The purpose-built student accommodation (PBSA) sector has continued to gain traction as a desirable asset class particularly in the UK. According to data from Knight Frank, the UK market for PBSA as of 2023 reached £85.8 billion and that’s set to grow significantly, hitting a value of £104 billion by 2028.
Investment in the sector reached £2.45 billion in the first half of 2024 - more than double the £1.1 billion invested in the same period in 2023 - with volumes in the second quarter boosted by large portfolio deals including Mapletree’s acquisition of the Cuscaden Peak portfolio for £964 million and PGIM Real Estate’s £184 million purchase from Unite Group.
With the sector set to outweigh other living asset classes over the next 12 months, according to the BNP Paribas Real Estate UK Living Market Update Q2 2024, it seems PBSA is standing out for investors. But why? Here’s why it should be on your radar.
Strong demographic tailwinds and occupational fundamentals
The fundamentals of the UK student housing market remain robust, driven by both international and domestic demand. Speaking at the Urban Living Festival 2024, Jonni Glick of Deutsche Finance International highlights the UK’s positioning as UK a global education hub, attracting students from emerging markets.
“The UK is one of the two markets that the world sends their kids to get educated, joined by the US. And the other major English-speaking market of Australia has just put a big cap on foreign students - that's not going to change. The UK has a really strong position there and as global emerging markets continue to grow, those students will continue coming to the UK.”
High demand and tight supply
Glick adds that the increase in number of 18-year-olds at least till 2030 means that occupationally, there are really sound positive fundamentals in the sector, and the UK is set to benefit from a domestic surge in the 18-year-old population.
However, both he and Joe Flaherty, director at Beaufort Capital Management advise on a laser focus on micro-location, with both highlighting Coventry and Glasgow as cities with opportunity.
“One of the biggest cities for opportunities at the moment is Glasgow. Up until about 18 months ago, they effectively had a moratorium on student accommodation. However, that was successfully challenged and there are now a number of schemes either starting on site or in the planning system. But it is so micro-location dependent - you have to look at your supply and demand as well as the micro-location,” Flaherty says.
Glick adds: “There are a number of assets I know in Coventry which are full despite the city having had occupancy challenges for a few years. And they’re full because the price is right, they’re in the right micro-location and they targeted the right demographic for those cities and for that demand pool. We actually see a lot of opportunity in some of the markets that everyone else perceives as oversupplied.”
Richard Ward, head of research at StuRents also highlights Birmingham as a city ripe with opportunity, with demand tracking above supply in the period from 2017 until 2024. “The number of beds added per student in Birmingham during that period, it was less than one.”
He adds: “Nationally, the trends are useful but are somewhat not very helpful if you’re looking at individual locations, and so understanding local markets is absolutely critical – as much granular as you can collect is going to be extremely useful and important for actually making informed decisions.
Declining interest rates
With interest rates now on a gradual path down following the Bank of England’s decision to hold UK interest rates at 5 per cent, experts have expressed optimism on activity in the sector, with the declining interest rates expected to boost sentiment.
“I think the new-ish reality of higher interest rates hopefully coming down and a reduction in build cost volatility should encourage a few more schemes to come forward,” Flaherty says.
Glick agrees, noting: “The consensus is pretty clear that interest rates are coming down, and we're expecting a significant shift over the next 18 to 24 months. That means that everything looks better on a spreadsheet - viability makes more sense and underwriting makes much more sense. As that comes down, I think we’ll start to see a lot more activity.”
Value-add opportunities
Experts stress the opportunity around affordability, noting that there’s room for value-add investments where portfolios of older assets can be optimized through capital expenditure and operational improvements.
“Student finance payments today doesn’t cover the cost of accommodation in most markets. Linked to that and because of that, I think we’ll see a lot more repositioning and repurposing on some of the older first and second-generation assets because it doesn’t make sense to continue developing high end properties people can't afford,” Glick says, highlighting interest in the more affordable side of the market, adding that “majority of the capital in the last 18 months has been broadly value-add type capital”.
Furthermore, Homes For Students COO Scott Lewis adds that university are actively seeking more investment in PBSA accommodation due to the myriad problems experienced by students in HMOs, noting “with PBSA, it’s a controlled, managed and secure environment with benchmarked quality.”
Blurring lines between PBSA, co-living and BTR
Looking forward, as the sector evolves and demand continues to rise, students may increasingly opt for co-living or BTR arrangements instead of traditional PBSA options.
“We're going to see some more blurring of the lines between PBSA, co-living and BTR, particularly if people keep underwriting PBSA schemes with 3 per cent rental growth year-on-year. There will come a point where there will be some more blurring of those lines where actually people looking to go to university look at co-living assets and BTR instead of just PBSA,” Flaherty says.
Ward agrees. “Some BTR schemes, for example in places like Leeds, are 10 to 40 per cent students. Some BTR contracts even start in September. They are targeting students, and with equivalent rents and more space, why wouldn’t you, especially if you’re an international student.”
It seems the PBSA sector offers a winning combination, and with the UK’s growing student population, increasing international demand, the sector stands as a resilient and future-proof investment option, which is certainly garnering significant interest.
To put into context the depth and breadth of investment demand, Glick highlights a process put on earlier this year which saw 20 to 30 parties across the capital stack express interest, and within that, around ten new entrants to the market.
Jamie Harris, head of student accommodation at Harris Associates puts it nicely: “PBSA is definitely in vogue especially because of viability because there are higher density units and therefore much more rentalisation. It seems to be the key sector that everyone wants to get a piece of at the moment - we're seeing lots of new capital calling us up and saying they want to get in and are really interested.”