Purpose-Built Student Accommodation

The Outlook

Ashurst has gained significant experience in recent years advising clients in relation to purpose-built student accommodation (PBSA), and it is easy to see why. This burgeoning sector has a number of attractions for investors.

Tenancy rates are high and cash flow is relatively secure, whether due to initial government funding or to the "bank of mum and dad" when students find themselves short and the rent is due. In times of recession, student accommodation is relatively cushioned. Furthermore, anglophone countries, such as the UK, Australia and Ireland, benefit from an education industry centred around the English language, which has enduring international appeal.

In the words of British newspaper the Financial Times, "student accommodation is not merely a small-scale and idiosyncratic development; it is an early example of a vast move to gain exposure to rental property, instead of financial securities". The driver behind this shift is low returns in bond markets. According to investment manager M&G, student accommodation can provide a premium over public bonds. Thus, PBSA has become an institutionally acceptable asset class.

For British universities a decline in government funding, increased competition for students, and ambitions for expansion have led to an ideological shift in the Higher Education sector where students are now akin to customers and universities are increasingly aligned with the private sector. This marketisation of higher education has facilitated a new approach to student accommodation.

Universities recognise that a factor in attracting students, and thereby meeting the financial challenges they currently face, is the quality and cost of the accommodation offering. Indeed, research undertaken by international estate agent Knight Frank in conjunction with UCAS (the Universities and Colleges Admissions Service, whose main role is to operate the application process for British universities) – the Student Accommodation Survey 2018/19 – found that accommodation was the most important factor influencing student wellbeing across the UK, outranking factors such as a good campus atmosphere and pastoral care.

The findings of the Student Accommodation Survey 2018/19 indicate that around 30 per cent of full-time first-year students now live in PBSA, up from 22 per cent five years ago. The corollary is that the number of students in the private rented sector or living at home has declined, while the number of students living in halls or in accommodation provided by the university remains roughly the same. The research also found that a higher percentage of students were happy with their choice of PBSA than those who had chosen the private rented sector.

Evidence indicates that students want PBSA and the market has continued to provide it. In 2018/19, the number of PBSA bed spaces in the UK reached 627,115 according to US-based commercial real estate company Cushman & Wakefield, and the development pipeline is strong. International interest in the UK PBSA sector also appears buoyant despite Brexit, as illustrated, for example, by Singapore Press Holdings' purchase of a portfolio of properties owned by the leading PBSA provider, Unite Students, for £180.5 million in September 2018. But what factors should investors be considering as the UK PBSA market continues to develop?

International Students

The Student Accommodation Survey 2018/19 confirmed various patterns regarding international students, who constitute around 22 per cent of the UK student population. International students are the group most likely to rent and are more likely than UK-based students to stay in the same accommodation for more than a year. Non-EU students are less likely to have an issue with the affordability of their PBSA than EU students. Non-EU students are also the group most likely to have their rent paid by someone else, for example, parents or wider family. For investors, these findings confirm the importance of international, non-EU students to the success of the PBSA sector.

UCAS figures from 2017/18 indicate that, while applications from UK students fell, applications from both EU and non-EU students increased. The growth in non-EU student numbers is particularly strong, and rose by 6 per cent in 17/18, driven perhaps in part by the relatively weak value of sterling. China sent more students to the UK than any other overseas country and current fears regarding stagnation in the Chinese economy have raised concerns that if Chinese students choose to stay at home or look elsewhere for higher education opportunities this could have a major impact on the UK PBSA sector.

While Brexit is unlikely to have a significant impact on numbers of non-EU students, for EU students there are a number of uncertainties. The two key questions which remain unresolved at the time of writing will be arrangements for fees (currently EU students pay the same fees as UK students) and access to student visas.

Arguably, the risks attached to losing EU students are less than those in relation to non-EU students because there are fewer of them. For example, UK PBSA operator Watkin Jones does not really feature Brexit in its demand forecasts because less than 7 per cent of students come from the EU. Watkin Jones' figures indicate a robust secured development pipeline comprising 17 sites, representing 7,534 beds, and reflect the widely held assumption that the strength of the domestic market, combined with ongoing interest from non-EU countries, indicates a healthy outcome for PBSA in 2019/20. Nevertheless, the significance of Brexit to the sector's investors may well depend on the geographic location of assets. A disproportionate number of EU students are based in London for example, 18 per cent of the London School of Economics' students are from the EU – arguably making London-based investment a riskier proposition post-Brexit.

More broadly, the risks posed by Brexit in terms of potential loss of EU funding for research at UK universities (which amounted to almost £1 billion at the time of the referendum), and the "brain drain" of European talent, could reduce the attractiveness of UK universities to overseas students. Therefore, although the direct detrimental impact of Brexit on student numbers may not be significant, the indirect consequences flowing from a reduction in the quality of UK higher education could be of more enduring significance.

Other Challenges

Over the last ten years, despite the introduction of tuition fees, there has been a steady increase in the number of UK-domiciled 18- and 19-year-olds going to university. However, domestic demographics indicate a decline in the birth rate that has led to fears of declining numbers in higher education. Added to this threat is the Government's drive to encourage more school leavers to participate in apprenticeships or undertake T Levels (technical exams in lieu of A-levels) rather than pursue a degree. However, statistics indicate that the demographic decline will be reversed from 2021 and there is also an argument that in times of uncertainty, such as now, people look to upskill to mitigate the risk of unemployment and therefore we may see more students, rather than fewer, in the next few years.

Another uncertainty facing the PBSA sector is the future of higher education itself. Academics opine that the role of universities has changed throughout history. From the home of medieval spirituality, to centres of technological innovation in the 21st century, universities have become quasi-businesses motivated by self-interest in a competitive market landscape. If this remains the case, universities will have to continue to customise education to meet their students' demands. This will mean providing a flexible learning experience, available 24/7, enabling students to work and learn online or on campus. Degrees may not be the only qualification on offer, as the rapidly changing needs of the labour market demand frequent reinvention and hence new skills. As the costs associated with a university education continue to rise, the motivation to learn remotely while working, or to live at home, may begin to outweigh the benefits of living and socialising within the physical environs of a university.

Nature of Future Developments

While predicting the future shape of education and the long-term impact of Brexit is, to say the least, challenging, in the shorter term the future of the PBSA sector seems assured. Nevertheless, the product will continue to evolve and be refined. In the Student Accommodation Survey 2018/19, affordability was, unsurprisingly, critical to students' overall attitude towards PBSA, and scaling up the size of developments, together with flexibility on the types of rooms available, is seen as a way of achieving this. Increasingly, future developments may also look to ensure that accommodation can be used in holiday periods on a hotel/hostel basis in order to maximise revenue. The London market, for example, is problematic in terms of affordability, but has greater potential to benefit from alternative use outside of term time.

We may also see an increased focus on top-ranking universities at the expense of lower-ranking institutions. For example, world-renowned Russell Group universities are more likely to attract international students and hence interest from the PBSA market. A vicious circle could ensue where struggling universities cannot attract students because their accommodation is poor, but PBSA operators are not interested because they do not have enough students. This could see a widening of the gap between "elite" UK higher education institutions and the rest. However, interest in PBSA even at top-ranking universities is subject to location factors. Research indicates that students are happier, and rental yields are more secure, the closer accommodation is to campus. Securing development opportunities within this range is challenging in many UK cities, particularly London, where availability and cost increasingly preclude development in zones 1 and 2.

In terms of new builds, there is scope for PBSA to benefit from smart construction methods, in particular, off-site manufacturing. Off-site manufacturing – where components or entire units are assembled or fabricated before reaching the construction site has proven financial benefits and is being promoted by the UK Government as a means of mitigating the current housing crisis. Because modules and components are produced to standardised systems a more consistent product can be achieved, enhancing the quality of a project as well as reducing the chances of delay and disruption. Whereas off-site manufacturing has historically been linked to aesthetically uninspiring buildings, modern digital manufacturing methods mean that architectural ambition can be fostered and not compromised by off-site methods. Irish construction company Graham Group is a proponent of off-site manufacturing and is set to use it on the University of York's current 1,400 bed student accommodation project. As well as delivering the accommodation, Graham Group is an investor as part of a consortium with fund manager, Equitix.

Across the real estate sector more broadly, we are seeing much greater focus on creative placemaking as a means of nurturing wellbeing, and this emphasis has not been lost on the PBSA market. Contented students means more students, and therefore monetising wellbeing by creating student communities instead of building merely for functionality has huge potential upsides for everyone involved. Cushman & Wakefield, for example, in its 2018 Student Accommodation Report, observed that future developments must look not just to room quality but to amenity spaces "to support the student experience, interaction, collaboration and good mental health". Its research indicates that providers taking this approach were able to secure a 3 per cent increase in rent in contrast to those with poorer quality spaces which managed only 2.5 per cent. This more holistic approach can be seen in action in the promotional material for the University of York's new PBSA, which states that the new residences will include "flexible and welcoming communal space", "a safe, secure and comfortable environment", "views of the lake and parkland" and "a sense of belonging".

If the future of PBSA is affordable high-quality accommodation with attractive communal spaces that foster wellbeing and community, then it is a win-win for students and universities. For investors, for the time being, the figures speak for themselves: student numbers are growing, they want PBSA and the appetite from domestic and international markets remains strong.

By Sadia McEvoy