Purpose-Built Student Accommodation (“PBSA”) as an Asset Class

    Investment into PBSA asset class in the UK has grown dramatically in the last 2-3 years. Should investors invest in this asset class? Read to learn more!

    Purpose-Built Student Accommodation (“PBSA”) as an Asset Class

    Table of Contents

    1. The Conundrum in Student Housing in the Past
    2. The Current Remedies to Student Accommodation Shortage
    3. Supply and Demand Factors in Purpose-Built Student Accommodation
    4. Why Choose Purpose-Built Student Accommodation (PBSA)?
    5. Current Ownership Status
    6. Attraction to Investors
    7. Notable Recent Transactions and Major Players
    8. The Outlook: A Continued Interest in PBSA

    In the UK, there are some 1,840,000 students currently enrolled at universities, of which approximately 23% or 423,000 come from overseas.

    Domestically, a very high percentage of the 1.4 million or so UK-domiciled students attend a university away from their home base, so it’s not only overseas students who require accommodation for term time. Therefore, demand for student accommodation across the country is huge.

    UK Student Accommodation Report
    Source: Cushman & Wakefield

    Yet there are only a total of some 680,000 beds in the private sector, and even this figure varies annually as older, obsolete stock is taken away from the market (estimated at some 7,000 per year). This leaves universities needing to provide over 1.2 million bed units every year.

    The quality of Higher Education in the UK is globally recognised and the country is home to 4 of the top 10 global institutions, namely University of Oxford, University of Cambridge, Imperial College London and University College London (UCL). As a result, the UK continues to attract an increasing number of domestic and international students. For example, until the early part of 2020, the highest percentage of overseas students came from China, totalling around 115,600 students, with the number growing at about 10% per annum since 2008.

    So, there is a clearly identified shortage of quality, student accommodation which needs to be addressed.

    Read also: Investing in the UK Real Estate Market

    The Conundrum in Student Housing in the Past

    Up until around 10-15 years ago, it was left to the universities (on-site) and also smaller, private landlords to provide accommodation for students (off-site). Universities often provided on-site “halls of residence”, but in reality these are little more than sleeping rooms with small areas for study. Sometimes universities helped arrange ad-hoc off-campus accommodation but that was not always the case.

    The Conundrum in Student Housing in the Past

    A high proportion of students lived off-campus in privately owned and rented accommodation. This was usually in either single houses shared by three, four or even more students or alternatively, in houses converted into small flats or bedsits, but the quality and maintenance of off-site accommodation was not great.

    Complaints were common about the condition of some of these properties, either being run down / lacking the basic services (including security) or about very high rents being charged. But the most common complaint was the overall shortage and challenges for students to find suitable accommodation.

    Read also: Understanding Property Management

    The Current Remedies to Student Accommodation Shortage

    Over the last 10-15 years or so, a number of developers and investors who had identified the student accommodation sector as an investment opportunity began to enter into partnerships with universities to provide accommodation.

    Even though the goal was the same, namely to create modern, liveable, attractive, affordable and well managed units for students to live and study in, various development permutations were tried.

    Three primary options were pursued:

    • Developers built the accommodation either on university land or off-site, taking the development profits as their compensation and leaving both the ownership and operation with the university;
    • An arrangement by the university to partner with the developer on building costs and have some sort of build-operate-transfer” (“BOT”) situation. The developer would bear most of the costs, but the developer would be “nominated” to run the accommodation for the long-term via a lease or other such arrangement. The rental and profits to be shared according to the terms of the development agreement; or
    • Simply, the developer undertook the development of PBSA, creating attractive product off-campus for students and bearing the risks but taking all of the rewards.
    Sign Up at RealVantage

    Supply and Demand Factors in Purpose-Built Student Accommodation

    Annually, student numbers have been increasing by around 9,600 and 25,000, or by 2.6-2.7%, between 2017/18 and 2018/19, respectively. Therefore, 2019 was another strong year for the PBSA market, with demand growth continuing to outstrip supply at a national level.

    Development pipeline of purpose built student accommodation
    Source: Knight Frank Research

    In 2019, there were 32,000 new bed spaces delivering a new level of quality stock to the market. A further 25,000 beds are expected in 2020, with approximately 87% of all new beds delivered by private sector providers.

    Across the UK, there are presently some 114,000 PBSA beds in the development pipeline, with around 75,000 having full planning approval. However, demand for student accommodation continues to rise at around 30% faster than the number of beds being developed and, in reality, the planning processes and development cycle are relatively slow causing a bottleneck in supply and demand.

    Furthermore, changes in September 2019 set by the government to the length of time that students are allowed to stay in the UK after graduation (from 4 months to 2 years) is having a material impact on demand growth. This is especially so for students from India, where demand numbers have grown 22% and 35% in the last two years.

    Why Choose Purpose-Built Student Accommodation (PBSA)?

    It's likely that, given the choice, most students will live in PBSA accommodation, and perhaps more so for overseas students. Some of the key factors influencing such decision include:

    • Purpose-built accommodation (most new units are around 13m2 for an en-suite to 19-20m2 for a studio) likely to offer a sense of community to student away from home in the UK or home overseas for the first time;
    • The accommodation is conducive to study and with 24-hour security helps give parents a reassurance about the safety of their offspring;
    • Some recognised operators include wi-fi, utility bills and even contents insurance as part of the package and so total outgoings are known in advance;
    • The strength of developer's marketing: the ability to pick and choose a unit with clear terms and conditions, floor plans, etc in advance of travel to the university is a definite marketing advantage for developers in persuading students to stay with them;
    • Recognised brand names such as Unite Students (74,000 beds), Upp (34,600) or iQ (28,000) promise and deliver a homogeneous unit with quality assurance;
    • The general affluence of the students’ parents means that the marginally higher rates for PBSA rent (typically 2-3% higher, but there are exceptions) when compared with other accommodation are not important to the decision making.

    Read also: Market Selection in Real Estate - RealVantage’s Approach

    Current Ownership Status

    With the continued increase in the participation of developers into the PBSA sector, the ownership ratios of the stock have changed and currently stand at:

    PBSA Sector Percentage
    University owned 43%
    Privately owned/ direct lets 35%
    Nomination or lease agreements 15%
    On-campus partnerships 7%

    Clearly, there is plenty of room for PBSA to catch up with universities as their primary accommodation provider.

    Attraction to Investors

    Investment into PBSA asset class in the UK has grown dramatically in the last 2-3 years, with some 58% of the reported total investment worth GBP £17 billion originating from overseas. Asian money, notably from Singapore, Thailand and China has been the bulk of  foreign investment.

    For developers, the attractions of PBSA are fairly obvious. They are as follows:

    • Secure, recurring income streams;
    • A clear shortfall in supply compared to demand near to favoured universities;
    • A growing market for students from affluent families to study in the UK (particularly from China, India, Canada, the US and Nigeria);
    • Rentals for purpose-built en-suite accommodation averaging around 2-4% more than non-purpose-built units, with such rents tracking 16% above the rate of inflation since 2014;
    • Even though yields have been compressed over the last few years, prime regional yields can be between 5-6% (although the yield tends to be lower in London, with a record 3.75% yield recorded in 2019);
    • Returns are predicated on occupancy by students for term time but there may be possibilities for additional income over the summer months from conferences, events or even leisure travellers;
    • Since a number of new developments in or near larger cities now embrace PBSA as part of mixed-use/ multi-use schemes, hence, there may be other amenities afforded near PBSA such as a retail centre or hotel or even a residential tower which can produce other income streams for developers and owners, within the complex.

    Read also: Overview of St Andrews (Scotland, UK) as an Investment Destination
    Read also: Manchester as an Investment Destination

    Notable Recent Transactions and Major Players

    Growth in supply has been driven by the strength of investor demand, with over GBP £4bn of PBSA traded in 2019, above the five-year average. Much of this activity was due to Unite Students PLC acquiring Liberty.

    Investment flows into UK purpose-built student accommodation by origin of capital
    Source: Savills

    2020 will represent a new high in terms of PBSA investment activity. In May 2020, Blackstone acquired iQ Student Accommodation in a GBP £4.66 billion deal. This transaction alone is worth more than all the PBSA stock traded in 2016-2018 period.

    2019 also witnessed the arrival of further new entrants to the market, notably DWS with their acquisition of Kelaty House in London and the Vita Student portfolio. This helps demonstrate the continued attractiveness of the UK PBSA sector to global investors, even in an environment of political uncertainty.

    Indeed, two major fund-raising exercises have been held in 2020 with the Unite Group raising GBP £300 million in June and Kinetic raising GBP £100 million in July.

    Read also: Important Considerations when Buying Overseas Properties

    The Outlook: A Continued Interest in PBSA

    The PBSA sector is likely to remain generally strong across the UK with a fundamental mismatch of both demand and supply. Once the pandemic abates and the uncertainty associated with Brexit dissipates, the sector is expected to continue to grow and outperform other market sectors.

    Find out more about real estate co-investment opportunities at RealVantage. Visit our team, check out our story and investment strategies.

    Sign Up at RealVantage

    RealVantage is a real estate co-investment platform that allows our investors to diversify across markets, overseas properties, sectors and investment strategies.
    Visit our main site to find out more!

    Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.