UK Purpose Built Student Accommodation – a safe port in a stormy 2023?

Viewpoints
January 5, 2023
3 minutes

With a chronic undersupply of beds struggling to keep pace with booming student demand, Purpose Built Student Accommodation (PBSA) could offer a place of shelter from potential market headwinds in UK real estate this year.

Real estate investors are bracing themselves for more turbulent markets in 2023 than in recent years. However, anecdotally, we are hearing notes of optimism that sector-specific pockets of the market will stand resilient. One such sector is PBSA in the UK, with optimism based on a deepening imbalance between student demand and PBSA beds and its track record of being an inflationary hedge, owing partly to its dynamic pricing and shorter-term leasing profile.

Soaring demand

Demand for student accommodation has reached new heights. A recent study by Cushman & Wakefield (C&W) reports a record number of full-time students at UK universities, with more of those studying away from home than ever before. An economic downturn is predicted to grow this trend, with students facing a difficult job market more likely to go to university or stay on for post-graduate studies. 

Not only is student demand soaring, but it is also increasingly concentrating into the PBSA sector. International students, who typically favour PBSA, are returning apace following the hiatus during the height of COVID-19, further buoyed by the weak pound. Appetite for PBSA is also growing amongst second and third-year students. They have traditionally moved into private rented accommodation, but are now increasingly valuing the certainty of all-inclusive rents, as well as the ancillary service offering and ‘experience’ that PBSA can provide.

Stagnating supply

Whilst demand is soaring, supply is stagnating.  C&W reports that 2021/22 continued a five-year slowdown in new schemes brought to market. It is difficult to see any meaningful uptick in supply over the short term, with building costs, already stretched by ‘greenflation’ in the drive towards Net Zero carbon, now spiraling under macro-economic, inflationary pressures.

Supply/demand imbalance

This has culminated in a UK-wide ratio of 2.4 students for each room of PBSA, which in some locations has driven rental growth to nearly 20% since 2017, as reported by C&W. Anecdotally, the Financial Times recently reported that students at Durham University waited in line for 12 hours to secure accommodation and first years at Manchester Metropolitan University were offered halls in Liverpool, an hour away.

However, the beds-to-students shortfall isn’t ubiquitous across the UK. For example, C&W reports that market headroom in Bristol has increased by 43% as new bed supply is only able to meet 18% of the growth in demand. In stark contrast, in Sheffield, overall market headroom has dropped by 30%.

Economic headwinds

Despite the underpinning demand/supply imbalance, PBSA isn’t immune to the wider macro-economic environment – using all-inclusive rents makes it exposed to higher operational costs, driven by soaring energy and staffing charges. The ability to set rents year-on-year allows PBSA to pass costs on, but this in-built inflationary hedge is ultimately limited by the extent to which students (or their parents) will shoulder higher rents. PBSA investors, like others, are also exposed to rising third party financing costs, since they typically like to use leverage to maximise returns.

Location, location, location

Considering its core features, PBSA seems set on solid foundations as we head into a somewhat uncertain and potentially dislocated market in 2023. That said, the vast differences in the supply/demand imbalance between university cities and those rising costs mentioned above bring the importance of location into sharp focus. In addition, students are becoming increasingly discerning about their living ‘experience’, thereby making active management and customer service a key feature of these assets.

The verdict?

Whilst gloomy clouds gather above the global economy, we are optimistic that UK PBSA will prove a sector-specific safe haven in 2023, but with parts of the PBSA market more exposed to the macro-economic climate than others, location, operational management and investor expertise will be as important as ever.