The expansion of university enrollment has led to a shortage of student housing, writes Jay Ahluwalia
Research by the university clearing group UCAS, in partnership with Knight Frank and Unite Students, suggests that by the end of the decade, there could be one million more education applicants in a single application cycle.
That’s a staggering 250,000 more than today. What’s interesting about these numbers is that regardless of policy changes or shifts in immigration, UCAS forecasts this growth will largely be driven by an increase in the UK 18-year-old demographic, with a predicted 38% rise in students from this background.
With this growth comes inevitable pressure, notably the issue of where these students are going to live during their time at university.
Historically, universities had the capital and surplus land to build their own accommodation.
However, budgets have become constrained and there is an urgent need for private developers and investors to plug the gap.
Consequently, universities are working with these third parties to create a favourable planning environment and ensure that planners are aware of the fundamental need to deliver quality accommodation.
Shifts in the housing market have meanwhile created supply-side imbalances and an unfavourable operating environment for private landlords.
The regulation around landlords operating house in multiple occupations is becoming increasingly more complex, and therefore is far less appealing. Accordingly, the supply-demand imbalance continues to widen.
Conversely, the appeal of the Purpose-Built Student Accommodation (PBSA) sector amongst institutional investors is growing.
According to a recent Savills report, 65% of European investors intend to increase their student housing portfolio allocation between 2024 and 2027, and 62% of UK investors express the same sentiment.
L&G has recently announced plans to deploy around £0.5bn of capital into the sector over the next two years, with the longer-term goal of growing their portfolio to more than £1bn.
From an institutional capital perspective, we are noticing an increasing demand for exposure to operational real estate.
When we consider where inflation has been in recent years, many businesses have shifted from a desire to invest in leased assets, to operational real estate where one can capture all of the rental inflation we have seen, and continue to see.
With these factors in mind, PBSA is now considered as an attractive prospect amongst developers and institutional investors; an in-demand sub-asset class in real estate.
This is being fuelled by a supply/demand imbalance, which is continuing to increase, thanks to the sort of rising student numbers we’ve already seen.
Currently seen as an alternate asset class, particularly when compared with the industrial sector, we believe PBSA will become a core asset class for real estate funds and institutional investors alike.
Over the next ten years, we expect activities such as build-to-rent and PBSA to continue ascending.
Another encouraging factor supporting PBSA’s rise is the pursuit of a sustainability agenda around alternative use. The post-Covid shift towards working from home means there is a surplus of office space, much of which can be re-purposed for student accommodation.
Planning policy and sustainability goals are driving many people to retain as much of a building as possible. The time and cost to deliver a new-build asset can be a deterrent for others, leading them to investigate the potential of transforming an old building into something new, benefitting both end-occupiers and local communities.
There’s also the issue of quality. Accommodation needs to be well-designed and managed so that students (on a revolving annual basis), have a comfortable, safe and welcoming place to call home.
With increasing competition in the market, providers need to ensure their developments are attractive to both domestic and international students, with spaces to socialise, study and relax outside of their rooms.
This flight to quality is therefore benefitting students, but savvy investors too – so long as they have a good product to sell.
With the significant rise in interest rates over the last two years and liquidity lower than previously, we are seeing more flexible capital solutions to enable PBSA projects to come forward.
We see a clear opportunity to provide a better standard of living for those going to university in the decades to come. And importantly, it’s proven that this can be financially rewarding to developers and investors too.
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