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A Purpose-built Student Accommodation Review (Knight Frank 2019)

by Nikki Dale -

Purpose-built student accommodation (PBSA) has become one of the stand-out markets in the real estate sector.  Coined an alternative asset over the last few years it has now evolved as an asset class of it own.

Knight Frank’s Global Student Property 2019 report gave an insightful perspective on student property and investment.

The UK is the second largest market for purpose-built student accommodation (PBSA) outside of North America. Rapid growth over the last decade means that the sector is now valuedat more than $65bn (£50bn) Key to this growth has been a strong global investor appetite for assets, underpinned by the safe haven appeal of the established UK market as well as rising demand from domestic and international students.

“Purpose-built Student Accommodation (PBSA) in
the UK is valued at more than than £50 billion.”

Investment into the UK has, in the main, emanated from North America. Investment from Asia currently remains small, but it is growing. The globalisation in the market extends to the make-up of the student body, with non-UKdomiciled students representing 16% of full-time undergraduate students and 19% of higher education students overall.
It is expected that these proportions will be maintained, or even rise, in the future. Data from UCAS shows a 6% year-on-year increase in the number of applications from international students for the 2019/20 academic year. A rise in applications from international students comes in spite of uncertainty surrounding the UK’s future relationship with Europe and serves to highlight the global appeal of UK universities globally.

“UK student property is yet to attract a significant volume – Asia will play a significant role in the future.”

Current demographic trends mean the number of 18-year olds in the UK is falling, however domestic demand is expected to rise over the long-term. Knight Frank analysis of ONS population projections, along with entry rates from UCAS, points to a 15% increase in full-time undergraduate numbers between now and 2030. This would represent an increase of 220,000 to over 1.7m.

The increase in applications and acceptances for international students has been a key factor driving the type of new PBSA entering the market in recent years, with a focus on studio flats, to cater for this international demand.

“A focus on studio flats, to cater for this international demand.”

However, as affordability pressures become more acute, especially among domestic students, the mix of accommodation being built will change. Some 61% of new PBSA schemes due to be built for the 2019/20 academic year are en suite and clusterled schemes which typically command lower rents.

Some 25,000 new PBSA beds are being delivered into the market each year, according to analysis of planning data over the last three years. Even with this healthy pipeline, full-time student numbers outweigh available PBSA rooms by approximately 3:1. There are challenges for the market. Policy revisions, including changes to the provision of affordable student accommodation in London, will add to viability pressures, while the findings of the Augar Review into university funding due in 2019, could have an impact on university finances. The sector will need to respond accordingly.

“Applications from international students for
2019/20 rose 6% year-on-year.”

What does the future hold?

In the short-term, many of the largest development opportunities will be in partnership with universities to redevelop older stock. This new generation of PBSA will be driven by quality, value for money and delivering student experience.

As new entrants and existing investors look to consolidate and acquire additional scale, bulk purchases will continue to be a feature of the investment market. Yield compression will continue as a result. However, this will occur primarily in markets where there are supply constraints, multiple universities and strong prospects for student number growth.

Affordability will also drive the agenda. The acquisition of schemes, where the rent that students pay is perceived as affordable, will become an important focus for investors. Consequently, the push towards even higher specification schemes will tail off as the sector focuses on delivering product which fully meets the changing needs of students. The market for international students is expected to remain strong. However, developers who overestimate the depth of market for high specification accommodation, targeted at the most affluent students will find it more  difficult to achieve full occupancy. Demand will instead be strongest for accommodation that provides clear and obvious elements that add value.

David Coates, MD of REW explained: Seeing how private student living has evolved globally and in the UK over the last number of years, REW has always kept insightful on what is having an impact on the market – positively and negatively – and we have selected our portfolio of investments accordingly.  We have always kept a varied mix of student property within our portfolio that cover’s the key factors ensuring our investors gain the best long-term investment on the market.”

Read Blog: Is student property investment really the best performing asset class?

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