during this time and many UK-based pension funds withdrew from this market, until they could be sure that students were returning to study, and that university balance sheets had not been irretrievably damaged.  In 2020-21, working for a corporate client, I was doing some consultancy work involving new-build PBSA, secured by a long lease to a mid-ranking university.   It was notable that, at that time, whilst overseas funds had an appetite for this type of deal, UK funds were more cautious – mainly because of doubts over occupiers’ covenants.

Fast forward to 2022, and many more investors have returned to this market – both private equity and institutional investors.  Student enrolment has recovered and is increasing at unprecedented rates, rents are rising, and UK universities appear to be continuing to enhance their global positioning.  Yield compression appears to be continuing in the sector. The ongoing pressure for large investors and funds to deploy capital and reallocate out of other real estate sectors bracket is driving strong interest in high quality PBSA opportunities in the best student cities. According to Cushmans, two-thirds of transactions in this sector in 2021 were in the 10 cities with the highest full-time student population – investors are clearly favouring opportunities located in close proximity to the highest ranked universities. The yield differential between the covenants of the highest-ranking universities and those in the lower end can be as much as 1 to 2%, and sometimes more.

According to Cushmans, there are approximately 2.2 million full-time students currently studying in UK universities and more students than ever are studying away from home (up almost a quarter of a million from five years ago).  Foreign student numbers are also higher – in 2021 there was an 81% increase in visas issued to foreign students, showing post-pandemic recovery. It is also estimated that average annual rental growth for 2022/23 will be 3.1%. An addition of 17,000 new student beds is also predicted for 2022/23. 

Looking at the 2022/23 academic year, student numbers have increased sharply, which has created pressure on university accommodation. This demand is also coming at a time when supply of rental stock in the wider private rented sector (i.e. HMOs) is becoming increasingly constrained by a combination of the tax and regulatory changes which has put pressure on buy-to-let investors, leading many to sell up. 

Many universities will need to look to agreements with the private sector, in order to meet student demand.  The growth in domestic student numbers creates a particular opportunity for PBSA operators, who could tap into this demand pool by providing stock of a different type and price point.

There are some clouds on the horizon, however.  Higher inflation and high energy costs will most definitely impact the operating costs of universities, with limited ability to pass these increases on to students.  On the flip side for investors, however, high inflation is also likely to increase rents as many long-term leases have CPI / RPI linked rent reviews (albeit rental increases are often capped).  However, higher build costs will also put pressure on both rental levels and investment pricing. Acquiring land for development is very competitive, with developers of other uses (such as housing / build to rent or logistics) often pursuing the same opportunities. There is also a scarcity of high-quality investment opportunities which may mean that yields will compress further, and a number of investors are now looking at development funding as they are priced out of the market for prime, stabilised assets. 

There is also a question mark on affordability of rents for students, with the difference between the maintenance loan and the cost of living potentially influencing where students choose to study. Additionally, the impact of future governments’ view of subsidising students in the sector could be an impact in the long-term.  In addition, only by increasing the range and quality of services available, can PBSA operators start to grow their markets and appeal to second and third year students who have traditionally lived in HMO’s.

When niching in sectors such as this, it’s always important to have a long-term view.  Whilst some market commentators may disagree, I would argue that, although the market is still strong, I do have my doubts on whether the current high attendance at universities will continue.  Apprenticeships and vocational qualifications are on the rise which could affect university attendance in the long term and historical issues with the repayment of student loans could affect future governments’ view of the sector. 

The impact on student HMOS’ of the arrival of PBSA blocks in university towns, tends to be increased room vacancies in all but the best quality HMO’s.  This can result in either disinvestment, or landlords pivoting into letting to professionals.  As a general rule, where there are PBSA blocks in a university town, HMO’s tend to be predominantly occupied by second and third year students.

However, in some towns and cities this pivoting / disinvestment has been an opportunity in itself, creating a shortage of student houses and rental and capital increases in those that remain.

Whilst the high capital values in PBSA means that this is out of the reach of many SME investors, if you are the owner or operator of student HMO’s it is important to both understand the market and keep a close eye on what is happening in your investment area to ensure you can understand when to invest, pivot or disinvest.