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Does Brexit spell the end for purpose built student property?

by Sajid Kazmi -

The question on everyone’s mind right now is, what does Brexit mean for investing in UK student property? Is now the time to cash in on the favourable yields on offer, coupled with strong institutional demand for purpose-built student accommodation (PBSA), or does Brexit spell the end for growth in the UK’s 2nd most popular property sector and the world’s 2nd most developed student property market?

As a leading agency for both residential and student property; it’s our view that despite Brexit, people see UK universities as very resilient, and it is safety and security that they are primarily looking for. Our clients find the sector attractive because they want long-term, steady returns. Student accommodation provides a service linked to a product that everyone needs and it’s countercyclical, meaning that if there is another economic crash people will stay at university longer or go back to school.

Compare this to commercial property where a business is making a decision about bigger offices, or residential property where a family is moving to a bigger house. Both of these can easily be deferred until there is less uncertainty about the impact of Brexit.

Knight Frank estimates that there are currently 525,000 student beds in the UK with planning consent for a further 90,000. Figures over the last two decades suggest that the number of full-time students in the UK is growing by 80,000 per annum; so this increase barely meets the demand from increasing numbers as opposed to addressing current undersupply.

The main concern that we hear is that students from the EU will be put off studying in the UK. The most important factor to be aware of is that EU students make up just 5% of the total UK student population. The highest contributing country is Germany and they are 6th on the list behind China, India, Pakistan, America, and Canada. KPMG’s worst estimate suggests a drop in EU students of 7.6% or 0.03% of the total UK student population. This doesn’t account for UK students choosing to study domestically as opposed to in Europe for similar reasons.

It is important however to recognise that non-UK students are 65% more likely to live in PBSA than UK students. To guard against a reduction in EU students it’s important to note that they are concentrated in certain locations. Scottish cities are popular with young continentals because they don’t have to pay fees and are therefore particularly exposed. In Aberdeen, for example, 16.3% of full-time students are EU nationals, while in Edinburgh, the proportion is 12.2%. London is also popular with EU students, who make up 10.3% of full-time students. The numbers vary from 3% to 25% depending on the institutions, with art universities accounting for the highest percentage. There are 12 university cities where EU nationals make up more than 5% of full-time students. These cities include Oxford (9.1%), Cambridge (9.2%), Coventry and Bath and are home to more than 50% of the UK’s EU student population.

In contrast; according to HESA the cities where EU students make up the smallest percentage of total students are Leicester, Preston, Newcastle, Sheffield, Stoke-on-Trent, Leeds, Swansea, Plymouth and Liverpool.

Currency devaluation is a likely consequence of Brexit. This is one of the key defensive mechanisms of UK student property both for the asset values and the rental income. For rentals; our feeling is that the depreciation of sterling makes UK living and fees more attractive. For capital growth; in a market where PBSA is 65% owned by foreign investors, the favourable FX rate increases demand from investors wishing to move money to England and thus keeps real sterling prices stable and often drives them upwards.

There also remains the pull of a world-leading UK degree. Students come here to learn English, get a prestigious UK degree and experience this country – these factors sit above cost in most student surveys. Plus, there’s also rising demand from an increasingly influential – and wealthy – Asian and African middle class.

In times of uncertainty, it is markets and companies that are diversified that perform best. Big investors including multinational investment banks and overseas pension funds have identified UK student housing as a goldmine that can generate big and predictable profits. Last year, according to a construction survey by Barbour ABI, the value of contracts awarded to build student housing projects in the UK totalled more than the deals to build care homes, housing associations, local authority housing and sheltered housing combined. The attraction in our view is that the capital flowing into the market is extremely diversified. Institutional investors, both from the UK and overseas, such as banks and pension funds make up a large proportion of purchases. The same, however, can also be said of individual investors from across the globe. Likewise, for the end user, there are UK students, students from the EU and international students from outside the EU wishing to rent high-quality purpose built apartments. Different sections of these broad markets are motivated either by a strong UK economy or conversely by a good FX rate in times of uncertainty. There is one irrefutable truth underwriting all decisions – crash or rising market, growth or recession; students still go to school.

The UK higher education sector remains highly respected worldwide, the student sector has strong rental growth and there is still the problem of significant structural undersupply of accommodation in the UK.

The most important fact to be aware of is that our university system is still heavily oversubscribed. For every place accepted by an EU student and a Non-EU student there were 7.3 and 7.9 applications from overseas students respectively. In light of just this factor, when coupled with the favourable exchange rate we are not concerned by even the worst case Brexit scenario of a 0.03% drop in student numbers.

Success is all about location, as any real estate specialist knows. The first step for developers and investors is to target cities that present the most sustainable opportunities. We continue to watch wider global trends carefully. International student numbers may keep rising to cover the EU drop-off, possibly helped by generous visa schemes. Our focus is to look at locations where demand is present or projected independent of wider factors. The opportunities you’ll receive from us will highlight either an endemic undersupply, cities where new campuses are opening or student applications are set to increase.

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