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Is student property investment really the best performing asset class?

by Nikki Dale -

“Purpose-built Student Accommodation UK’s No. 1 Asset Class” – how many times have investors, who are actively seeking the best student property investment, read this statement? Many a time, that is for certain.

So, what does it mean? And is it in fact true?

Purpose-built student accommodation (PBSA) – an asset class of its own

For a number of years now investors have been redirecting their attention to alternative asset classes, verses more mature mainstream buy to let property investment, and student property without a doubt has been the most prominent and in-demand asset class.  A robust investment opportunity that provides sustainable high returns in top university locations has meant appetite has been strong since 2015.

As a result, across 2017 and 2018, the UK’s development pipeline reached the highest level to date.  Over £4 billion of investment, and even though there was a small drop in applicants during 2018 investor demand didn’t succumb. And 2019 saw university applications rise to record figures.

“706,000 students applied for full-time

university in 2019/2020″

Student property really has formed an asset class of its own, with Savills publishing last year the student housing sector, whilst attracting a variety of global institutional investors, has evolved from an alternative asset class into a mainstream investment.

Even during the political uncertainty and the impact of Brexit on the student market, it stayed resilient.  As a result of the economic climate during 2018 and 2019 and with the decrease in the sterling’s value, investment in the UK from overseas boomed more than ever before.

PBSA – an in-demand asset class for investors

As we come to the end of Q1 of a new decade, the demand for new build properties in all sectors is at an all-time high in the UK. It is expected that investment in Living (student property, co living, residential housing and care homes) will increase by £8.8 billion over the next two years, with 31% of expected to go into purpose-built student property.

Previously in PWC’s survey “Emerging Trends Europe” in 2015, only 28 per cent of survey respondents said they would even consider investing in alternative investments, at the time this would include: student property, hotels, co-working, healthcare, retirement living to name a few.

Last year, almost 60 per cent of respondents are already investing in alternatives in some way, and 66 per cent wish to increase their holdings. And student accommodation of course topped the wish-list for 2019.

Student is also the UK’s No. 1 Defensive Asset Class

The high sustainable return is the first draw but what really sets it apart is its counter-cyclical nature. Student numbers increase during economic downturn, as people look to up-skill and return to university while they wait for the job market to regain, or students stay in higher education – naturally when this happens demand for student accommodation tends to increase, and naturally investors are drawn to this counter-cyclical income stream.  The irony is Brexit could well give students reason to stay in school for another year or two.

Student property – a mainstream investment. What was the turning point?

Since 1999/2000 international students studying in UK Universities have grown by 215%. Figures according to UCAS data state there are 2.3 million students in the UK overall enrolled in higher education.  The institutional change in 2015 on lifting University number restrictions on student in-take was an overnight game changer for; universities, councils, overseas students, domestic students, investors and developers alike.

“The PBSA market contributes

£51 Billion to the UK Economy”

The influx was phenomenal and lead to universities going to great lengths with local councils to plough millions of pounds into infrastructure, high-tech facilities and new and extended campuses.

By 2030 there will be capacity for 500,000 additional students, JLL forecast, and this expected rise in numbers is a combination of 18 year old’s from 2021 and the government’s efforts in new policies to attract a large increase of international students.

The effect on towns and cities has been positive and outwardly lucrative, with many retaining students after they leave university and evolve into young professionals and start roles with local businesses & companies.  Major companies has helped this in the North West of England by relocating their headquarters.

“500,000 additional students expected by 2030”

Students and landlords are moving away from HMO’s 

With HMO licensing and restrictions for landlords and as the residential sector as a whole recovers from a flurry of new legislation and tax reforms, PBSA has been a very popular new choice for landlords.

The satisfaction rates in PBSA are high and if popularity continues market share will only go one way, with demand being even higher.  In a recent 2020 survey (UCAS and Knight Frank) 75% of students who live in private PBSA would recommend this type of student living to first year students. It would only 10% of students living in HMO’s to change to a purpose-built studio or en-suite to increase the instant requirement to 100,000 more units.

Student demand equals investor demand

It’s wonderful nowadays so many students can afford such luxury student-living, and for many students it’s non-negotiable.  International students are the majority but EU and UK students are also not phased by spending £160 p/w on their accommodation.  In the same UCAS/ Knight Frank survey, location and proximity to campus and university buildings were the number one deciding factor.  Followed by the option to stay longer than one year and joint third, the ability to live with friends and access to on-site convenient facilities and amenities.

A summary student investment ROI

That age-old saying, you get back what you put in, does not apply here – you get a whole lot more.  And below is an indication of the typical structure of what domestic and overseas investors are achieving in this low void, under-supplied student housing market.

Example to demonstrate ROI – based on £70,000 unit.

*Year 5 to year 10 rental return based on 2% p.a. compound interest.

PBSA success to date 

I’ve covered many of the positive dynamics that made purpose-built student accommodation investment switch from an alternative investment, that investors and landlords would use to diversify their portfolios, to a main stream investment that contributes £51 billion to the UK economy.

  • The strength of the UK higher education system – holds four of the world’s top ten universities.
  • Excellent international appeal – investors from around the globe are investing in UK student property.
  • Overseas applications up 6% year-on-year
  • A strong defensive asset class – outstanding performance during previous recessions.
  • Rental growth is outperforming inflation in recent years.

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

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