Investment into the UK purpose-built student accommodation (PBSA) market totalled £4.4bn in 2021. This followed a dip in transactions during 2020, while representing a 6% uplift on 2019. The sector’s resilience demonstrates its long-term appeal to investors, many of whom now consider PBSA a maturing market capable of delivering institutional-grade returns.
By Daniel Halstead, Real Estate Partner, Shoosmiths
The PBSA sector is, however, rapidly evolving. Long gone are the days of simply maximising space for beds. Developers are now faced with having to adapt to the changing needs of students, while remaining commercially viable and attractive to investors.
Origins of PBSA
The PBSA sector has already experienced significant structural overhaul. The original change was the move away from student operator developed accommodation. It is no longer standard practice for those building PBSA to also run it.
Rather, a wide range of developers and investors are now building or funding new student accommodation projects ahead of then allowing another organisation to operate it. As well as a creating a more diverse pool of PBSA developers, the way accommodation is brought to market is also changing. Historically, those developing PBSA may have considered forming a relationship with a nearby university to help fill the accommodation.
These partnerships may have seen PBSA developers building new accommodation and then either letting it in its entirety to a university or entering into a nomination agreement.
Nomination agreements provided the accommodation owner with comfort over occupancy and revenue, while allowing the university input on rent setting and operational matters. However, the main growth area for PBSA was driven by the direct-let market, which according to research from Cushman & Wakefield, now makes up 37% of the market – closing the gap on university owned accommodation, which continues to hold a 42% share.
The 2008 financial crisis was a key turning point for the PBSA market. It saw investors begin to recognise student accommodation as an asset class capable of generating returns at a time where the wider residential and commercial property market was disrupted.
The volume of investment into PBSA increased steadily following the crisis. UK transactions peaked at £5.7bn in 2015 and while impacted by the Covid-19 pandemic, the market has remained resilient, as demonstrated by the rapid recovery in deals seen last year.
There is now billions of pounds of investment being deployed, with institutional investors increasingly active in the market and looking for PBSA opportunities. The high level of liquidity is good for developers bringing student accommodation to market. It is not guaranteed though, and the PBSA sector’s future growth is reliant on its ability to adapt.
The pandemic has presented the UK’s higher education sector with numerous challenges.
The National Student Survey showed the proportion of students satisfied with their course dropping from 83% to 75% between 2020 and 2021. The Office for National Statistics (ONS) also revealed that over half of students in higher education in England had reported that their wellbeing and mental health had worsened due to the pandemic.
Though many students have now returned to campuses and in-person learning, the long-term effects of Covid-19 are yet to be seen. What is clear is that the pandemic has reaffirmed the importance of well-designed and high quality PBSA.
This is not necessarily new news for the sector. But with higher education now under more scrutiny than ever before and students raising concerns publicly, it is crucial that the PBSA sector – developers, operators and investors – acts swiftly to meet changing student needs.
A key consideration for those creating PBSA must now be on designing schemes that create more opportunities for students to meet each other and interact. This must go further than the typical kitchen or eating area, with an onus now on developing communal spaces where groups of students can study together or socialise throughout a scheme.
Such spaces are key to combatting loneliness, which was often cited as one of the main effects of the pandemic, with a large proportion of students – up to 50% according to the ONS – stating that they did not feel part of the university community.
Connectivity is a critical part of all of this. Developers must ensure that all students in PBSA benefit from strong internet connectivity enabling them to work, should they choose or be required to, just as effectively from their room, the common spaces, or wherever they may find themselves in a scheme as compared to being in a campus library or study space. It will not come as a surprise to anybody with teenage children that internet connection is now considered as an essential service.
Catering for a student’s needs in such a manner and taking away any problems is also key to enabling PBSA developers to tap into second and third year markets – making the PBSA sector more attractive than the traditional house in the multiple occupation (HMO) market.
Pricing will remain a factor and only where PBSA is competitive against the HMO will we see a more noticeable shift in student patterns. However, opening up markets to second and third year students, especially domestically, will only serve to expand the market.
PBSA developers should also use the experience of the last two years as an opportunity to re-evaluate what resident amenities are included in a scheme. For example, developers may consider prioritising integrating a gym facility over a cinema room – recognising the importance of a student’s physical and mental health, and the benefits exercise can bring. The unifying factor for PBSA design and development must always be understanding and meeting the needs of student residents.
It cannot be ignored that this may come at a cost to developers, either through increased capital expenditure or by reducing the amount of bed-space in a scheme. By not adopting this approach and meeting changing student needs, developers do, however, risk their PBSA asset becoming stranded and of less interest to potential residents and investors.
There is a clear upside for developers that embrace this outlook – of which, we are now seeing a greater number now bringing schemes to market and achieving strong rental yields. Providing more versatile and quality PBSA that improves the student experience should not be seen as in conflict to commercial viability, but rather as an essential way for developers to sustain their growth and ensure projects are attractive to investors.