Another strong year lies ahead for Europe’s purpose-built student accommodation (PBSA) sector, as macroeconomic conditions stabilise and demand continues to outstrip supply, experts agreed during a recent webinar hosted by student housing specialist Bonard.
For the foreseeable future at least, two factors look set to continue to support the performance of student housing as an asset class: growing demand and lagging supply.
After yet another year of increasing student numbers and declining provision rates in key university cities, the outlook for the purpose-built student accommodation (PBSA) sector remains bright with further rental growth on the cards for 2024 – and likely beyond.
During a webinar hosted by student housing research and advisory firm Bonard in early February, a panel of sector experts agreed that PBSA remains a counter-cyclical success story and an attractive play for investors and operators. Coupled with expectations of a more stable macroeconomic environment – and possible interest rate cuts – in 2024, the broad picture is of another solid year for the asset class with higher capital inflows and increased investment activity compared to 2023.
‘The sector is an effective partial inflation hedge, and that’s a compelling case for why more investors are looking at PBSA now more than ever,’ said Philip Wedge Bernal, vice president at Harrison Street.
The investment firm has acquired over 21,000 student housing beds in Europe over the last nine years and entered the Italian market last year.
He added: ‘Compared to a lot of other sectors in Europe, PBSA really is one of the standout performers so we’re optimistic that we will still see strong rental growth.
‘Demand is pushing rents quite significantly. It’s not just confined to one location, it’s steady and strong across the whole portfolio.’
Charles Combet, senior international origination executive at Berlin Hyp, commented: ‘Every year, the Key Performance Indicators [for PBSA] are better and better. There is growing appetite from the lender side, even though the environment has been challenging.’
He added: ‘We definitely see that a lot of the capital that is already allocated to real estate is looking to enter or grow in PBSA.’
Strong fundamentals
Presenting Bonard’s latest annual report on the sector during the seminar, CEO Samuel Vetrak said the sector’s fundamentals remain ‘very, very strong for the foreseeable future’.
Rents increased by 9.2% on average last year across the markets surveyed, with several countries recording double-digit growth compared to 2022, including Poland (17%), the UK (13%) and Austria (10%). Across Continental European markets, monthly rents rose by an average 5.4%.
Last year’s increase followed on from substantial growth the year before, ‘so we have two strong years of increases – and growth in 2022 was already triple the average increase from previous years’, pointed out Vetrak. This, he added, had been achieved without a significant impact on demand or occupancy rates, which remained high (between 96% and 99%).
‘2023 was a challenging year for the rented residential sector, but student housing was affected less, mostly because of higher tenant demand, higher occupancy rates, longer waiting lists and faster mobilisation of occupancies,’ he said.
Bonard’s research found that international student numbers swelled by 6.4% on average last year, while provision rates declined in 22.5% of cities analysed. Vetrak noted that supply of new stock had slowed for the last few years, mostly due to Covid and inflation, which had made conditions challenging for developers. And the provision rate is projected to deteriorate further, with 38% of student cities experiencing a decline by 2025. ‘The gap between demand and supply is actually not closing, in fact in 38% of cities it is widening,’ he remarked.
Pedro Sousa, vice president at Brookfield Asset Management and another member of the panel, observed that even extra-large student housing sites (1,800 beds per site) opened two years ago were almost fully let in 2023. ‘We always expected to take up to three years to stabilise assets like this, and surprisingly this happened one year ahead of plan.’
Affordability concerns
Yet despite forecasts of continued rental growth, the panel highlighted affordability as a factor to watch, suggesting the current pace of hikes could not be sustained indefinitely.
Said Sousa: ‘Our expectations are still high - we still believe there is going to be robust rental growth, but there is another factor that needs to be taken into consideration and that is affordability. We’re talking about students, so there is a cap on how much you can increase rents.’
Marta Cladera de Codina, managing director and head of portfolio management Europe, housing and alternatives at Nuveen, said: ‘One question mark going forward is: how can rents increase and accommodate that affordability rate for students – I think this is really key.’
Harrison Street’s Wedge Bernal remarked: ‘We’re still expecting strong rental growth and our forecast for the year depending on the market and the type of product is anywhere between 4 and 8%.
‘But that’s all within the wider context of strong rental growth last year. We’re anticipating that that level of growth over the next few years is not something that is sustainable because of the affordability standpoint.’
Deal momentum
On the investment side, activity is expected to pick up in 2024 after a marked slowdown in transactions last year, which followed a record year in 2022. Total deal volumes in Continental Europe dropped to €1.2 bn last year from €4.7 bn in 2022, while €1.6 bn was transacted in the mature UK market, down sharply from €7.7 bn in 2022.
Said Wedge Bernal: ‘The macro scenario looks like it’s stabilising - we have much greater certainty of where peak rates are likely to be and the question has now pivoted towards when cuts will happen in terms of the base rates. From a transactional perspective we started to see an uptick in activity towards the end of 2023, which hopefully will be carried over into the early part of 2024.’
Nuveen’s Cladera de Codina said she was confident of more deal activity in 2024. 'I think some of the value-add players who have invested in student accommodation might at some point have to make an exit so probably we will see some more platform deals during the second half once the market and the macro environment has stabilised.’
Yields are not expected to expand further in 2024 after softening by 40 bps last year in the markets monitored by Bonard. This shift was far less pronounced than in other traditional asset classes which recorded increases of 80-100 bps, although the UK PBSA market saw significant yield decompression.
‘The UK and more liquid parts of Europe have repriced the most and I think those countries are probably going to see early stabilisation in terms of pricing this year,’ said Wedge Bernal. Yields are not likely to soften any further in 2024, he predicted, as investor interest comes back into the sector, resulting in ‘a much more solid footing for the year ahead than what we experienced last year’.
Markets in focus
In terms of markets, the panel agreed that southern Europe, in particular Italy and Spain, offer attractive investment opportunities, along with more traditional markets such as the UK and Ireland.
Cladera de Codina noted that Nuveen closed two deals in Italy during 2023 and completed an asset in Poland, where undersupply is ‘especially acute’. Commenting on the deals in Italy, she said: ‘The main challenge is timing… you need to be very resilient to stay in some markets. We call [2023] the “workout year”, but a very fruitful year still.’
Harrison Street and Brookfield, too, are eyeing southern Europe for further expansion.
Sousa said that after selling its UK platform Student Roost in 2022, Brookfield was looking to expand its existing footprint in other parts of Europe and ‘also looking at markets where we are not present yet like the Nordics’.
Wedge Bernal said Harrison Street would continue to explore southern Europe, which is ‘supported by extremely strong fundamentals’. More generally, he predicted: ‘I think what we’ve seen over the past year in terms of repricing in certain markets will make a wider pool of investors able to transact in markets that were otherwise quite keenly priced so I would expect investors to look at the Nordics with increasing popularity in the year ahead.’
Other trends flagged by the panel for 2024 include a potential increase in office-to-PBSA conversions, optimizing cashflow from student housing portfolios through better operational efficiency, and a stronger focus on ESG.
Said Berlin Hyp’s Combet: ‘There is definitely room to improve ESG and the PBSA sector has proven to be innovative enough to keep growing within ESG requirements – not only the E but also the social aspects which are sensitive from the lender’s perspective.’
Investor Intentions survey
Bonard's first Student Housing Investor Intentions Survey, based on 120 responses from sector stakeholders, will be released in full later in February, but initial findings include:
- Four in five respondents (80%) expect investment in student housing to grow in 2023, with 30% expecting ‘considerable growth’
- Over 60% of respondents plan to invest more in student housing in 2024 compared to 2023
- Two in five respondents believe that pension funds and other long-term holders are more interested in investing in the sector.
The survey respondents – including investors, operators, developers and banks - collectively represent 300,000 beds under management globally and €80 bn of investment.
