The purpose-built student accommodation (PBSA) sector constantly reaches new highs, with its popularity increasing year-on-year. However, there are still improvements to be made that have seemingly fallen through the gaps, such as accommodating for the ever-anticipated rise of international students and reviewing outdated PBSA to fulfil this demand. Partner and Head of Real Estate at Morton Fraser discusses these bumps in the road for the PBSA sector.
By Jonathan Seddon, Partner and Head of Real Estate at independent Scottish law firm, Morton Fraser
Student numbers in the UK are at an all-time high – especially when it comes to overseas students. While Brexit resulted in some reduction in European students into the UK, the impact has been minimal and significantly offset by an increase in students from within the EU.
Despite the cost-of-living crisis posing a serious problem for many domestic students, a weak pound has acted as a counterbalance to students coming from overseas. Pair that with the prestige of degrees associated with UK universities, and our higher education institutions, act as a constant draw.
This high volume of students, paired with significant volumes coming from overseas, is good news for the PBSA sector – especially at the top end of the market, where overseas students are more likely to stoke demand. That demand is further supported by UK legislation. Since HMO restrictions have strangled the undersupply, there are fewer alternatives to PBSA’s.
But does the UK have adequate supply?
Take Scotland as an example. Good quality PBSA in Edinburgh, Glasgow and St. Andrews should be an obvious opportunity for commercial property developers, since operators and owners cannot get their hands on the assets quickly enough in those cities.
But supply chain issues, fluctuating costs for materials and undersupply of labour have all caused problems for developers and contractors over the last 12 to 18 months. Interest rate rises do not help businesses that are already operating on relatively slim margins, and ones that often borrow to build.
This means that in the UK, particularly when looking at the high-end PBSA market, demand is soaring high while supply is low. And when considering the investment opportunity in the high-end PBSA layer of the sector, rents are only going to increase in the short to medium term, as are capital values. This will suit long term plays by major funds acquiring sizeable portfolios.
So where are the opportunities for quicker returns and added value?
1. Transforming underperforming stock
Put simply, if there are student blocks in well regarded university towns and cities in the UK that are not fully let, there is likely to be a clear reason why. Because there is no shortage of demand, any stock with low occupancy needs to be reviewed. If the location is good, is the accommodation itself dated or tired? Investment in such properties to make them more modern and fit for purpose is more likely to bring fresh rewards year-on-year.
2. Repurposing existing real estate assets
One of the main drags on supply is the lack of availability of land, and when land is available, the cost of acquiring that land. Repurposing and retrofitting existing buildings – underutilised offices, for example – is one way that developers in the UK are unlocking opportunities to deliver new student accommodation schemes.
The added advantage to refurbishment as opposed to demolition and rebuild is the opportunity to enhance the property’s ESG credentials and reduce the developer’s carbon emissions, whilst at the same time producing accommodation that has quirky, attractive character.
Build to Rent schemes, which have stalled because of rent caps, can also be repurposed. While there are no obvious examples of this taking place on any great scale, the longer rent caps exist, the greater the chance we will begin to see this taking place.
3. Up-and-coming university locations
While Edinburgh, Glasgow and St. Andrews should have fully occupied PBSA, alternative university towns and cities could offer a strong opportunity to investors and developers.
In Scotland, Dundee and Aberdeen make good examples of where we may start to see this take place. As demand for education within the UK grows, we can expect to see these locations also become undersupplied, improving capital values. For investors who acquire a student block in these locations and invest in its refurbishments and consumer brand, a decent return could be seen in a few years’ time.
4. Slightly ‘off pitch’ opportunities
A trickier concept, but it might be time to look at potential accommodation that is slightly out of the key student commuter zones. Consider locations where there is a five- or ten-minute walk to the bus, or the bus journey is 20 minutes rather than ten. If the quality of accommodation is to a high enough standard, would a slightly off pitch location really deter students? If priced accordingly, these types of off pitch locations could bring real returns.
The student accommodation sector is both fascinating and resilient. After the past few years, it may appear to be unshakeable. While every bubble will eventually burst – or at least deflate, it remains hard to see this very mature and highly nuanced sector of the real estate market slowing down any time soon.