The student accommodation market looks to have recovered from the pandemic – so much so, that fresh takeovers are now being muttered about.
The remarkable recovery appears to be not just down to the fact that students appear keen to return to campuses in person. But it’s also that the sector’s demographics and long-term fundamentals remain strong – and highly attractive when compared with other real estate asset classes. The operational asset class attracts not only dedicated PBSA investors, but also those with a broader interest in buildings with beds, including those mixing portfolios of rental housing, and hotels.
Following asset writedowns in the last year, and a standoff between those providers that gave students rent discounts, and those who stood firm, the main providers are reassessing their positions. Most recently, GCP Student Living has revealed a takeover approach by a consortium backed by Dutch investor APG. APG currently holds just over 11% of the group’s shares, and will need to decide to bid or not by an end July deadline.
According to research by Cushman & Wakefield, there were 2.02m full time students studying in the UK in 2019/20, of which 61% were studying outside their home region. The market saw close to 25,000 beds added to the market in 35 locations, for the 2020/21 academic year, taking total room stock to 681,000 rooms. This despite the pandemic cutting 3,800 beds from the supply pipeline, with a further 10,000 beds in projects that have been delayed.
Over the last seven years, the best performing student accommodation has delivered a 4.1% average rental growth per year, according to C&W. The consultants note: “The importance of market selection on long-term rental growth is now clear, with huge differences across different locations,” and weak performers, such as the Newcastle market, tracking nearly 10% below inflation over the period.
There is reckoned to still be a structural undersupply, with more than 735,000 students taking private rented homes, as they cannot be accommodated in purpose-built space.
Covid-19 has had an impact: “Difficult markets that saw the most discounting in 2019/20 repeated those trends in 2020/21, with covid-19 amplifying problems with absorption, pricing and product types. As would be expected, markets with a high preponderance of international students were amongst those with the highest levels of discounting/incentivisation, although a number of “Grade A” markets were still able to avoid these impacts.” Around a quarter of direct let schemes offered students some form of discount.
“For assets with strong underlying fundamentals the PBSA sector should continue to show resilience and be an attractive sub-sector of the UK property market,” commented James Dunne, head of UK real estate transactions at Aberdeen Standard Investments. “We are experiencing the acceleration of certain trends within the sector, leading to a greater divergence in the attractiveness of individual properties and markets.”
Despite the pandemic shock, “student accommodation has maintained its position as the go to alternative of choice”, say C&W, noting that 2020 saw a record volume of GBP6.1bn of transactions, headed by Blackstone’s GBP4.66bn acquisition of the 28,000 bed iQ portfolio.
The current year has seen no let-up, with Greystar paying GBP291m for the 2,163 bed Colorado portfolio, part of GBP750m of deals already completed in 2021.
And Mark Quigley, managing director of UK real estate finance at Beaufort Capital Management UK, told Hotel Analyst it is those fundamental strengths of stronger demand side numbers that help underpin the market. “The asset class has remained extremely resilient – and we have seen new entrants even after covid.” In 20 years of lending to the sector, he says the fundamentals have changed little – and are currently being boosted in the UK by a surge in school leavers.
Uniquely – and in contrast to other residential rental products – he notes that there is a churn of tenants every year, who don’t have a direct market price comparison: “You’ve got a ready made cohort of people who turn up every year.”
While there have been worries around the loss of overseas students due to Brexit, Quigley says other issues have helped. A backlash in China against the attitude of President Trump, has led to more Chinese students opting for UK further education over that available in America.
Quigley warns that there has been some cannibalisation in several city markets, and there will, ultimately, be a limit on the number of students in a market whose parents are prepared to pay for five-star accommodation. But that simply means smart developers need to “get into the weeds” and understand the dynamics in a local market, before starting a project: “It’s just not good enough to simply build anywhere.”
HA Perspective [by Chris Bown]: Fundamentally, student housing looks a good bet – the macro numbers are strong. But anyone new to the sector will need to drill down into the details. Some city markets have languished, while others benefit from a rise in currency of the academic institution that they are located close to.
As ever, it’s about location and working out local market demand. Your Cardiff-based correspondent, for example, has seen several instances where developers have pleaded with local planners for a temporary change of use to serviced accommodation, declaring there isn’t any student demand.
But as Quigley notes, here’s a market where next year’s intake have no reference point – the market rent is the market rent, typically just for that first year away from home. Just so long as enough parents and students can be persuaded that an investment in a university education is worthwhile. So far, that appears to be one thing the pandemic has not fundamentally changed.
Additional comment [by Andrew Sangster]: The Purpose Built Student Accommodation market has many parallels with the rise the branded budget hotel sector. The difference is that PBSA is bigger and has arguably been more successful in establishing three separate REITs listed in the UK.
And like branded budget hotels, the fundamentals of the PBSA market have been questioned thanks to Covid lockdowns. The big question marks are around the rise of remote-learning and whether online players will disrupt the higher education business model.
Edtech is a big threat to higher education and it will lead to a significant restructuring of the industry. It won’t, I suspect, see a marked decrease in student numbers attending educational establishments.
Just as the death of business travel has been foretold numerous times (thanks to, at different times, the telephone, the fax machine, video conferencing and now Zoom), the undoing of higher education as an in-person experience is unlikely.
There are simply too many soft benefits that come from travelling to meet people and too many soft benefits from spending three or four years in the company of your peers. The hard benefits of exchanging information in business or acquiring the qualifications in education are replaceable online. But the lack of proper human interaction makes the net experience poorer and less effective.
Online might succeed as a distress sale but it is very much a second-place substitute and will likely remain so. The value creation in physical is meaningfully stronger.
There will be shifts in the pattern of demand. Just as budget hotels stuck on ring roads have gone out of fashion, some universities and higher education establishments may not prove able to sustain demand.
I would suggest, for example, that there is considerably better value spending GBP9,250 a year on fees at Cambridge University to study English than spending GBP8,000 a year on fees at the new University Centre Peterborough to study its English Literature BA.
The latter may make sense to local students, particularly if they can study part-time, but needing to pay for accommodation too ought to cause a rethink of the cost-benefits. However, the evidence so far is that demand for even the lower tier universities is holding up. This may be a result of deferments from last year and I suspect there will be some disruption to come.
Overall, though, the net demand for accommodation looks set to keep rising, albeit modestly. A key will be the revival of the overseas market. PBSA operators will have to adjust their offer to allow for shorter lets to accommodate shorter courses and potentially exploit transient demand during holiday periods.
The exit of Houses of Multiple Occupation as student residences will continue, just as independents have been squeezed out of the hotel market by branded budget operators. And this gain of market share will help PBSA outgrow the overall market.
The future of PBSA remains robust. But most of the easy wins look to have been banked. Adaptation and consolidation are likely key features of the market from now on.