Student accommodation sector shows its resilience

The UK’s purpose-built student accommodation (PBSA) sector remains resilient despite months of economic and political uncertainty.

“The fundamentals of the operational market in PBSA are very strong. I don’t think anyone is sat there saying that we don’t have great universities, we’ve got great occupancy and we’ve got growing demand,” outlined Alex Pease, executive director at Watkin Jones Group, at a recent Shoosmiths’ roundtable.

Bringing together funders, operators, developers and agents, as well as policy and legal experts, the discussion - held at the firm’s London studio - focused on the evolution of PBSA.

One of the main reasons for the sector’s resilience is a systemic undersupply of PBSA.

Martha Kool, senior policy officer at the British Property Federation, explained: “It is a resilient market compared to a lot of others, particularly during the pandemic. It has bounced back quite well, as it has from other crises in the past. So, I think positive in that respect. But there are supply issues.”

The scale of the problem was revealed by the roundtable host Shoosmiths’ Darren Cleveland: “A shortage of around 200,000 beds is anticipated to grow to 450,000 by 2025.”

With increasing demand and overseas students returning to UK universities, it is clear that more must be done to tackle the PBSA shortage. This presents an opportunity for investors, funders and developers who can all play a role in bringing forward new accommodation.

There are challenges that the sector and real estate industry must navigate first, however.

“Operational costs are going the wrong way. And PBSA tends to sell as an all-in solution to its residents,” said Mark Dawson, executive director at Vita Group. “So that includes utilities and that's going the wrong way. And coming to market, we've got challenges. Challenges in the debt markets, which are caused by rising interest rates and increasing swap rates. And construction prices have also been going the wrong way.”

Upcoming legislative changes also pose potential hurdles for PBSA developers.

There are now less than 12 months until new mandatory biodiversity net gain requirements (BNG) are enforced as part of the Environment Act 2021. The legislation will require all new developments in England, bar a few exceptions, to deliver at least 10 per cent BNG.

Lisa Tye, planning partner at Shoosmiths, outlined the implications for student accommodation at the roundtable: “Particularly for PBSA, where you are unlikely to be delivering much onsite. It’s getting those systems up and running. And again, the certainty of having a fund that you can pay in to discharge those liabilities.”

Following the government announcing its intentions for student accommodation to be subject to the new regulatory regime laid out in the Building Safety Act 2022, Ian Hardman, construction partner at Shoosmiths, said: “As we all know with student accommodation, one of the big challenges is around completion. I can't think really of another sector where completion is so important given term start dates. 

“One aspect of The Building Safety Act is that we can't have occupation without a completion certificate. The consultation is suggesting that this could take up to 12 weeks.”
Projects are still being brought forward, however, showing the sector’s ability to adapt.

“We’ve got a good pipeline. We’ve completed transactions recently. We've got stock coming to market and completing next year. There's a lot of positives in the market,” said Dawson.

The latest research from Savills reveals that €11.7bn has been invested in PBSA across Europe during the first three quarters of 2022. This represents a 130 per cent increase on the same period in 2021, with the UK seeing the largest portion of this investment.

“From a lender perspective, we've still got strong appetite for the sector. It's difficult to put the cost of funds issue aside at the moment, but our margins have come down over the years as we've got more and more comfortable,” said Kieran Redford, lending manager at AIB Group.

“We're happy with the demand and supply profile that there is in the sector. Fundamentally the bank likes this from a social perspective. Higher education is a big success story for the UK, but students need somewhere to live and to study, and to be safe.”

The prevailing sentiment was that despite current headwinds, the sector has the potential to continue growing – buoyed by those funding, developing and investing in PBSA. 

“I think in order to overcome some of these problems, there's going to have to be some real entrepreneurship,” said Pease. “There's going to have to be some flexibility. I think we're going to see some contracts sort of vary and flex a little bit more. There's going to be a bit more risk sharing between parties, but there is always going to be, to our mind, like minded capital and developers who still fundamentally believe in the space and want to deploy.”

Even when supply evens up, which could take years, PBSA can look to other parts of the student housing market for opportunities and become increasingly competitive against the traditional second and third-year HMO market.

“The demand fundamentals for PBSA are looking very strong,” commented Will Hyslop, associate for alternative Living capital markets at Montagu Evans.

“If you start projecting forwards, well, if you just take UK domestic 18 year olds they're looking to increase by two and a half per cent to 2030. In terms of investment and appetite, there is a very strong and growing demand from a wide range of parties. 

“The market has matured enough that it is no longer viewed as an alternative asset class.”

The focus must remain on bringing forward quality, versatile and varied PBSA to the market. This will enable the industry to put itself in the strongest position possible for growth, while delivering heightened student experience and boosting the supply of accommodation in the UK.

Watch the full roundtable discussion, Student accommodation market has overcome crises before.

Disclaimer

This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances. © Shoosmiths LLP 2024.

 


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