By Matthew Bowen, Head of Residential Investment Research, Knight Frank
The Covid-19 pandemic has brought to the surface many of the future challenges that the purpose-built student accommodation (PBSA) sector faces, and it has done so sooner than expected. These challenges include the value and cost of higher education in an emerging knowledge services sector, and the extent of the sector’s reliance on overseas students.
Nevertheless, the last year has also shown us that despite the challenges of the pandemic, the student property sector is built on steadfast fundamentals that deliver strong outcomes for universities, investors and students alike.
Investment volumes held up well throughout 2020, benefiting from low interest rates and pent-up demand for equity placement. Despite unprecedented macro uncertainty, new equity entrants were drawn to the sector. According to Knight Frank research, globally there were 383 deals totalling $17bn(£12.5bn). This is in line with broader trends and, as a result, student property captured a greater share of global capital than in previous years. Furthermore, this investment was underpinned by the flow of capital between global regions. Cross border investment reached a new record of 60% in 2020.
In the US, investment activity totalled $4.2bn in Q4 2020, which was the second highest quarterly amount on record, while volumes in H1 2021 are in line with pre-Covid levels. In the UK, cumulative deal volumes in the first half of 2021 were 47% higher than last year and 4% higher than pre-Covid-19 levels. Overseas investment formed a key part of this performance.
Positive sentiment is also underpinned by strong occupancy and rent collection. UK occupancy in 2020 was within 15% of 2019 levels, while rent collection stayed above 90%.
However, investors and lenders have become increasingly sensitive to the timing of the academic cycle and to preleasing performance. While the challenges that universities and operators faced was unprecedented, the legacy of this will mean heavier scrutiny of the overall offering to students. As a result, we will likely see the ongoing divergence of sentiment between Tier 1, Tier 2 and Tier 3 markets – despite the deep pool of investors and pent up capital.
That said, we expect a further strong outturn of investment in 2021 (we may see £4.5bn of investment in the UK this year) and 2022 based on a number of factors.
Firstly, student property remains good value, both in the UK and globally. The difference in yields between PBSA and conventional multifamily is 31bps in the US and 100bps in the UK. While this will provide confidence across the sector, we have seen a definite ‘flight to quality’.
Globally the broader drivers of growth look positive and short term global investment will continue to match existing levels. If the flow of cross-border money continues (predicted in Knight Frank’s Active Capital research), we may see volumes increase.
We’re also witnessing increasing enrolment rates across the board. In the UK and US, positive demographics and competition for jobs in the graduate employment market should mean student number growth, while in less developed countries demand for higher education is increasing at a faster rate and this has meant a more diverse internationally mobile student population.
If demand is compared to supply globally, we estimate that less than 15% of full time students are able to access PBSA.
However, while there is much to be positive about, there are also a number of key challenges – many of which existed long before Covid-19, but almost certainly have become more serious as a result.
Geopolitical events such as Brexit, as well as growing populism and protectionism worldwide, have long been threats to the existing model of globalised higher education. While it could be tempting for governments facing the challenges posed by globalisation to look inward, when framing policy, higher education must remain outward-looking, but it must also fulfil a greater role locally.
The policy approach of governments in emerging markets will also create both opportunities and challenges. Over the past three years, for example, the number of Asian universities in the ‘Top 200’ globally has increased by 47%. The push and pull factors influencing students in countries where the middle classes are increasing significantly will be more important than ever. One of these factors will be online learning and the widespread growth of digital content – something that Covid-19 has brought into sharp focus.
The combined threat of better technology, acceptance of that technology, and the increasing costs of education means that universities globally are facing key decisions about their approach to ‘EdTech’. These considerations sit within the wider context of mass digital content production and it will be crucial for universities worldwide to respond to this quickly.
On the flip side, the pandemic has also helped to provide clarity for universities about the aspects of higher education that were working well before Covid-19 – such as face to face learning and campus development. For universities in the UK, ‘blended learning’ has started the process of discussion on the dividing line between what can be successfully digitised and what cannot.
Despite these challenges ‘on campus’ will win out, but universities and investors must be alive to two things. Firstly, they must continue to work with stakeholders locally to deliver the highest quality student experience and to win the value for money argument. PBSA will increasingly be the differentiator in supporting students to achieve the best experience, and student property must therefore be part of the discussion. We must respond to the needs of generation Z students, embrace the post-lockdown momentum they have for freedom, travel and new experiences and use this to support changes in our approach.
Secondly, we must be pro-active on the opportunities that exist in emerging markets. India, for example, has a shortfall of 8 million PBSA beds, yet middle class income growth is projected to be in excess of 6% per annum. There will be a point in the future when the development economics stack up.
Both these factors are synonymous with the development and evolution of cities both at home and overseas. The opportunities, for young people especially, will be concentrated in cities and PBSA along with other residential investment is part of that story. Cities are leading the way in the post-Covid recovery.
Student property will benefit from this and we should be confident about what we are offering. Knight Frank’s latest Student Accommodation Survey tells us that levels of satisfaction with PBSA remained high through Covid, that sentiment regarding value for money is more positive that the cheaper alternative options in the wider rental market and that the level of first to second year retention for PBSA is increasing. The proportions of second years that are actively recommending their PBSA accommodation to first years moving up is at record levels – over 70% in this year’s survey.
The pandemic has undoubtedly accelerated many of the challenges we face. However, longer term, student numbers are still forecast to rise, and the campus will continue to be at the centre of a university’s offering to students. Universities themselves acknowledge that they must play a larger role in the evolution of cities and in the repurposing of place, with their own real estate a key agent in driving this agenda.
Many of the broader drivers of change for our sector will be political, whether that is via impacts to higher education, ESG or directly in the form of regulation.
Regardless, it is clear that being able to navigate through this will be critical for investors and operators over the next few years. The most successful will have an understanding beyond bricks and mortar, and will be mindful of the wider issues facing students and higher education. A lasting impact of Covid-19 will be that the quality of the accommodation experience of ALL students and not just first years will become ‘hardwired’ into university planning, and so we must make good partners. Those who are part of the vision that universities and students have of the future will benefit most.