With the UK still in lockdown, to an extent, some broad measures easing under strict social distancing guidance for all, and travel restrictions unchanged, how will the coronavirus and all its unintended consequences affect the PBSA sector?
Ultimately leaving investors asking, where & when they should buy PBSA?
To answer this question relevantly we must (ignore the unfounded scaremongering at this time) look at the affect the pandemic has had and will possibly have on the PBSA sector.
It’s also important to listen to the feedback first-hand from the developers and providers.
There are many moving cogs of this multi-billion pound higher-education machine, and alas some of these cogs will be panicking more than others – but rest assured PBSA providers are not.
PBSA: a quick pre-pandemic sector summary
What will help us foresee where to buy PBSA post-COVID-19, is the structural strengths of the sector beforehand.
PBSA was in the best shape it’s ever been, despite the challenges thrown at the higher education sector, including: political uncertainty, policy changes, Brexit and the question marks over fees for international student – even with all this happening behind the scenes, the PBSA sector was flying.
The higher education sector reported student numbers, applications and acceptances, across the board have been on the rise.
Every breakdown that’s measured, was up last year (2019/20) and – until March 2020 which was the last assessment – this year was too (2020/21), including 18-year old UK students who were up by 1.7%. This was great news for the sector as higher education numbers had seen a decline in recent years from this group, due to a population dip.
- February 2020 saw the largest ever UK private real estate transaction at £4.7billion, with Blackstone’s acquisition of iQ student accommodation from Goldman Sachs & Wellcome Trust.
- Total acceptances for 2019/20; 541,240 (up 1.5% y-o-y)
- Applicants for 2020/21 so far were up 1.2% compared to the same point in the cycle in 2019/20
- Non-EU applicants for 2020/21 were the highest they have ever been at this point – over 73,000 (up 15%)
- Total acceptances for 2019/20 from 18-year old UK students up 1.3% y-o-y
- 2018/19 Full-time registered students estimated demand pool for PBSA: 1.16 million (up 1.5% y-o-y)
PBSA: a quick current-pandemic sector summary
Equally, knowing the affect the pandemic is currently having, albeit short-term, will help plan where to buy PBSA post-pandemic.
- There are many unoccupied student properties right now, and providers are suffering a loss due to rent forgiveness for vacant units and rebates for paid-in advance rents for international students.
- It’s unknown whether students will be on campus come September 2020, but consensus from providers is, this bump in the road is sustainable for the short-term, even if students don’t return to campus until January 2021. The percentage varies from provider to provider, but one of the UK’s largest, Unite Students, estimated a 16%-20% loss overall for 2019/2020.
- Depending on travel restrictions for overseas students, how universities will deliver teaching and whether there will be a delay on the academic year, it’s challenging to predict next year. However, recent surveys have shown international students still plan on following through with their overseas study plans – with some stating they may defer till 2021/22.
- We may see some rent reductions to focus on attracting domestic students, as high occupancy is the key focus. Providers are confident with seeing the rise in domestic student numbers anyway, there could well be a higher-than-predicted number of 18-year old students come September 2020 – with unemployment down a focus on skills for future employment becomes a priority.
- The rent reduction may only affect certain rooms types, particularly at the top-end. In some cities rents will still rise by inflation rather than the staggering 4-5% rent increases some investors and providers have enjoyed.
- New PBSA construction did slow, and even stop in some cases, as contractors paid attention to the government’s social distancing advice, but for many projects this shouldn’t affect completion dates dramatically, if at all. It’s developer/project dependent, but time delays and cost increases for materials could be a situation in the short-term for some.
- Student sentiment was good in a recent survey from UCAS and YouthSight published on 3rd April 2020. It found that 86% of A-level students were continuing with their university application as planned for the 2020/2021 academic year.
PBSA: Where should you buy post-pandemic
Naturally, there will be a recovery period for PBSA, we know its robust and will not feel the potential long-term effects that many sectors may.
The sector will resiliently prepare for what will be a short-term, but manageable, risk to income. It will fully focus on maximising occupancy for 2020/21 academic year and put rental growth to one side during this recovery period. We can then feel confident of being back to normal and at full strength by the 2021/22 academic year.
So, when looking at where to buy post-pandemic, please:
- Be diligent about the university or universities – there are many higher education institutions in need of a government bailout as the UK heads towards an imminent recession.
- Look at universities for specialist areas/facilities like Medical schools and engineering – this attracts the ideal overseas tenant for PBSA.
- Buy where there is a good percentage of overseas students verses domestic students.
- Be diligent about the student numbers overall and the undersupply ratio in the university town or city.
- If buying off-plan;
- Buy where the project will finish in time for the 2021/22 in-take.
- Carry out extra due diligence on the financial structure offered by the developer, we don’t expect projects to become all of a sudden unviable due to pandemic, but we can easily see where not to buy PBSA.
- If buying stock already completed (or completing Q4 2020);
- Buy where the assured rental return is sustainable and does not appear too high. For example, if you are being offered 10% net assured rental and the PBSA is not literally on/next to the campus, or, it’s not in a second or third tier city where land is much cheaper – dig a bit deeper!
- Buy where the developer has a clear contingency plan for any assured rental return shortfall – this is normal in the first year anyway – but even more important going into the 2020/21 academic year.